Rakon September 2012 Half Year Result

RAK
15/11/2012 08:34
HALFYR

REL: 0834 HRS Rakon Limited

HALFYR: RAK: Rakon September 2012 Half Year Result

Rakon Limited
Results for announcement to the market
Reporting period 6 months to 30th September 2012
Previous reporting period 6 months to 30th September 2011

Amount NZ$000 % Change
Revenue from ordinary activities 89,414 -5.5%
Earnings before interest, tax, depreciation, amortisation & share based
payments 4,695a -24%
Earnings before interest & tax -3,348b -3,482%
Net profit after tax -3,960b -1,429%
Note a: includes share of EBITDA from associates and joint venture of
NZ$1,942,000.
b: includes share of profit of associates and joint venture of NZ$501,000.

Amount per security Imputed amount per security
Interim / Final Dividend Nil Nil
Record Date Not Applicable Not Applicable
Dividend Payment Date Not Applicable Not Applicable

Comments

Rakon (RAK) has posted a half year revenue of NZ$89 million, down $5 million
on the previous year but up $6 million on the preceding 6 months, reflecting
the company's re-invigorated strategy in the Asian market.

Rakon Managing Director, Brent Robinson, said the company had been building
its position in several markets and investing in its manufacturing platforms
to meet anticipated growth. This has required the business to continue to
carry additional costs over that period. The results in the current half
year also reflected a softer than expected Telecommunications infrastructure
market.

The economic situation in Europe and North America has impacted the
Telecommunications market for longer than had been expected. Operator spend
has been down but recent announcements, such as those from AT&T, show this is
turning, as operators begin building their 4G networks.

Mr Robinson said Rakon is strongly positioned in this market and beginning to
see an increase in demand. "Although recent announcements by several
operators to roll out 4G networks have been later coming than the market
expected, we remain in a very strong position as a preferred supplier to the
leading vendors of equipment for these networks."

"These new 4G networks will incorporate both traditional macro base station
equipment and small cells. This equipment and associated backhaul investment
will provide significant growth for Rakon in the coming years."
Mr Robinson said SWD (smart wireless device) growth has continued strongly,
which meshed well with Rakon's strategy.

During 2012, China has surpassed the US as the largest market for smartphone
sales and Chinese brand names are taking an increasing share of this market.

"Rakon is a leading supplier not only to the well-recognised names but also
to the leading Chinese brands. Rakon's RCC (Rakon Crystal Chengdu) facility
is operating well. Capacity will increase with the planned movement of two
high volume lines from NZ and additional new capacity in the new year," he
said.

EBITDA on a look through basis including JVs and Associates for the first
half was NZ$4.7 million compared with $6.2 million in the same period in the
prior year and $6.9 million in the last 6 months of the prior year. A bottom
line Net Loss after tax of NZ$4.0 million was recorded.

"Our manufacturing facilities in China and India are now well established
which will enable us to reduce costs we have been carrying through the
transition and allow us to improve earnings and continue to invest in
growth."

Recently Rakon announced a realignment of its global business, taking
advantage of its scale manufacturing plants in India and China that form a
vital part in the company's long term growth strategy. This realignment will
reduce global costs by NZ$10 million per annum, with 70% of the planned
changes expected to be in place by April 2013. It would also enable the NZ
business to concentrate more heavily on growing its R&D activities and new
product development.

Commenting upon full year guidance given to the market in August, Mr Robinson
said that with the current prospects and orders being received Rakon should
achieve a result within the range predicted.

Directors Declaration (NZX Listing Rules Appendix 1, 3.1 & 3.2)

The Directors declare that the consolidated financial statements on pages 3
to 15 have been prepared in compliance with applicable Financial Reporting
Standards. The accounting policies the Directors consider critical to the
portrayal of the company's financial condition and results which require
judgements and estimates about matters which are inherently uncertain are
disclosed in note 2.17 of the financial statements for the year ended 31
March 2012.
Unaudited Consolidated Interim Statement of Comprehensive Income

The accompanying notes form an integral part of these interim financial
statements.
Unaudited Consolidated Interim Statement of Changes in Equity

The accompanying notes form an integral part of these interim financial
statements.
Unaudited Consolidated Interim Balance Sheet

The accompanying notes form an integral part of these interim financial
statements.
Unaudited Consolidated Interim Statement of Cash Flows

The accompanying notes form an integral part of these interim financial
statements.
Unaudited Consolidated Interim Statement of Cash Flows

The accompanying notes form an integral part of these interim financial
statements.

