Rakon FY2019 Results Announcement

RESULTS ANNOUNCEMENT

0
Results for announcement to the market
Name of issuer
Rakon Limited (RAK)
Reporting Period
12 months to 31 March 2019
Previous Reporting Period
12 months to 31 March 2018
Currency NZD

Amount (000s) Percentage change
Revenue from continuing
operations
$113,985 12.7%
Total Revenue
$113,985 12.7%
Net profit/(loss) from continuing
operations
$3,364 -66.4%
Total net profit/(loss)
$3,364 -66.4%
Interim/Final Dividend
Amount per Quoted Equity Security
No dividends are proposed to be paid.
Imputed amount per Quoted Equity
Security
Not Applicable
Record Date
Not Applicable
Dividend Payment Date
Not Applicable
Current period Prior comparable period
Net tangible assets per Quoted
Equity Security
$0.35 $0.34
A brief explanation of any of the
figures above necessary to enable
the figures to be understood
Please refer to the comments on the following pages and the audited
financial statements released in conjunction with this announcement
Authority for this announcement
Name of person

authorised
to make this announcement
Maureen Shaddick
Contact person for this
announcement
Anand Rambhai
Contact phone number (09) 571 9225
Contact email address anand.rambhai@rakon.com
Date of release through MAP

16/05/2019

Audited financial statements accompany this announcement.

RESULTS ANNOUNCEMENT

1
COMMENTS
16 May 2019
Steady growth in core business drives improving results

1
All amounts are in NZ$ unless otherwise indicated.

2
Refer to Note B1 of the FY2019 audited consolidated financial statements for an explanation of how ‘Non-GAAP Financial Information’ is used,
including a definition of ‘Underlying EBITDA’ and reconciliation to NPAT.

High technology company Rakon Limited (‘Rakon’ or the ‘Group’) posted a net profit after tax of $3.4m (FY18:
$10.0m), and Underlying EBITDA of $13.3m (FY18: $12.1m) for the year ended 31 March 2019. The Group’s
Underlying EBITDA was in line with earlier guidance provided of between $12m to $14m.
The prior year’s $10m net profit after tax included $8.8m of gains recognised in relation to the sale of property in
Argenteuil France. It also included the dilution gain and sale of shares in Thinxtra Pty Limited.
Managing Director Brent Robinson said, when the one-off gains are excluded it was pleasing to see the year on year
growth in core net profit on the back of stronger 4.5/5G telecommunications infrastructure demand and continuing
growth in the Defence segment.
“The roll-out of 5G continues to be our biggest opportunity and challenge. Rakon is well positioned with a good
share of business awarded by Tier 1 customers. The challenge for Rakon is to meet existing demand and continue to
bring to market new products which meet the higher specifications demanded by 5G applications.
“A key event during the year was the acquisition in May 2018 of the remaining 51% of our previous joint venture
Rakon India Private Limited (previously called ‘Centum Rakon India Private Limited’). With Rakon now having full
decision-making control of India’s low cost manufacturing operation, it was pleasing to see India’s positive
contribution to the Group’s full year result,” he said.
The current year showed higher operating costs with the inclusion of Rakon India from May 2018 and one-off costs
relating to integrating Rakon India into the wider Group.
Net debt was $7.7m (FY18: was a net cash position of $7.4m). This movement was due to the impact of higher
working capital requirements to support growing revenue, the acquisition of Rakon India, and the investment in
additional manufacturing capacity during the year.
The value of Rakon’s investment in Thinxtra changed from $5.3m at March 2018 to $4.5m at March 2019. Thinxtra’s
impact on Rakon’s net profit after tax for the year is -$0.3m. Further explanation is provided in notes B4 d) of the
audited financial statements.
The Directors confirm that this FY2019 results announcement is based on audited results.


