INTERIM REPORT SEPTEMBER 2006
Contents
Half Year Review
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Financials Interim Statement of Financial Performance
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Interim Statement of Movements in Equity
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Interim Statement of Financial Position
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Interim Statement of Cash Flows
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Notes to the Interim Financial Statements
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Accountants’ Report
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Rakon at a Glance
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Directory
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Half Year Review We are pleased to report an unaudited net surplus after tax of $5.6 million for the six months ended 30 September 2006, a 200% improvement on the same six month period in 2005. Growth in revenue was the major factor driving the growth in earnings. Revenue of $50.5 million was recorded for the first six months, a 48% increase on the same six month period in 2005. Eliminating for the impact of currency movement, underlying revenue growth was up 33% on the corresponding period in 2005. Reductions in manufacturing costs were also a significant contributor to the improved results. Engineering smaller and lower cost products, reducing the unit cost of key components and economies of scale largely from labour costs all contributed to offsetting unit sales price reductions as is the norm in this industry. Markets An increase in competition between the major GPS manufacturers has driven retail prices for personal navigation devices to new lows. These new price points have had the net effect of expanding the overall market and further fuelled already strong consumer demand for navigation products. From Rakon’s perspective the demand for these portable navigation devices has more than offset slower than expected sales of GPS (Global Positioning Systems) enabled phones. Design activity for GPS in mobile
phones is however significant and points to this slower demand being merely a delay in this market development. In the past six months Rakon has opened our European office and expanded our marketing team in the fast growing Asian market. These changes have us well placed to develop a stronger position in Europe and ensure we service and enhance our position in the rapidly growing Asian region. Our customers move to the contract design and manufacturing model in Asia meant that this region accounted for more than 60% of our sales in the first six months of the 2007 financial year. New Products Rakon’s focus on new product development for our already diverse customer base of more than 400 businesses is ongoing. Early in 2006 Rakon announced the successful development of a GPS Receiver Module (GRM). Customer interest in this module is strong, we are currently sampling a number of units and we anticipate solid growth in sales of this product in the next financial year. The GRM is a tiny radio receiver providing a complete Radio Frequency (RF) solution , which makes it uniquely simple for GPS designers to embed into their devices. The receiver means GPS manufacturers can meet market demand to miniaturise devices, while offering improved capability.
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We have continued the evolution of our core product, the integrated Temperature Compensated Crystal Oscillator (TCXO). Whilst sales of the 5.0 x 3.2 mm unit are still the largest contributor to revenue, sales of the 3.2 x 2.5 mm TCXO have increased significantly. Development of a smaller 2.5 x 2.0 mm unit is underway, and will generate revenue in the 2008 financial year. Rakon remains the leader in the supply of high stability TCXOs for GPS, which enable very weak GPS signals to be received. This is critical in an industry that demands products that will function in urban environments with very high interference. We will continue to build on this market position with products in smaller packages and lower costs, as well as products that offer even higher stability. Our development of new crystal construction techniques has enabled us to produce a crystal that is several times more resistant to shock and vibration than anything currently available on the world market. Customers in the demanding surveying market have already released products based on this G-tolerant design. We are now focussing on developing aerospace customers who have stringent requirements for shock and vibration performance. Other product developments are underway which will enable Rakon to better address the expanding telecommunications infrastructure market. 4
Manufacturing Rakon operates an international manufacturing model, combining the engineering strength and product development expertise in New Zealand with highly efficient manufacturing processes and excellent sub-assembly arrangements. Maintenance of this high quality, secure and cost competitive manufacturing process is imperative to Rakon’s current and future success. The $4.5 million expansion of our crystal manufacturing facility is nearing completion. This will increase our crystal manufacturing capacity by 40%, reduce manufacturing cost and better balance the mix of manufactured and sub-contracted crystals used in the manufacture of our TCXOs. The increase in demand over the past 6 months has given Rakon the opportunity to test the scalability of its manufacturing model. Planned installation of further proprietary testing ovens and associated equipment was accelerated enabling TCXO capacity to be increased from 3.5 million to 4.5 million units per month. Outlook Rakon has a clear strategy to deliver growth in earnings. We are focussed on developing products that deliver performance and features that add value to any GPS solution. We will continue to leverage our expertise in quartz crystal technology in an effort to broaden the market for our products.