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 15 November 2012.
2. Summary of significant accounting policies
2.1. Basis of preparation
This condensed consolidated interim financial information for the six months
ended 30 September 2012 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 2012, which have been
prepared in accordance with NZ IFRS.
2.2. Accounting policies
The accounting policies applied are consistent with those of the annual
financial statements for the year ended 31 March 2012 with the addition of
the following:
2.3. The Group has adopted the following new and amended IFRSs as of 1
April 2012:
NZ IFRS 7 (amendment): Financial Instruments disclosures - Transfer of
Financial Assets (effective for annual periods beginning on or after 1 July
2011)
The amendments require additional disclosures about transfer of financial
assets to enable users of financial statements
- To understand the relationship between transferred financial assets that
are not derecognised in their entirety and the associated liabilities; and
- To evaluate the nature of, and risks associated with, the entity's
continuing involvement in derecognised financial assets.
The amendment is not expected to have a material impact on the Group or
Company's financial statements and will be adopted in the financial
statements for the annual reporting period ending 31 March 2013.
FRS 44 New Zealand Additional Disclosures and Harmonisation Amendments
(effective for annual periods beginning on or after 1 July 2011)
FRS 44 sets out New Zealand specific disclosures for entities that apply NZ
IFRSs. These disclosures have been relocated from NZ IFRSs to clarify that
these disclosures are additional to those required by IFRSs. The
Harmonisation Amendments amends various NZ IFRSs for the purpose of
harmonising with the source IFRSs and Australian Accounting Standards.
The new standard and amendments are not expected to have a material impact on
the Group or Company's financial statements and will be adopted in the
financial statements for the annual reporting period ending 31 March 2013.
NZ IAS 1 Amendments Presentation of Items of Other Comprehensive Income
(effective for annual periods beginning on or after 1 July 2012)
The amendment requires entities to separate items presented in other
comprehensive income into two groups, based on whether they may be recycled
to profit or loss in the future. This will not affect the measurement of any
of the items recognised in the balance sheet or the profit or loss in the
current period. The Group and Company expect to adopt the amendment in the
financial statements for the annual reporting period ending 31 March 2014.
NZ IAS 12 Recovery of Underlying Assets (effective from 1 January 2012)
The amendment requires the measurement of deferred tax assets or liabilities
to reflect the tax consequences that would follow from the way management
expects to recover or settle the carrying of the relevant assets or
liabilities, that is through use or through sale and introduces a rebuttable
presumption that investment property which is measured at fair value is
recovered entirely by sale. The amendment is not expected to have a material
impact on the Group or Company's financial statements. The Group and Company
expect to adopt the amendment in the financial statements for the annual
reporting period ending 31 March 2014.

3. Segment Information
The chief operating decision maker assesses the performance of the operating
segments based on a measure of adjusted earnings before interest, tax,
depreciation and amortisation (EBITDA look through). This EBITDA "look
through" measure excludes the non-controlling interest's share of the
subsidiaries EBITDA where applicable. Interest income and expenditure are not
included in the result for each operating segment that is reviewed by the
chief operating decision maker. Except as noted below, other information
provided to the chief operating decision maker is measured in a manner
consistent with that in the financial statements.
The segment information provided to the chief operating decision maker for
the reportable segments for the half year ended 30 September 2012 is as
follows:

1 Includes Investments in subsidiaries, Rakon Financial Services Ltd, Rakon
UK Holdings Ltd, Rakon Europe Limited.
2 Does not include foreign exchange gains or losses recognised directly in
sales and costs of sales.
3 Excludes intercompany receivable balances eliminated on consolidation.
4 The measure of liabilities has been disclosed for each reportable segment
as it is regularly provided to the chief operating decision-maker and
excludes intercompany payable balances eliminated on consolidation.
5 Includes Investment in subsidiary Rakon Temex SAS. As at 30 September 2011
Rakon Temex SAS was amalgamated into Rakon France SAS.
6 Includes Investment in Rakon Crystal (Chengdu) Co Limited.
7Includes Rakon Limited's 40% share of investment in Shenzhen Timemaker
Crystal Technology Co, Limited, Chengdu Timemaker Crystal Technology Co,
Limited and Shenzhen Taixaing Wafer Co, Limited
8 Includes Rakon Limited's 49% share of investment in Centum Rakon India
Private Limited

A reconciliation of adjusted EBITDA to (loss) before tax is provided as
follows:

Breakdown of the revenue from all sources is as follows:

The Group's trading revenue is derived in the following regions.