Brent Robinson
Chief Executive Officer & Managing Director

NZ$m
1
, audited
FY2019
FY2018
% Change
Revenue
114.0
101.1
13%
Underlying EBITDA
2
13.3
12.1
10%
Net profit/(loss) after tax
3.4
10.0
-66%
Operating expenses
47.3
41.6
14%
Operating cash flow
(1.8)
7.9
-122%
Net cash/(debt)
(7.7)
7.4
-203%

RESULTS ANNOUNCEMENT

2
-ends-

Contact:
Anand Rambhai (CFO)
09 571 9225

Media Liaison:
Louise Howe
021 206 0985


www.rakon.com

About Rakon
Rakon is a global high technology company and a world leader in its field. The company designs and manufactures advanced
frequency control and timing solutions. Its three core markets are Telecommunications, Global Positioning and Space and
Defence. Rakon products are found at the forefront of communications where speed and reliability are paramount. The
company’s products create extremely accurate electric signals which are used to generate radio waves and synchronise time in
the most demanding communication applications. Rakon has six manufacturing plants, including two joint venture plants, and
has six research and development centres. Customer support personnel are located in fifteen offices worldwide.
Rakon is proud of its New Zealand heritage; it was founded in Auckland in 1967. It is a public company listed on the New Zealand
stock exchange, NZSX, ticker code RAK.

RESULTS ANNOUNCEMENT

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Other Information
A. Dividends (NZX Listing Rules Appendix 2)
The Board of Directors has declared that no dividend is to be paid for FY2019. Rakon maintains a dividend policy
such that it will pay a dividend of up to 50% of the after tax profit, if considered fiscally appropriate. The payment
of dividends is subject to the approval of Rakon’s bank, ASB Bank, under its facility arrangement.
B. Control gained and lost over Entities (NZX Listing Rules Appendix 2)
Rakon Limited has gained control over the following entities during the period:
On 2 May 2018, Rakon acquired the remaining 51% interest in Rakon India that it did not previously own.
C. Associates & Joint Ventures (NZX Listing Rules Appendix 2)
Rakon Limited has the following associate entities and joint venture arrangements.

Shareholding
Rakon India (up to 2 May 2018) 49%
Chengdu Timemaker Crystal Technology Co. Limited 40%
Shenzhen Taixiang Wafer Co, Limited 40%
Thinxtra Pty Limited (up to 31 May 2018) 21.4%

Rakon India ceased being a joint venture on 2 May 2018 when Rakon acquired the remaining 51% of securities
that it did not previously own. For the period to 2 May 2018 Rakon India’s contribution to Rakon Limited’s net
results from ordinary activities is a net profit after tax of $76,000 (March 2018: net loss after tax of $550,000).
The contribution of Chengdu Timemaker and Shenzhen Taixiang (together the Timemaker group) to Rakon
Limited’s net results from ordinary activities is a net profit after tax of $1,050,000 (March 2018: net profit after
tax $908,000).
On 1 June 2018, Rakon irrevocably waived its right to appoint a director to Thinxtra’s board and concurrently
Rakon’s appointed director resigned. Accordingly, it was concluded that Rakon lost significant influence in
Thinxtra on 1 June 2018 and therefore ceased equity accounting the investment. The contribution of Thinxtra
to Rakon Limited’s net results from ordinary activities for the period to 31 May 2018 is a net loss after tax of
$287,000 (March 2018: net loss after tax $2,123,000). From 1 June 2018, Rakon’s investment in Thinxtra was
accounted for as a financial asset.
D. Audit (NZX Listing Rules Appendix 2)
The financial statements have been audited and are not subject to any qualification.
E. Business Changes (NZX Listing Rules Appendix 2)

Acquisition of remaining shares in Rakon India
On 2 May 2018, Rakon Limited acquired the remaining 51% of the issued shares it did not own in Rakon India,
a previously held joint venture which provides products and services to the frequency control industry.
Consideration was US$5.5m and the acquisition was part of the Group’s overall manufacturing strategy,
providing a low cost manufacturing platform and, in addition, access to the local Indian market in the longer
term. Consideration of US$4.1m was paid on 2 May 2018 with US$1.4m payable within 18 months of
acquisition date.
F. Directors’ Declaration (NZX Listing Rules Appendix 2 )
The Directors declare that the financial statements released in conjunction with this announcement have been
prepared in compliance with applicable financial reporting standards. The accounting policies the Directors
consider critical to the portrayal of Rakon Limited’s financial condition and results which require judgements

RESULTS ANNOUNCEMENT

4
and estimates about matters which are inherently uncertain are disclosed in each note of the audited financial
statements that form part of this announcement.

