Results for announcement to the market Date: 19 May 2016 Rakon Limited (RAK) Reporting period 12 months to 31st March 2016 Previous reporting period 12 months to 31st March 2015 Audited Revenue from ordinary activities c Underlying EBITDA (Earnings before interest, tax, depreciation, Amount NZ$000 % Change 112,737 -14% a -41% b -154% b -154% 9,008 amortisation, impairment, employee share schemes, non-controlling interests, adjustments for associates and joint ventures share of interest, tax & depreciation and other non-cash items) Loss from ordinary activities after tax attributable to security holders (1,731) Net profit attributable to security holders (1,731) Note a: includes share of Underlying EBITDA from associates and joint ventures of $1,148,000 (March 2015: $6,687,000). b: includes equity accounted earnings from associates and joint ventures of $902,000 (March 2015: $3,153,000). c: further information regarding the disclosure and use of non-GAAP financial information is disclosed at note B1 (Notes to the audited Consolidated Financial Statements) in this results announcement. Amount per security Imputed amount per security Nil dividend proposed Nil dividend proposed Record Date Not Applicable Not Applicable Dividend Payment Date Not Applicable Not Applicable Interim / Final Dividend COMMENTS 19 May 2016 Telcos’ infrastructure investment delays reduce earnings for Rakon       Net loss after tax of NZ$1.7m vs Net profit after tax of NZ$3.2m in FY2015 Revenue NZ$112.7 million (FY2015 NZ$131.4 million) 25% decrease in revenue from Telecommunications major contributor to decrease in total sales volumes and revenue Growth in margin dollars (and % of revenue) from consolidated subsidiaries: FY2016 NZ$47.9 million (43%) vs NZ$41.8 million (32%) in FY2015 Increase in operating cash flow: FY2016 NZ$7.3 million vs NZ$3.6 million operating cash flow loss in FY2015 New investment in Thinxtra opens up opportunities in Internet of Things (IoT) NZD Millions, Audited FY2016 FY2015 % Change Revenue 112.7 131.4 (14.2) Underlying EBITDA1 9.0 15.4 (41.4) Net profit/(loss) after tax (1.7) 3.2 (>100.0) Gross Profit 47.9 41.8 14.6 Operating expenses 47.8 46.2 (3.3) Operating cash flow 7.3 (3.6) >100.0 Net debt 12.6 13.4 6.0 1 A detailed reconciliation of Underlying EBITDA to net profit/(loss) after tax, is included at Note B1 of the Audited Financial Statements. Reduced capital expenditure by telecommunications companies around the world has seen global high technology company Rakon Limited post a net loss after tax of NZ$1.7 million on revenue of NZ$112.7 million for the year ended 31 March 2016. The company’s Underlying EBITDA of NZ$9.0 million was in line with forecasts issued earlier this year. Rakon Managing Director Brent Robinson said major network operators around the world had continued to delay infrastructure investment. This had affected sales in Rakon’s telecommunications market segment, which remains the company’s main source of revenue. “As we flagged earlier this year, major network operators continue to favour investment in 5G bandwidth and M&A activities over spending on base stations and other infrastructure,” he said. Mr Robinson said the move to 5G would in itself create a need for increased infrastructure investment to cope with growing demand for an ever-expanding range of applications and faster network speeds. Rakon has strong relationships with both network equipment and original design manufacturers, meaning it was well-placed to benefit from an upturn in infrastructure investment, but remained cautious about forecasting exactly when demand would rebound. 1 Mr Robinson said the increasing usage of GPS technology in a whole range of industries was generating significant opportunities for Rakon. Changing technologies, including the decline of the Personal Navigation Device in favour of other solutions, was helping to drive increased margins in Rakon’s Global Positioning business, while the company’s automotive customers were looking beyond GPS to address advanced connectivity applications for Smart Cars. Rakon’s Space and Defence segment was also expecting increased sales in the coming year, with the introduction of new products following the completion of several key long-term development projects during FY2016. Rakon’s move to diversify into the Internet of Things (IoT) business via a cornerstone shareholding in Thinxtra, which will develop and operate the SIGFOX global