Revenue is allocated above based on the country in which the customer is
located.
4. Operating expenses

Unaudited Six
Months ended
30 September 2012
($000s) Unaudited Six
Months ended
30 September 2011
($000s) Audited Year ended 31 March 2012
($000s)
Operating expense by function:
Selling and marketing costs 8,453 8,012 15,459
Research and development 7,541 7,630 14,738
General and administration 13,244 11,440 28,808
29,238 27,082 59,005

5. Other (losses)/gains - net
Unaudited Six
Months ended
30 September 2012
($000s) Unaudited Six
Months ended
30 September 2011
($000s) Audited Year ended 31 March 2012
($000s)
Loss on disposal of intangibles, plant and equipment (51) (20) 1,014
(51) (20) 1,014
Foreign exchange (losses)/gains - net
Forward foreign exchange contracts
- held for trading 476 215 205
- net foreign exchange gains - 636 -
(Losses)/gains on revaluation of foreign denominated monetary assets and
liabilities1 (954) (1,248) (626)
(478) (397) (421)
(529) (417) 593
1 Includes realised and unrealised (losses)/gains 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.
6. Net Finance (costs)/income
Unaudited Six
Months ended
30 September 2012
($000s) Unaudited Six
Months ended
30 September 2011
($000s) Audited Year ended
31 March 2012
($000s)
Financial income
Interest income 59 143 222
Unwinding of discount on deferred settlement 28 - -
87 143 222

Financial expenses
Interest expense on bank borrowings (967) (380) (1,729)
Interest expense on other borrowings - (9) (13)
Unwinding of discount on deferred settlement - (45) (25)
(967) (434) (1,767)
Net finance (costs) (880) (291) (1,545)
7. Income Taxes
Current tax
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.
Deferred tax
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.

8. Share Capital

At 30 September 2012 the total authorised number of ordinary shares is
191,038,591 shares (31 March 2012 and 30 September 2011: 191,038,591):
o 188,945,302, are fully paid shares (31 March 2012: 188,945,302, 30
September 2011: 188,868,455);
o 743,289 unpaid ordinary shares were on issue and held in trust on behalf of
participants in the Rakon Share Plan (31 March 2012: 743,289, 30 September
2011: 743,289);
o 1,350,000 fully paid restricted ordinary shares were on issue and held in
trust on behalf of participants in the Rakon Restricted Share Plan (31 March
2012: 1,350,000, 30 September 2011: 1,350,000);
9. Dividends
The Directors reviewed the dividend policy and no dividend will be paid.
10. Capital expenditure

Unaudited Six Months Ended
30 September 2012
($000s) Unaudited Six Months Ended
30 September 2011
($000s) Audited Year Ended
31 March 2012
($000s)
Opening net book value 90,411 79,035 79,035
Additions 5,258 16,726 22,402
Disposals (10) (37) (587)
Depreciation (5,645) (4,112) (8,018)
Other movements (1,058) (274) (2,421)
Closing net book value 88,956 91,338 90,411
Amounts committed to capital expenditure subsequent to the end of the interim
period total $1,554,000 (31 March 2012: $112,000, 30 September 2011:
$2,306,000).
11. Intangible assets

Goodwill
($000s) Patents
($000s) Software
($000s)
Product development
($000) Assets under construction
($000) Total
($000s)
At 30 September 2011
Cost 25,654 3,767 8,645 3,326 847 42,239
Accumulated amortisation - (1,740) (4,909) (313) - (6,962)
Net book value 25,654 2,027 3,736 3,013 847 35,277

At 31 March 2012
Cost 24,826 3,701 6,347 3,612 274 38,760
Accumulated amortisation - (1,912) (4,970) (398) - (7,280)
Net book value 24,826 1,789 1,377 3,214 274 31,480

At 30 September 2012
Cost 24,775 3,697 6,936 3,831 447 39,686
Accumulated amortisation - (2,072) (5,254) (615) - (7,941)
Net book value 24,775 1,625 1,682 3,216 447 31,745

12. Impairment tests for goodwill
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:
Unaudited Six Months Ended
30 September 2012
($000s) Unaudited Six Months Ended
30 September 2011
($000s) Audited Year Ended
31 March 2012
($000s)
New Zealand 7,663 7,934 7,678
United Kingdom 15,070 15,605 15,101
France 510 528 511
India - OCXO products transferred from France 1,532 1,587 1,536
Goodwill recognised in Intangible assets 24,775 25,654 24,826
Goodwill recognised in Investment in associates - China (T'Maker) 10,134
10,283 10,182
Goodwill recognised in Investment in joint venture - India (Centum Rakon)
2,937 3,345 3,085