---

PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand
T: +64 9 355 8000, F: +64 9 355 8001, pwc.co.nz


Independent auditor’s report
To the shareholders of Rakon Limited
We have audited the financial statements which comprise:
 the balance sheet as at 31 March 2019;
 the statement of comprehensive income for the year then ended;
 the statement of changes in equity for the year then ended;
 the statement of cash flows for the year then ended; and
 the notes to the financial statements, which include significant accounting policies.

Our opinion
In our opinion, the accompanying financial statements of Rakon Limited (the Company), including its
subsidiaries (the Group), present fairly, in all material respects, the financial position of the Group as
at 31 March 2019, its financial performance and its cash flows for the year then ended in accordance
with New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and
International Financial Reporting Standards (IFRS).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (New Zealand) (ISAs
(NZ)) and International Standards on Auditing (ISAs). Our responsibilities under those standards are
further described in the Auditor’s responsibilities for the audit of the financial statements section of
our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised)
Code of Ethics for Assurance Practitioners (PES 1) issued by the New Zealand Auditing and Assurance
Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for
Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in
accordance with these requirements.
Our firm carries out other services for the Group in the areas of treasury advisory services, agreed
upon procedures in relation to the Annual General Meeting and half year financial statements, as well
as review procedures over the confirmation of the Eligible Research and Development Expense
claimed under the Growth Grant. The provision of these other services has not impaired our
independence as auditor of the Group.

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Our audit approach
Overview

An audit is designed to obtain reasonable assurance whether the
financial statements are free from material misstatement.
Overall Group materiality: $1,140,000, which represents 1% of
revenue.
Given the changes in the business during recent years, in our
judgement, revenue provided a more stable measure for establishing
our materiality benchmark.
We have determined that there are three key audit matters:
 Impairment risk for non-financial assets
 Valuation of research and development costs associated with the
development of new products
 Accounting for the investment in Thinxtra Limited.
Materiality
The scope of our audit was influenced by our application of materiality.
Based on our professional judgement, we determined certain quantitative thresholds for materiality,
including the overall Group materiality for the financial statements as a whole as set out above. These,
together with qualitative considerations, helped us to determine the scope of our audit, the nature,
timing and extent of our audit procedures and to evaluate the effect of misstatements, both
individually and in aggregate on the financial statements as a whole.
Audit scope
We designed our audit by assessing the risks of material misstatement in the financial statements and
our application of materiality. As in all of our audits, we also addressed the risk of management
override of internal controls including among other matters, consideration of whether there was
evidence of bias that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an
opinion on the financial statements as a whole, taking into account the structure of the Group, the
accounting processes and controls, and the industry in which the Group operates.
We conducted a full scope audit over two segments, New Zealand, including the investment in
Thinxtra, and France and a limited review was conducted for India. Together these make up 100% of
external revenue. We conducted specific audit procedures for the UK subsidiary and for the
investment in Timemaker.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in
our audit of the financial statements of the current year. These matters were addressed in the context
of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.

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Key audit matter How our audit addressed the key audit matter
Impairment risk for non-financial assets
As noted in note C1a, the Directors assess
assets annually for impairment. The
Directors look initially for indicators of
impairment which requires a level of
judgement.
When the market capitalisation is lower
than the net asset value of the Group this
can be an indicator of potential
impairment of non-financial assets held by
the Group. Market capitalisation of the
Group at 31 March 2019 was $75.6 million
compared to the carrying value of the net
assets of $90 million.
The Directors performed an assessment of
impairment on an asset class basis as well
as performing a business valuation for the
Group as a whole. The business valuation
was prepared on a value in use basis using
a discounted cash flow model.
The key assumptions used by the
Directors in the discounted cash flow
model are included in note C1a of the
financial statements which include:
 Annual sales growth rate
 Gross margin
 Terminal growth rates
 Discount rates
The results of the Directors’ assessment
are detailed in note C1a.