Our continual drive to keep enhancing our proprietary test equipment capability is designed to ensure an industry leading cost and quality platform for the manufacture of high performance quartz crystal products.
predict, as we move from the high volume sales months of October and November to a seasonal dip in December and January. Never the less the Directors remain comfortable with the 2007 financial year forecast EBIT of $14.8 million.
Rakon’s product quality and market position leave us well placed to benefit from the forecast continued growth of GPS particularly in consumer products. This growing exposure to consumer demand brings with it greater potential for seasonal demand variations making the second half of the 2007 financial year more difficult to
Rakon’s team Demand in the first six months has been much stronger than originally anticipated and the Directors wish to thank the team at Rakon for ensuring that this extra demand was met without compromise to quality of either products or service.
Bryan W Mogridge Chairman November 8, 2006
BJ Robinson Managing Director November 8, 2006
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Financials Interim Consolidated Statement of Financial Performance Note
Operating revenue Operating expenses Operating surplus
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Other income/(expenses) Other income Interest income Interest expense Net surplus before income tax Income tax Net surplus after income tax Basic earnings per share Diluted earnings per share
Unaudited 6 Months Ended 30 September 2006 ($000s)
Unaudited 6 Months Ended 30 September 2005 ($000s)
Audited Year Ended 31 March 2006 ($000s)
50,461 (41,928) 8,533
34,196 (30,477) 3,719
74,309 (65,738) 8,571
6 135 (352)
6 (899)
62 (1,386)
8,322 (2,763) 5,559
2,826 (971) 1,855
7,247 (2,445) 4,802
5.3 5.2
2.4 2.4
5.5 5.5
The accompanying notes form an integral part of these interim financial statements.
Interim Consolidated Statement of Movements in Equity
Equity at beginning of the period Recognised revenues and expenses Net surplus after tax Total recognised revenues and expenses Other movements Capitalisation of Shareholders’ loan Distributions to owners Issue of ordinary shares Cost of IPO Foreign currency translation reserve Equity at end of the period
Unaudited 6 Months Ended 30 September 2006 ($000s)
Unaudited 6 Months Ended 30 September 2005 ($000s)
Audited Year Ended 31 March 2006 ($000s)
24,045
7,957
7,957
5,559 5,559
1,855 1,855
4,802 4,802
10,055 (1,103) 8,952 38,556
(1,600) 1 (1,599) 8,213
12,886 (1,600) 11,286 24,045
The accompanying notes form an integral part of these interim financial statements. 7
Interim Consolidated Statement of Financial Position
Assets Current assets Cash and bank Accounts receivable and other assets Inventories Total current assets Non-current assets Property, plant and equipment Deferred tax Total non-current assets Total assets Liabilities Current liabilities Bank overdraft Borrowings Payables and accruals Total current liabilities Non-current liabilities Borrowings Deferred tax Total non-current liabilities Total liabilities Net assets Equity Share capital Retained earnings Total equity
Unaudited as at 30 September 2006 ($000s)
Unaudited as at 30 September 2005 ($000s)
Audited as at 31 March 2006 ($000s)
5,946 15,561 20,858 42,365
716 14,083 19,260 34,059
853 13,614 19,735 34,202
17,648 164 17,812 60,177
14,734 14,734 48,793
14,880 118 14,998 49,200
24 13,597 13,621
10,587 15,279 6,574 32,440
6,901 1,314 8,940 17,155
8,000 8,000 21,621 38,556
8,000 140 8,140 40,580 8,213
8,000 8,000 25,155 24,045
23,191 15,365 38,556
250 7,963 8,213
13,136 10,909 24,045
The accompanying notes form an integral part of these interim financial statements.