The recoverable amount of a CGU is determined based on value-in-use
calculations.
These calculations use post-tax cash flow projections based on financial
budgets and models approved by the directors covering a four year period due
to product life cycles and their pricing trends. The projections used in
the model are based on industry forecast of continued significant growth in
sales of wireless devices including smart phones and significant increases in
the utilisation intensity of these devices. This growth is expected to
translate into investment by operators into new network infrastructure to
handle the increase in data traffic. Rakon's projection is to both benefit
from the industry trend and secure an increasing share in the market for both
devices and infrastructure reflecting the quality of its product range,
technology advantages, manufacturing competitiveness and diversity. The
actual rate of growth may differ from the projections used.
At 30 September 2012 goodwill was reviewed for indicators of impairment. The
overall global economy has impacted on expected results for the CGUs during
the six months under review. The economic conditions have resulted in lower
than forecast investment in new network infrastructure equipment by operators
and lower demand for consumer electronic products. This generally reduced
the actual results below those expected for the CGUs.
Despite these factors the New Zealand CGU improved revenue and earnings
compared with the comparative period in the prior year and the preceding six
month period. This was achieved due to the diverse mix of this business and
was due to growth in sales of consumer wireless devices. This market has
continued to grow in spite of the overall economic environment.
Revenue and earnings from the United Kingdom CGU reduced when compared with
the comparative period in the prior year and the preceding six month period
due to the lower than forecast spending by operators on network
infrastructure which is the prime market for the UK CGU.
Revenue and earnings from the French CGU were lower than the comparative
period in the prior year but improved on the preceding six month period.
The improvement on the preceding six month period was due to increased market
share which offset the impact of lower overall spending on network
infrastructure. The reduction on the comparative period in the prior year
was due to the timing of sales made for high reliability space and defence
applications.
Results for the India Associate CGU (Centum Rakon) were slightly above
expectations and higher than the comparative period in the prior year and the
preceding six month period due to improved margins and product mix.
Results for the China Associate CGU (T'Maker) were lower than predicted due
to slightly lower than forecast demand and tighter margins as a consequence
of lower than forecast overall demand for general consumer electronic
products. The outlook for this business is for continued growth driven by
overall demand and improved margins due to improvement in manufacturing
operations and yield.
The Directors consider the overall assumptions for the four year period of
increasing sales into smart wireless applications and network infrastructure
continue to be appropriate and do not consider the results and events in the
six month period under review indicate any impairment in the carrying value
of goodwill at 30 September 2012. An impairment test will be performed at
the year end.

13. Contingent liabilities
The Group has contingent liabilities in respect of legal claims arising in
the ordinary course of business. It is not anticipated that any material
liabilities will arise from the contingent liabilities.
14. Subsequent events
On 6th November 2012 Rakon announced plans to realign its global business.
These plans include shifting some manufacturing activities from New Zealand
to China and prioritising global project activities. Substantial cost savings
will be generated as a result and there will be a loss of approximately 60
jobs in New Zealand plus a small number in other locations. No provision has
been recorded in these financial results.

Other Information
A. Dividends (NZX Listing Rules Appendix 1: 2.3(d))
Rakon Limited currently has adopted a policy that there will not be any
dividend payments made for the foreseeable future and surplus funds will be
retained in order to capitalise on immediate and future growth opportunities.

B. Net Tangible Assets per Security (NZX Listing Rules Appendix 1: 2.3(f))
30 September 2012 30 September 2011
Net tangible assets $000 157,247 166,441
Number of ordinary securities 000 191,038 191,038
Net tangible asset backing per ordinary security $ 0.82 0.87
C. Control gained and lost over Entities (NZX Listing Rules Appendix 1:
2.3(g))
Rakon Limited has acquired the following entities during the period:
Nil
D. Associates & Joint Ventures (NZX Listing Rules Appendix 1: 2.3(h))
Rakon Limited has the following associate entities and joint venture
arrangements.
Shareholding
Centum Rakon India Private Limited 49%
Shenzhen Timemaker Crystal Technology Co, Limited 40%
Chengdu Timemaker Crystal Technology Co, Limited 40%
Shenzhen Taixiang Wafer Co, Limited 40%
The contribution of Centum Rakon India Private Limited to Rakon Limited's
profit from ordinary activities was a profit of $705,000. The contribution
of Shenzhen Timemaker, Chengdu Timemaker and Taixiang to Rakon Limited's
profit from ordinary activities was a loss of $204,000.
End CA:00229748 For:RAK Type:HALFYR Time:2012-11-15 08:34:34