Our audit procedures included the following:
We updated our understanding of business processes
and controls applied in the assessment of indicators of
impairment of non-financial assets and determining
any impairment required.
In considering the results of the Directors’ assessment
of impairment on an asset class basis we have:
 Considered the historical recoverability of
inventory balances and whether there is any
indication of impairment.
 Assessed whether there were indicators of
impairment for intangible R&D assets, which has
been discussed in the key audit matter below.
 Considered the recoverability of deferred tax
assets.
In considering the discounted cash flow model used for
the assessment of impairment of the business as a
whole we have:
 Compared cash flow forecasts used in the
discounted cash flow models to the latest Board
approved budgets and long-term forecasts.
 Tested the mathematical accuracy of the
underlying model and agreed the carrying value of
each CGU to the audited financial records.
 Assessed the reliability of forecasts by performing
a look back analysis of historical forecasts against
actual results.
 Considered key assumptions used in the
discounted cash flow models, in particular the
estimated sales growth rates, by agreeing to
supporting evidence of:
- Historical sales
- Current orders in place
- Communications with customers
- External market forecast reports.
 Engaged our valuation expert to assess and
challenge the assumptions for terminal growth
rates and discount rates used by management by
comparing them to relevant industry rates and
performing sensitivity analysis on those rates.

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Key audit matter How our audit addressed the key audit matter

 Performed a sensitivity analysis on the cash flows
to determine whether a reasonably possible
change in assumptions could lead to a conclusion
that the assets are impaired.
 Assessed the adequacy of disclosures in the
financial statements to ensure that they are
compliant with the requirements of NZ IFRS.
As a result of these procedures we did not propose any
adjustments.
Valuation of research and development
costs associated with the development of
new products
Rakon incurs costs with respect to
developing new products. This is included
within the product development and
assets under construction categories of
intangible assets (note B5b of the financial
statements) and amounts to $6.8 million
at 31 March 2019. There is a risk that the
costs that are being capitalised for
development may not meet the criteria for
capitalisation as an intangible asset under
NZ IFRS.
In particular, there is judgement and often
uncertainty around the potential for
success of new projects as well as the
technical feasibility and probable future
economic benefits associated with new
and existing projects primarily with
respect to telecommunications
infrastructure products.
The Directors assessed the future income
generating ability of capitalised
development expenditure by referring to
current demand for the products now in
production and to the business case for
future sales of products not yet in
production.



Our audit procedures included the following:
 We updated our understanding of how the costs
for research and development are captured and
approved for capitalisation and the controls over
these processes.
 We obtained an understanding of the projects
which have been capitalised during the year and,
on a sample basis, agreed costs incurred to
supporting documentation and approval.
 We assessed overall costs capitalised for
compliance with Group policies and the
requirements defined in NZ IFRS for capitalisation
of research and development costs.
 For those products in production, where costs
have been capitalised, we challenged the Directors’
assessment of the future income expected from
those products by comparing the estimate with the
level of sales currently being achieved.
 We challenged the Directors’ assessment of the
future income expected from new
telecommunications infrastructure products by
comparing the estimate with the level of sales of
previous generations of telecommunications
infrastructure products and with market forecast
reports.
As a result of these procedures we did not propose any
adjustments.

