Interim report september 2008
Contents
Rakon Half Year 09 Results
2-4
Financials Unaudited Consolidated Interim Income Statement
6
Unaudited Consolidated Interim Statement of Changes in Equity
7
Unaudited Consolidated Interim Balance Sheet
8-9
Unaudited Consolidated Interim Statement of Cash Flows
10-12
Notes to the Unaudited Consolidated Interim Financial Statements
13-23
Accountants’ Report
24
Global Presence
26-27
Directory
28
Half Year 09 Results The Directors of Rakon remain confident that the company’s business plans are robust and will deliver excellent results for shareholders despite the recent slow-down in consumer spending. Rakon’s diversification into telecom infrastructure and aerospace markets through our European operations gives us a solid base of customers in a variety of market sectors. We have significant potential to increase our global market share and deliver growth in a difficult market. We plan to do this by capitalizing on our excellent European technology base and leveraging our increasingly competitive cost base in Asia. GPS will continue to offer growth opportunities for Rakon and remains the core of our business. Whilst consumer markets are expected to be weaker there is an increasing number of GPS enabled products available on the market. We see great potential in emerging applications beyond the existing PND space to applications such as GPS enabled mobile phones and cameras. We remain committed to supporting these emerging consumer markets as the volume and profit potential is significant.
Bryan W Mogridge Chairman November 14, 2008
GPS enabled mobile phones continue to grow in numbers and popularity. Rakon has been involved in this market for some time now and is continuing to make strong progress. The high level of engagement we have with the major phone manufacturers gives us a very good opportunity to achieve significant growth in this market. Although current volumes are not large, our commitment to China as a manufacturing base and our unique product offerings have put us in a strong position. More recently digital cameras with integrated GPS have begun appearing on the market. Rakon is a supplier to a number of these and is the only company able to offer a near complete hardware solution to camera manufacturers. The phenomenon of attaching the location of where the photo was taken to the digital image file is called geotagging. The popularity of this is constantly growing as users of digital cameras look for new ways to categorise and share their images. Popular photo sharing sites such as Flikr and Picassa all now support and promote geotagging. Rakon believes the potential for further growth in this market is large.
Consumer GPS customers are now going through a period of inventory adjustment, which has led them to reducing stock levels and therefore taking less components from Rakon. The continuing lowering of retail prices for PND and other GPS is predicted by our customers to offset some of the slowing in consumer demand with overall volumes increasing. Rakon maintains a very strong share in the supply to these markets and is well placed to capitalise on forecast growth as consumer confidence returns. Despite the dramatic decline in global economic activity our revenue was down only 12% and EBITDA 16% on the same period last year. Importantly, Rakon has maintained market share in core markets during difficult times. Rakon has also managed the cost base to ensure percentage margins remain the same despite the expected reduction in sales prices. Our joint venture in China is operating profitably and well. We also plan to establish a base there for manufacturing our products for very high volume markets. We will time the building of our factory there to coincide with the expected upturn in demand. In the mean time we have a highly scalable and automated manufacturing model in New Zealand. This allows us to continue to grow substantially and meet projected increases in demand until the extra scale sought from a China based plant is required. Our UK operations had a very positive result for the half year. Revenue was up on last year on the back of an increased proportion of sales being for the high value Pluto TCXO product destined for the telecom infrastructure markets. Investments in our Lincoln manufacturing plant have begun to yield solid returns. This has been coupled with reduced materials costs achieved through utilization of Rakon’s global supply base. As a result the UK has delivered good increases in bottom line returns.