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Interim Consolidated Statement of Cash Flows
Operating activities Cash was provided from Receipts from customers Interest received Other income received Cash was applied to Payments to suppliers and employees Finance lease charges Interest paid Income tax paid Net cash flow from operating activities Investing activities Cash was applied to Purchase of property, plant and equipment Net cash flow from investing activities Financing activities Cash was provided from Issue of ordinary shares Proceeds from borrowings Cash was applied to Repayment of principal on borrowings Finance lease principal payments IPO costs paid Dividends paid to Shareholders Net cash flow from financing activities Net increase (decrease) in cash held Foreign currency translation adjustment Cash at the beginning of the period Cash at the end of the period Composition of cash Cash and bank balances Bank overdraft
Unaudited 6 Months Ended 30 September 2006 ($000s)
Unaudited 6 Months Ended 30 September 2005 ($000s)
Audited Year Ended 31 March 2006 ($000s)
47,865 125 2 47,992
32,839 7 32,846
75,639 62 75,701
(37,179) (352) (2,103) (39,634) 8,358
(28,236) (115) (726) (1,036) (30,113) 2,733
(61,208) (203) (1,444) (3,121) (65,976) 9,725
(4,362) (4,362)
(3,648) (3,648)
(5,395) (5,395)
10,055 10,055
10,508 10,508
11,264 11,264
(1,314) (611) (1,925) 8,130 12,126 (156) (6,048) 5,922
(14,236) (453) (1,600) (16,289) (5,781) (6,696) (439) (2,736) (9,871)
(15,621) (915) (492) (1,600) (18,628) (7,364) (3,034) (278) (2,736) (6,048)
5,946 (24) 5,922
716 (10,587) (9,871)
853 (6,901) (6,048) 9
Interim Consolidated Statement of Cash Flows
Reconciliation of net surplus to net cash flows from operating activities Reported net surplus after tax Items not involving cash flow Depreciation expense Increase in estimated doubtful debts Movement in foreign currency Deferred tax (Gain) loss on disposal of property, plant and equipment Impact of changes in working capital items Accounts receivables Inventory Prepayments Trade creditors and accruals GST receivable Tax provisions Net cash flow from operating activities
Unaudited 6 Months Ended 30 September 2006 ($000s)
Unaudited 6 Months Ended 30 September 2005 ($000s)
Audited Year Ended 31 March 2006 ($000s)
5,559
1,885
4,802
1,596 499 (44)
1,430 18 214 (25)
2,958 158 489 (283)
(2) 2,049
1,637
74 3,396
(2,648) (1,123) (227) 4,756 (717) 709 750 8,358
(1,719) 1,857 (219) (972) 279 (15) (789) 2,733
468 1,381 (141) 188 37 (406) 1,527 9,725
The accompanying notes form an integral part of these interim financial statements.
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Notes to the Interim Consolidated Financial Statements 1. Basis of presentation The financial statements are for the economic entity comprising Rakon Limited and its subsidiaries (“the Group”). The accompanying unaudited interim consolidated financial statements have been prepared in accordance with Financial Reporting Standard No 24, “Interim Financial Statements”, issued by the New Zealand Institute of Chartered Accountants, and are presented in New Zealand dollars. These financial statements should be read in conjunction with the financial statements and related notes included in the Group’s Annual Report for the year ended 31 March 2006. 2. Accounting policies The accounting policies used in the preparation of the unaudited financial statements are consistent with those used in the preparation of the audited financial statements for the year ended 31 March 2006. 3. Adoption of International Financial Reporting Standards In December 2002 the New Zealand Accounting Standards Review Board announced that reporting entities would be required to comply with New Zealand equivalents of International Financial Reporting Standards (NZ IFRS) for financial statements covering annual reporting periods starting on or after 1 January 2007,
with earlier adoption for periods starting on or after 1 January 2005 permitted. In the case of Rakon Limited and subsidiaries (Rakon), the first financial year for which fully compliant financial statements must be produced will be for the year commencing on 1 April 2007 (and ending 31 March 2008) at which time the comparative figures for the previous year will also be restated to comply with NZ IFRS. Although early implementation is an option, the Board of Directors has determined that Rakon will adopt NZ IFRS for the first time in its reports to shareholders for the year ending 31 March 2008. The Board has considered the impact of NZ IFRS as regards to the appropriate functional currency for Rakon and determined that Rakon should continue to report using NZ dollars as its functional and presentation currency when it adopts NZ IFRS. This is based on management’s current interpretation of the standards that have been released to date. There is potential for the significance of the impact to change when Rakon prepares its first set of NZ IFRS financial statements due to changes in the standards, changes in the Company, or changes in management’s interpretation of the standards. At the date the financial statements were issued Rakon had not performed any further analysis of the differences between NZ IFRS and current New Zealand Financial Reporting 11
Standards and as such cannot determine if there will be a significant impact on the financial statements presented by Rakon. A project has been initiated to identify the full implications of NZ IFRS on Rakon and to prepare for the implementation of systems to capture the necessary information to comply with the new standards.
As the Company progresses toward the start of the 2008 financial year, Rakon will continue to provide users of the financial statements with updated information about the likely impacts of NZ IFRS on Rakon’s earnings, cash flows and financial position.