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Key audit matter How our audit addressed the key audit matter
Accounting for the investment in Thinxtra
Limited
Rakon holds ordinary shares in Thinxtra
Limited (“Thinxtra”), which was an equity
accounted associate investment in the
prior year. On 1 June 2018, Rakon lost
significant influence triggering a change in
the accounting method from equity
accounting to a financial asset carried at
fair value.
We considered the valuation of the
investment in Thinxtra a key audit matter
because of the uncertainty involved in the
estimation process and the significant
judgements the Directors make in
determining the fair value. Changes in the
assumptions applied as part of the
estimation process can lead to significant
movements in the fair value of the
investment.
The Directors developed a valuation
methodology based on a range of
valuation techniques with different
assigned probabilities based on the
available information and Directors’
judgement, as disclosed in note B4d. This
methodology was applied to estimate the
fair value of the investment as at
1 June 2018 and as at 31 March 2019.
The Directors also considered sensitivity
by determining other reasonably possible
scenarios and assessing the impact on the
valuation of these scenarios.
The results of the Directors’ assessment
and sensitivity analysis is detailed in note
B4d.



Our audit procedures included:
 We obtained an understanding of the valuation
methodology developed by the Directors and the
key assumptions they applied in determining the
fair value of investment in Thinxtra as at 1 June
2018 and 31 March 2019.
 We agreed the key inputs in the valuation model to
unaudited information obtained by management
from Thinxtra.
 We considered the discounted cash flow model
approach which formed part of the Directors’ basis
of valuation. We determined the underlying
forecasts used in the model were not sufficiently
reliable due to Thinxtra’s business being at an
early stage of development, the history of not
meeting budgeted results and the reliance on
raising additional funding to achieve those
forecasts. Accordingly, this required us to take a
different valuation approach to that taken by the
Directors.
 We engaged our valuation expert to provide
support in our assessment of the fair value of the
investment as at 1 June 2018 and 31 March 2019.
Our expert’s assessment was based on the
following valuation approaches:
- Consideration of the share price achieved in
Thinxtra’s capital raise that closed on 18 April
2019, adjusted for an estimated discount to
fair value that would be expected in the
circumstances of that capital raise.
- Cost to replicate approach based on the
capital contributed and the losses incurred to
date on the basis that a purchaser would avoid
those costs to reach the position that Thinxtra
is currently in.
- Look-back assessment of the fair value at
1 June 2018 given the circumstances and
events between 1 June 2018 and
31 March 2019.
 We considered a range of reasonably possible
alternative scenarios. For each scenario, we
assessed whether the changes were reasonably
possible and tested the impact of those changes on
the valuation.

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Information other than the financial statements and auditor’s report
The Directors are responsible for the annual report. Our opinion on the financial statements does not
cover the other information included in the annual report and we do not and will not express any form
of assurance conclusion on the other information.
In connection with our audit of the financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent with
the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially
misstated. If, based on the work we have performed on the other information that we obtained prior to
the date of this auditor’s report, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in this regard, except that
not all other information was available to us at the date of our signing. Prior to the date of this report
we had received and read the Directors’ Report. The Shareholder Information and Corporate
Governance sections of the annual report are expected to be made available to us after the date of our
report.
Responsibilities of the Directors for the financial statements
The Directors are responsible, on behalf of the Company, for the preparation and fair presentation of
the financial statements in accordance with NZ IFRS and IFRS, and for such internal control as the
Directors determine is necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements, as a whole,
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs (NZ) and ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.

Key audit matter How our audit addressed the key audit matter

 We assessed the adequacy of disclosures in the
financial statements to ensure that this is compliant
with the requirements of NZ IFRS.
Based on our work we consider that, given the
estimation uncertainty for an investment in a business
of this nature, the fair value determined by the
Directors at 1 June 2018 and at 31 March 2019 is
within the range of reasonable expected outcomes.

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A further description of our responsibilities for the audit of the financial statements is located at the
External Reporting Board’s website at:
https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-
report-1/

This description forms part of our auditor’s report.
Who we report to
This report is made solely to the Company’s shareholders, as a body. Our audit work has been
undertaken so that we might state those matters which we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our
audit work, for this report or for the opinions we have formed.
The engagement partner on the audit resulting in this independent auditor’s report is Lisa Crooke.
For and on behalf of:




Chartered Accountants
16 May 2019
Auckland