Brent J Robinson Managing Director November 14, 2008
Volume sales out of France last year were exceptionally high as significant investment in China went into preparing communications infrastructure for the Beijing Olympics. This year saw volumes reduce to a lower than expected level which had a negative effect on the comparative European year-on-year results. This slow down in France has enabled the transition of manufacturing capability from France to India
to occur with no impact on customer deliveries. France is now geared towards supplying low volume, very high value products, as well as supporting India with product and process design. India offers a much lower cost base for the OCXO products. This will enable Rakon to profitably target higher volume applications in the telecom infrastructure market that have previously been closed to us. New 4th generation (4G) wireless networks continue to gather support even in the current market. Many of these new networks have very tight requirements for their frequency control products and are well suited to Rakon’s TCXO and OCXO products manufactured in Europe and India. We are working closely with a number of tier one and tier two equipment vendors on frequency control solutions for these next generation networks. We expect to be able to capture an increased market share as they are rolled out in the future. The femtocell market is one area that Rakon’s technology and manufacturing expertise has allowed it to take a commanding position as the number one supplier of frequency control products to this emerging market. A femtocell is a very small cellular base station that can be installed in a consumers home and enable a range of services to be delivered, such as landline calling from mobile, internet, tv and radio services. Although independent analysts projections about the timing of this market developing are likely to be optimistic Rakon believes there is significant potential for this market to rapidly grow over the next 2-3 years. Rakon’s position in the current market remains strong. The immediate economic environment has and will continue to impact on the financial results in the 2009 financial year; however, our technology base for consumer and industrial applications is in our view still the best in the world. When coupled with our increasingly competitive cost base, with increased automation in New Zealand and the UK plus our investments in India and China, we are confident of delivering earnings growth for shareholders in the years to follow.
Financials Unaudited Consolidated Interim Income Statement Note
Unaudited Six Months Ended 30 September 2008 ($000s)
Unaudited Six Months Ended 30 September 2007 ($000s)
Continuing operations Revenue 4 79,372 89,912 Cost of sales (49,536) (55,772) Gross profit 29,836 34,140
Unaudited Consolidated Interim Statement of Changes in Equity Audited Year Ended 31 March 2008 ($000s)
174,292 (107,847) 66,445
Other operating income Operating expenses Other gains/(losses) – net 6
8 (28,266) 4,210
72 (26,649) 932
273 (53,201) 3,138
Operating profit Net finance (costs)/income 7 Share of profit of associate and joint venture
5,788 (784)
8,495 174
16,655 (262)
255
-
-
Profit before income tax Income tax expense 5 Net profit after tax
5,259 (3,281) 1,978
8,669 (2,926) 5,743
16,393 (5,542) 10,851
Attributable to: Equity holders of the company 1,995 5,743 Minority interests (17) -
10,851 -
Earnings per share for profit attributable to the equity holders of the Company: Basic earnings per share Diluted earnings per share
1.6 1.5
The accompanying notes form an integral part of these interim financial statements.
4.6 4.4
8.6 8.4
Note
Share Capital ($000s)
Retained Earnings ($000s)
Other ($000s)
Equity ($000s)
Minority Interests ($000s)
Balance at 1 April 2007 8 80,833 21,361 (1,055) 101,139 - Net profit after tax for the half - 5,743 - 5,743 - year ended 30 September 2007 Currency translation differences - - (898) (898) - Total recognised income for the half year - 5,743 (898) 4,845 - Employee share schemes - value of employee services - - 409 409 - - proceeds from shares issued 279 - - 279 - Cash flow hedges, net of tax - - 722 722 - Issue of ordinary shares 22,097 - - 22,097 - Share issuance costs (66) - - (66) - Balance at 30 September 2007 8 103,143 27,104 (822) 129,425 - Net profit after tax for the - 5,108 - 5,108 - half year ended 31 March 2008 Currency translation differences - - (3,151) (3,151) - Total recognised income - 5,108 (3,151) 1,957 - for the half year Employee share schemes - value of employee services - - 466 466 - - proceeds from shares issued 18 - - 18 - Cash flow hedges, net of tax - - (29) (29) - Balance at 31 March 2008 8 103,161 32,212 (3,536) 131,837 - Net profit after tax for the half - 1,995 - 1,995 (17) year ended 30 September 2008 Currency translation differences - - 3,872 3,872 (8) Total recognised income - 1,995 3,872 5,867 (25) for the half year Minority interest – newly 12 - - - - 57 acquired in subsidiary Employee share schemes - value of employee services - - 233 233 - - proceeds from shares issued 17 - - 17 - Cash flow hedges, net of tax - - (1,233) (1,233) - Balance at 30 September 2008 8 103,178 34,207 (664) 136,721 32
Total Equity ($000s)
101,139 5,743 (898) 4,845 409 279 722 22,097 (66) 129,425 5,108 (3,151) 1,957
466 18 (29) 131,837 1,978 3,864 5,842 57
233 17 (1,233) 136,753
The accompanying notes form an integral part of these interim financial statements.