4. Operating revenue Unaudited 6 Months Ended 30 September 2006 ($000s)
Unaudited 6 Months Ended 30 September 2005 ($000s)
Audited Year Ended 31 March 2006 ($000s)
32,412 12,357 4,843 849 50,461
17,411 10,983 3,897 1,905 34,196
40,217 23,270 8,038 2,784 74,309
Unaudited as at 30 September 2006 ($000s)
Unaudited as at 30 September 2005 ($000s)
Audited as at 31 March 2006 ($000s)
2,465
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Region Asia North America Europe Others
5. Commitments
Amounts committed to capital expenditure:
There has been no material change in operating lease commitments since 31 March 2006.
6. Contingent liabilities At 30 September 2006 there were no contingent liabilities (31 March 2006: nil, 30 September 2005: nil). 7. Subsequent Events There are no subsequent events after 30 September 2006.
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Accountants Report
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Rakon at a Glance Rakon is a world leader in the development and production of high performance Quartz Crystal components used for timing reference and frequency control in demanding applications, such as GPS (Global Positioning Systems) and microwave communications. From its head office and manufacturing facility in Auckland, New Zealand, Rakon produces a range of Crystals and Oscillators for its global customer base. Rakon’s business was founded in 1967 by Warren Robinson with the incorporation of Rakon’s predecessor company, Rakon Industries Limited (RIL). The Company currently has operations in New Zealand and marketing offices in the United States, Taiwan and the United Kingdom, and employs approximately 500 people. The vast majority of employees and operations are based in New Zealand. Since first developing Temperature Compensated Crystal Oscillator (TCXO) technology in 1980, RIL, and now Rakon, has focused on staying at the forefront of Crystal and Oscillator technology. Through ongoing investment in new technologies, Rakon has developed the proprietary know-how to mass produce Crystals and Oscillators with a miniature form factor (size) suited to consumer mass market electronic devices, while maintaining the highest performance specifications required in recreational, commercial and military/aerospace applications.
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Central to the Company’s capability and market position is its embedded culture of continual innovation and improvement. This has led to the creation of many proprietary products and processes designed and produced by the Rakon team. Quartz Crystals Quartz Crystals are found in nearly all electronic devices, from high-tech aerospace applications through to TVs and wrist watches. Quartz Crystals are used in electronic devices to act as a timing or frequency reference device to ensure the functionality of electronic equipment dependent upon accurate timing or frequency control. Affecting quartz’s resonating frequency is temperature, with frequency varying widely across a wide temperature range. In order to create stability of a Quartz Crystal’s oscillating frequency across a temperature range, a compensating correction voltage can be applied based upon an output signal received from a temperature sensor, which stabilises the frequency output when temperature changes. Rakon’s key products, which are produced to a range of specifications, are: • Quartz Crystals, which Rakon manufactures in both round (UM) and strip (RSX) designs in metal and ceramic packages respectively. Rakon currently produces Crystals in the RSX design down
to a 3.2x2.5mm form factor and is currently developing a new model with a form factor of 2.5x2.0mm, which is among the smallest in the world. • Oscillators, Rakon produces both discrete and integrated Oscillators. Rakon is currently capable of producing its integrated TCXOs in a range of sizes down to 3.2x2.5mm with a 2.5x2mm size under development. Rakon believes it is also the leading global producer of calibrated dual Crystal Oscillators (CDXO). CDXOs provide a higher degree of performance than
TCXOs and are currently used in a number of military/aerospace applications. • RF module, Rakon has recently developed, and is now manufacturing samples of what it believes to be the world’s smallest GPS front-end receiver (RF module). The RF module will incorporate a range of Rakon Oscillators and significantly reduces the size and cost of incorporating a complete GPS unit into small electronic equipment such as mobile phones and personal digital assistants (PDA).
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Directory Registered Office Rakon Limited One Pacific Rise Mt Wellington AUCKLAND Telephone: 09 573 5554 Facsimile: 09 573 5559 Website: www.rakon.co.nz Mailing Address Rakon Limited Private Bag 99943 Newmarket AUCKLAND Directors of Rakon Limited Bryan Mogridge Brent Robinson Bruce Irvine Peter Maire Darren Robinson Warren Robinson
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Principal Lawyers Bell Gully PO Box 4199 AUCKLAND Auditors PricewaterhouseCoopers Private Bag 92162 AUCKLAND Share Registrar Computershare Investor Services Limited 159 Hurstmere Road North Shore Private Bag 92119 AUCKLAND 1020 Telephone: 09 488 8700 Facsimile: 09 488 8787