Unaudited Consolidated Interim Balance Sheet Note
Unaudited as at 30 September 2008 ($000s)
Assets Current assets Cash and cash equivalents 5,285 Trade and other receivables 39,115 Derivatives – held for trading 101 Derivatives – cash flow hedges 626 Inventories 44,870 Current income tax asset - Total current assets 89,997 Non-current assets Trade and other receivables 707 Investment in shares 743 Property, plant and equipment 10 42,807 Intangible assets 11 39,859 Investment in associate 12 16,130 Interest in joint venture 12 4,379 Total non-current assets 104,625 Total assets 194,622 Liabilities Current liabilities Bank overdraft 6,177 Borrowings 786 Trade and other payables 20,909 Derivatives – held for trading - Derivatives – cash flow hedges 1,524 Current income tax liabilities 4,437 Total current liabilities 33,833 Non-current liabilities Bank borrowings 8,000 Other liabilities 12 12,855 Provisions 2,201 Deferred tax liabilities 5 980 Total non-current liabilities 24,036 Total liabilities 57,869 Net assets 136,753 10
Unaudited as at 30 September 2007 ($000s)
Unaudited Consolidated Interim Balance Sheet continued Audited as at 31 March 2008 ($000s)
10,044 39,818 106 2,324 41,692 - 93,984
7,168 38,811 115 1,063 44,731 1,144 93,032
- - 37,643 39,884 - - 77,527 171,511
36,675 39,226 5,511 81,412 174,444
4 2,507 23,513 - 377 4,152 30,553
673 3,288 23,573 339 31 3,654 31,558
8,000 - 1,935 1,598 11,533 42,086 129,425
8,000 1,623 1,426 11,049 42,607 131,837
Note
Unaudited as at 30 September 2008 ($000s)
Unaudited as at 30 September 2007 ($000s)
Equity Share capital 8 103,178 Reserves (664) Retained earnings 34,207 136,721 Minority interest 32 Total equity 136,753
103,143 (822) 27,104 129,425 - 129,425
Audited as at 31 March 2008 ($000s)
103,161 (3,536) 32,212 131,837 131,837
The accompanying notes form an integral part of these interim financial statements.
11
Unaudited Consolidated Interim Statement of Cash Flows Unaudited Six Months Ended 30 September 2008 ($000s)
Operating activities Cash was provided from Receipts from customers 84,136 Interest received 129 Other income received 8 84,273 Cash was applied to Payments to suppliers and others (50,942) Payments to employees (22,269) Interest paid (651) Income tax paid (1,354) (75,216) Net cash flow from operating activities 9,057 Investing activities Cash was provided from Sale of property, plant and equipment 665 Sale of net assets 921 1,586 Cash was applied to Purchase of property, plant and equipment 10 (9,146) Purchase of intangibles (658) Investment in shares (743) Investment in associate (2,672) Investment in joint venture - Issuance of loan to joint venture (2,466) (15,685) Net cash flow from investing activities (14,099)
12
Unaudited Six Months Ended 30 September 2007 ($000s)
Unaudited Consolidated Interim Statement of Cash Flows continued
Audited Year Ended 31 March 2008 ($000s)
84,536 460 73 85,069
165,802 891 88 166,781
(65,983) (22,686) (338) (2,140) (91,147) (6,078)
(107,855) (51,141) (904) (5,478) (165,378) 1,403
- - -
-
(8,897) (259) - - - - (9,156) (9,156)
(10,987) (2,748) (8,228) (21,963) (21,963)
Note
Unaudited Six Months Ended 30 September 2008 ($000s)
Unaudited Six Months Ended 30 September 2007 ($000s)
Financing activities Cash was provided from Issue of ordinary shares 17 Proceeds from borrowings - 17 Cash was applied to Repayment of principal on borrowings (2,477) Share issuance costs - (2,477) Net cash flow from financing activities (2,460) Net increase (decrease) in (7,502) cash and cash equivalents Foreign currency translation adjustment 115 Cash and cash equivalents at 6,495 the beginning of the period Cash and cash equivalents at the (892) end of the period Composition of cash and cash equivalents Cash and cash equivalents 5,285 Bank overdraft (6,177) (892)
Audited Year Ended 31 March 2008 ($000s)
22,376 1,654 24,030
22,394 2,378 24,772
- (66) (66) 23,964 8,730
(66) (66) 24,706 4,146
(817) 2,127
46 2,303
10,040
6,495
10,044 (4) 10,040
7,168 (673) 6,495
The accompanying notes form an integral part of these interim financial statements.
13
Unaudited Consolidated Interim Statement of Cash Flows Unaudited Six Months Ended 30 September 2008 ($000s)
Reconciliation of net profit to net cash flows from operating activities Reported net profit after tax 1,978 Items not involving cash flow Depreciation expense 3,012 Amortisation expense 1,098 Increase in estimated doubtful debts (130) Employee share based payments 250 Movement in foreign currency (1,915) Movement in interest rate swap fair value - Deferred tax - Loss on disposal of property, plant and equipment 48 Goodwill impairment 292 Share of profit of associate and joint venture 255 2,910 Impact of changes in working capital items Trade and other receivables 3,332 Inventories (1,690) Trade and other payables 600 Tax provisions 1,927 4,169 Net cash flow from operating activities 9,057
Unaudited Six Months Ended 30 September 2007 ($000s)
Audited Year Ended 31 March 2008 ($000s)
5,743
10,851
2,429 1,106 (168) 409 (368) 17 99
5,436 2,459 (197) 875 321 123 390
1 - - 3,525
3 9,410
Notes to the Unaudited Consolidated Interim Financial Statements 1. General information Rakon Limited (“the Company”) and its subsidiaries (together “the Group”) is a world leader in the development of frequency control solutions for a wide range of applications. Rakon has leading market positions in the supply of crystal oscillators to the GPS, telecommunications network timing/synchronisation, and aerospace markets. The Company is a limited liability company incorporated and domiciled in New Zealand. It is registered under the Companies Act 1993 and is an issuer in terms of the Securities Act 1978. The Company is listed on the New Zealand Stock Exchange. These consolidated interim financial statements have been approved for issue by the Board of Directors on 14 November 2008. 2. Summary of significant accounting policies 2.1. Basis of preparation This condensed consolidated interim financial information for the six months ended 30 September 2008 has been prepared in accordance with NZ IAS 34, Interim Financial Statements (“NZ IAS 34”). The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 March 2008, which have been prepared in accordance with NZ IFRSs. 2.2. Accounting policies
(6,616) (6,904) (3,484) 1,658 (15,346) (6,078)
(7,260) (9,706) (2,080) 188 (18,858) 1,403
The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 March 2008, as described in those annual financial statements with the addition of the following: Available for sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets (Investment in shares) unless management intends to dispose of the investment within 12 months of the balance sheet date. Investments are initially recognised at fair value plus transaction costs and are subsequently carried at fair value. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognised in profit or loss, while translation differences on non-monetary securities are recognised in equity. Changes in the fair value of monetary and non-monetary securities classified as available-forsale are recognised in equity. When securities classified as available for sale are sold or impaired, the accumulated fair value
14
15
adjustments recognised in equity are included in the income statement as ‘gains and losses from investment securities’.
5. Income Taxes
Dividends on available-for-sale equity instruments are recognised in the income statement as part of other income when the Group’s right to receive payments is established.
Current tax expense for the interim periods presented is the expected tax payable on the taxable income for the period, calculated as the estimated average annual effective income tax rate applied to the pre-tax income of the interim period.
The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models making maximum use of market inputs and relying as little as possible on entity-specific inputs. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. 3. Segment Information Primary reporting format – business segments At 30 September 2008, the Group is organised on a worldwide basis into one business segment; namely the development and manufacture of electronic components for timing reference and frequency control. The segment result is reflected in the financial statements. 4. Revenue
Unaudited Six Months Ended 30 September 2008 ($000s)
Unaudited Six Months Ended 30 September 2007 ($000s)
Audited Year Ended 31 March 2008 ($000s)
42,846 16,266 18,564 1,696 79,372
50,168 18,200 19,985 1,559 89,912
93,286 37,911 37,599 5,496 174,292
Revenue is allocated above based on the country in which the customer is located. 16
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amounts of the assets and liabilities, using the estimated average annual effective income tax rate for the interim periods presented. 6. Other gains/(losses) – net
Unaudited Six Months Ended 30 September 2008 ($000s)
Unaudited Six Months Ended 30 September 2007 ($000s)
Audited Year Ended 31 March 2008 ($000s)
Gain on disposal of intangibles, plant and equipment to joint venture Cost attributable to investment in and sale of intangibles, plant and equipment to joint venture Cost attributable to investments in associates and subsidiaries Goodwill impairment loss Forward foreign exchange contracts - held for trading - net foreign exchange gains Trading foreign exchange1
1,662
-
3,058
(999)
-
(1,066)
(416)
-
-
(292)
-
-
101 - 4,154 4,210
347 - 585 932
156 210 780 3,138
Includes realised and unrealised gains/(losses) arising from accounts receivable and accounts payable. Hedge accounting is sought on the initial sale of goods and purchase of inventory, subsequent movements are recognised in trading foreign exchange.
Total Revenues by destination Region Asia North America Europe Others
Deferred tax
1
The Group’s trading revenue is derived in the following regions.
Current tax
7. Net Finance (costs)/income
Financial income Interest income on current and short-term bank accounts Fair value gains on interest rate swaps Financial cost Interest expense on bank borrowings Interest expense on other liabilities
Unaudited Six Months Ended 30 September 2008 ($000s)
Unaudited Six Months Ended 30 September 2007 ($000s)
Audited Year Ended 31 March 2008 ($000s)
126
583
920
-
(17)
(123)
(651) (259) (784)
(392) - 174
(1,059) (262) 17
8. Share Capital
11. Intangible assets Number of shares
At 1 April 2007 Shares issued - - ordinary shares - redemption of redeemable ordinary shares to ordinary shares - employee share option scheme Share issuance costs At 30 September 2007 Shares issued - - employee share option scheme At 31 March 2008 Shares issued - - employee share option scheme At 30 September 2008
Ordinary Shares ($000s)
121,064,815
80,833
5,456,006 22,537 237,169 - 126,780,527
22,097 35 244 (66) 103,143
10,890 126,791,417
18 103,161
52,493 126,843,910
17 103,178
At 30 September 2008, 1,077,463 redeemable ordinary shares were on issue and held in trust on behalf of participants in the Rakon Share Growth Plan: (31 March 2008 and 30 September 2007: 1,077,463; 1 April 2007: 1,100,000). Partial payments received from Rakon Share Growth Plan participants of $162,000 at 30 September 2008 are recorded within trade and other payables (31 March 2008 and 30 September 2007: $108,000; 1 April 2007: $55,000). 9. Dividends The Group’s current dividend policy is that no dividend will be paid as all profits are to be reinvested into the business. 10. Capital expenditure
Unaudited Six Months Ended 30 September 2008 ($000s)
Unaudited Six Months Ended 30 September 2007 ($000s)
Audited Year Ended 31 March 2008 ($000s)
Opening net book value Additions Disposals Depreciation Other movements Closing net book value
36,675 9,146 (665) (3,012) 663 42,807
31,172 8,897 - (2,429) 3 37,643
31,172 10,987 (5,436) (48) 36,675
Amounts committed to capital expenditure subsequent to end of the interim period total $724,000. 18
Order Product Goodwill Trademarks Patents backlogs Software development ($000s) ($000s) ($000s) ($000s) ($000s) ($000s)
At 1 April 2007 Cost 34,179 710 4,498 1,242 3,765 - Accumulated amortisation - (8) (37) (73) (2,567) - Net book value 34,179 702 4,461 1,169 1,198 - Half year ended 30 September 2007 Opening net book value 34,179 702 4,461 1,169 1,198 - Foreign exchange differences (872) (12) (74) (20) - - Additions - - - - 259 - Amortisation charge - (50) (221) (428) (407) - Closing net book amounts 33,307 640 4,166 721 1,050 - At 30 September 2007 Cost 33,307 Accumulated amortisation - Net book value 33,307
Assests under construction ($000s)
Total ($000s)
-
44,394
- -
(2,685) 41,709
-
41,709
- -
(978) 259
-
(1,106)
-
39,884
698
4,424
1,222
4,015
-
-
43,666
(58)
(258)
(501)
(2,965)
-
-
(3,782)
640
4,166
721
1,050
-
-
39,884
4,166
721
1,050
-
-
39,884
(272) - -
(36) - -
(51) 520 (628)
- 1,587 -
- 565 -
(1,977) 2,672 (628)
(212)
(414)
(321)
-
-
(1,353)
-
-
628
-
-
628
3,682
271
1,198
1,587
565
39,226
Half year ended 31 March 2008 Opening net book value 33,307 640 Foreign exchange differences (1,573) (45) Additions - - Disposals - - Amortisation charge - (406) Amortisation reversal on disposals - - Closing net book amounts 31,734 189
19
Impairment tests for goodwill
Intangible assets continued Order Product Goodwill Trademarks Patents backlogs Software development
($000s)
At 31 March 2008 Cost 31,734 Accumulated amortisation - Net book value 31,734
($000s)
($000s)
($000s)
($000s)
Total
($000s)
($000s)
Goodwill is allocated to the Group's Cash Generating Units (CGUs) identified according to country of operation. A geographical-level summary of the goodwill allocation is presented below:
653
4,152
1,186
3,865
1,587
565
43,742
(464)
(470)
(915)
(2,667)
-
-
(4,516)
189
3,682
271
1,198
1,587
565
39,226
3,682
271
1,198
1,587
565
39,226
238 - -
7 - -
7 199 (74)
71 274 -
- 185 -
2,114 658 (753)
-
-
-
-
-
(292)
(213)
(278)
(413)
-
-
(1,098)
-
-
4
-
-
4
3,707
-
921
1,932
750
39,859
Half year ended 30 September 2008 Opening net book value 31,734 189 Foreign exchange differences 1,786 5 Additions - - Disposals (679) - Impairment charge (292) - Amortisation charge - (194) Amortisation reversal on disposals - - Closing net book amounts 32,549 - At 30 September 2008 Cost 32,549 Accumulated amortisation - Net book value 32,549
($000s)
Assets under construction
Unaudited Six Months Ended 30 September 2008 ($000s)
Unaudited Six Months Ended 30 September 2007 ($000s)
Audited Year Ended 31 March 2008 ($000s)
New Zealand United Kingdom France/India
10,067 19,798 2,684 32,549
9,992 20,650 2,665 33,307
9,520 19,675 2,539 31,734
The recoverable amount of a CGU is determined based on value-in-use calculations. On 2 June 2008 the majority of Rakon Europe’s net assets were sold for $1.8 million including goodwill of $679,000 and deferred settlement of $888,000. The remaining goodwill of $292,000 was written off from the United Kingdom CGU. At 30 September 2008 goodwill was reviewed for indicators of impairment; the France/India year to date financial performance highlighted potential indicators of impairment and an impairment test was performed. Key assumptions used in the France/India value-in-use calculations The calculations are most sensitive to the following key assumptions:
658
4,390
1,193
3,997
1,932
750
45,469
(658)
(683)
(1,193)
(3,076)
-
-
(5,610)
-
3,707
-
921
1,932
750
39,859
Growth rate average rate for first three years is 13%, subsequent years are 5% and terminal rate is 2% Discount rate 9.7% Growth rate – The growth rate determined by management is based on past performance and expected business growth from existing and new customers. The expected business growth is underpinned by design and manufacturing improvements, cost reductions and change in sales mix which are expected to offset sales price reduction. Discount rates – Discount rates reflect management’s best estimate of the risks specific to each unit. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. In determining appropriate discount rates for each unit, regard has been given to the yield on a ten-year government bond at the beginning of the budgeted period. The discount rates used are pre-tax and reflect specific risks relating to the relevant segments.
20
21
Sensitivity to changes in assumptions in the France/India value-in-use calculations At 31 March 2008 the value-in-use for the France/India CGU exceeded the carrying value by $1.6 million using the base assumptions. At 30 September 2008 the amount by which the value-in-use exceeds the carrying value has increased significantly and as such a sensitivity analysis has not been performed. During the period a detailed 4 year forecast was prepared based on existing and prospective customers and their individual product requirements. This resulted in a change in sales mix and the increase in the value-in-use. No other indicators of impairment were identified and impairment tests were not performed for the other CGUs.
Details of net assets acquired and goodwill were as follows:
($000s)
Purchase consideration: - cash paid - deferred settlement - direct costs relating to the acquisition Total purchase consideration - fair value of net identifiable assets acquired (see above) Goodwill included in the Investment in Associate
1,917 11,505 755 14,177 4,102 10,075
A full impairment review will be carried out prior to 31 March 2009. 12. Business combinations
The goodwill is attributable to the product, markets and workforce, of the three companies and the significant synergies expected to arise from this investment.
Current year
As at 30 September 2008 the value of Rakon’s investment and the related deferred settlement is as follows:
On 30 June 2008 the Group acquired 100% of the shares of Etimes Holdings Limited (renamed Rakon Investment HK Limited on 1 August 2008). This Company, a non-trading holding company, owns a 40% interest in the following companies • Shenzhen Timemaker Crystal Technology Co, Limited • Roye Crystal Technology (Shanghai) Co, Limited • Shenzhen Taixaing Wafer Co, Limited As part of this acquisition Rakon sold a 30% share of Rakon HK Limited to the other shareholders of the above companies. Share of earnings in associate of $372,000 have been recognised since acquisition.
Investment in associate ($000s)
Other liabilities ($000s)
Initial amount as above Foreign exchange differences Share of profit for period Balance at end of period
14,177 1,581 372 16,130
(11,505) (1,350) 12,855
Prior year
The Group’s share of assets and liabilities arising from the acquisition were as follows:
Acquiree’s carrying amount ($000s)
Preliminary fair value ($000s)
Cash and cash equivalents Trade and other receivables Inventories Property, plant and equipment Intangibles Order backlog Borrowings Trade and other payables Net identifiable assets acquired
542 2,440 1,946 2,790 - - (1,171) (1,720) 4,827
312 1,731 1,548 2,752 13 93 (1,171) (1,176) 4,102
On 25 March 2008 the Group acquired 49% of the shares (through Rakon (Mauritius) Limited) of Centum Frequency Products Private Limited for cash consideration of $8.2 million. Centum Frequency Products Private Limited was subsequently renamed on 15 April 2008 to Centum Rakon India Private Limited.
These values have been determined provisionally based on current available information. 22
23
The Group’s share of assets and liabilities arising from the acquisition were as follows:
Acquiree’s carrying amount ($000s)
Preliminary fair value ($000s)
Final fair value ($000s)
Cash and cash equivalents Short term deposits Trade and other receivables Inventories Property, plant and equipment Intangibles Order backlog Deferred tax asset Borrowings Trade and other payables Net identifiable assets acquired
100 4,018 1,015 903 788 5 - - (1,773) (554) 4,502
100 4,018 1,015 903 788 5 54 - (1,773) (554) 4,556
44 4,074 1,047 973 734 18 54 19 (1,801) (620) 4,542
13. Contingent liabilities At 30 September 2008 there were no contingent liabilities, (31 March 2008 and 30 September 2007; nil). 14. Subsequent events There are no subsequent events after 30 September 2008. 15. Seasonality of business The development, manufacture and sale of electronic components for timing reference and frequency control products are subject to seasonal fluctuation pre-empting end use purchase demand. The peak period is in the September to November period.
Fair values were finalised after the Centum Rakon India Private Limited joint ventures financial statements at 31 March 2008 were finalised. Details of net assets acquired and goodwill were as follows:
($000s)
Purchase consideration: - cash paid Total purchase consideration - fair value of net identifiable assets acquired (see above) Goodwill included in the Interest in Joint Venture
8,228 8,228 4,542 3,686
The goodwill is attributable to the existing product range and workforce of Centum Rakon India Private Limited and the significant synergies expected to arise from the joint venture.
30 September 2008 ($000s)
31 March 2008 ($000s)
Beginning of period Acquisition of joint venture Elimination of gain realised by Rakon France Foreign exchange differences Balance at end of period
5,511 - (1,479) 347 4,379
8,228 (2,938) 221 5,511
Centum Rakon India Private Limited has purchased intangible assets and plant and equipment from Rakon France SAS who realised a gain on sale. From a Group perspective, 49% of this gain is unrealised and therefore this has been eliminated from the Group's profit. 24
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Accountants Report
Accountants’ Report To the shareholders of Rakon Limited
We have reviewed the interim condensed consolidated financial statements (“financial statements”) on pages 6 to 23. The financial statements provide information about the past financial performance and cash flows of the Group, comprising Rakon Limited and its subsidiaries, for the half year ended 30 September 2008 and its financial position as at that date. This information is stated in accordance with the accounting policies set out on pages 13 to 14.
Directors’ responsibilities The Company’s Directors are responsible for the preparation and presentation of the financial statements that present fairly the financial position of the Group as at 30 September 2008 and its financial performance and cash flows for the period ended on that date.
Accountants’ responsibilities We are responsible for reviewing the financial statements presented by the Directors in order to report whether, in our opinion and on the basis of the procedures performed by us, anything has come to our attention that would indicate that the financial statements do not present fairly the matters to which they relate.
Basis of opinion A review is limited primarily to enquiries of company personnel and analytical review procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit on the financial statements and, accordingly, we do not express an audit opinion. We have reviewed the financial statements of the Group for the period ended 30 September 2008 in accordance with the Review Engagement Standards issued by the Institute of Chartered Accountants of New Zealand. We have no relationship with or interests in the Company or its subsidiaries other than in our capacities as accountants conducting this review, auditors under the Companies Act 1993 and providers of other assurance services.
Review opinion We have reviewed the financial performance and cash flows of the Group for the period ended 30 September 2008 and its financial position as at that date. Based on our review, nothing has come to our attention that causes us to believe that the financial statements do not present fairly the financial position of the Group as at 30 September 2008 and its financial performance and cash flows for the period ended on that date in accordance with both International Accounting Standard 34 and New Zealand Equivalent to International Accounting Standard 34, Interim Financial Reporting. Our review was completed on 14 November 2008 and our review opinion is expressed as at that date.
Chartered Accountants
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Auckland
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Global Presence KEY
Lincoln/Harlow, UK Design and manufacturing of Pluto速 based TCXOs and Advanced Technology Products. Chicago, IL, USA
Sales and Customer Support Manufacturing
EUROPE
NORTH AMERICA
Beijing, China ASIA/PACIFIC
Tokyo, Japan ASIA/PACIFIC
Mannheim, Germany
Shenzhen, China Joint venture with TimeMaker. New factory planned.
Europe
Argenteuil, France Sales, support, design and manufacturing of SC crystals and OCXOs.
Shanghai, China ASIA/PACIFIC
ASIA/PACIFIC
EUROPE
Taipei, Taiwan Penang, Malaysia
India Joint venture with Centum Electronics Ltd. Manufacturing of OCXOs and VCXOs.
ASIA/PACIFIC
ASIA/PACIFIC
ASIA/PACIFIC
Auckland, New Zealand Sales, support, design and manufacturing of crystals and TCXOs. Head Quarters
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Directory Registered Office
Principal Lawyers
Rakon Limited
Bell Gully
One Pacific Rise
PO Box 4199
Mt Wellington
AUCKLAND
AUCKLAND Telephone: 09 573 5554 Facsimile: 09 573 5559 Website: www.rakon.co.nz
Auditors PricewaterhouseCoopers Private Bag 92162 AUCKLAND
Mailing Address Rakon Limited Private Bag 99943 Newmarket AUCKLAND
Share Registrar Computershare Investor Services Limited 159 Hurstmere Road North Shore Private Bag 92119
Directors of Rakon Limited
AUCKLAND 1020
Bryan Mogridge
Telephone: 09 488 8700
Brent Robinson
Facsimile: 09 488 8787
Bruce Irvine Peter Maire Darren Robinson Warren Robinson
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