network in Australia and New Zealand, made the company part of a worldwide network of potential customers for its innovative component technology, said Mr Robinson. “The SIGFOX network is the only global network designed with the IoT in mind. It has the lowest deployment-andmaintenance costs of any system proposed, making it viable for a huge number of applications that will revolutionise the way we work and live, and Rakon is excited to be involved in bringing it to this part of the world,” he said. “It will also generate massive amounts of data, which will in turn require new infrastructure. Rakon’s track record as an innovator in semiconductors equips it to be a supplier of choice to customers around the world.” Overall, Rakon was maintaining a strong focus on continuous improvement in operational excellence and efficiency. In the past year, it has been standardising its global quality systems to ensure best in class quality and customer service. The Directors confirm that this FY2016 preliminary results announcement is based on audited results. Brent Robinson Chief Executive Officer & Managing Director -ends- Media Enquiries: Louise Howe (Media Liaison) 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 for telecommunications, global positioning and space and defence applications. 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 five manufacturing plants including two joint venture plants and has five research and development centres. Customer support centres are located in ten 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. 2 Statement of Comprehensive Income For the year ended 31 March 2016 2016 2015 Note $000s $000s B2 a) 112,737 131,417 (64,797) (89,599) 47,940 41,818 Continuing operations Revenue Cost of sales Gross profit Other operating income B2 b) 125 250 Operating expenses B2 c) (47,766) (46,246) Other gains - net B2 d) 871 3,841 1,170 (337) Operating profit/(loss) Finance income B2 f) 3 4 Finance costs B2 f) (1,128) (1,276) Share of (loss)/profit of associates and joint venture (902) 3,153 (Loss)/profit before income tax (857) 1,544 (874) 1,646 (1,731) 3,190 932 (1,641) - (53) Increase/(decrease) in fair value currency translation differences 4,998 (1,586) Income tax relating to components of other comprehensive income (261) 474 Other comprehensive income/(losses) for the year, net of tax 5,669 (2,806) Total comprehensive income for the year 3,938 384 Income tax (expense)/credit Net (loss)/profit for the year B2 g) Other comprehensive income Items that may be reclassified subsequently to profit or loss Increase/(decrease) in fair value cash flow hedges Decrease in fair value net investment hedge (Loss)/profit attributable to equity holders of the Company (1,731) 3,190 Total comprehensive profit attributable to equity holders of the Company 3,938 384 Earnings per share for (loss)/profit attributable to the equity holders of the Company from continuing operations Cents Cents Basic (losses)/earnings per share (0.9) 1.7 Diluted (losses)/earnings per share (0.9) 1.6 The accompanying notes form an integral part of these financial statements. 3 Statement of Changes in Equity For the year ended 31 March 2016 Balance at 31 March 2014 Share capital $000s 173,881 Retained earnings Other reserves $000s $000s (71,119) (23,795) Total equity $000s 78,967 Net profit after tax for the year ended 31 March 2015 - 3,190 - 3,190 Currency translation differences - - (1,586) (1,586) Cash flow hedges, net of tax - - (1,182) (1,182) Net investment hedge, net of tax - - (38) (38) - 3,190 (2,806) 384 Total comprehensive income/(losses) for the year Employee share schemes Value of employee services - - 58 58 173,881 (67,929) (26,543) 79,409 Net loss after tax for the year ended 31 March 2016 - (1,731) - (1,731) Currency translation differences - - 4,998 4,998 Cash flow hedges, net of tax - - 671 671 - (1,731) 5,669 3,938 Balance at 31 March 2015 Total comprehensive income/(losses) for the year Employee share schemes Value of employee services Balance at 31 March 2016 The accompanying notes form an integral part of these financial statements. 4 - - 81 81 173,881 (69,660) (20,793) 83,428 Balance Sheet As at 31 March 2016 2016 2015 $000s $000s 3,370 4,858 28,812 34,430 227 52 Assets Current assets Cash and cash equivalents Trade and other receivables Derivatives – held for trading Derivatives – cash flow hedges Inventories Current income tax asset Total current assets 459 281 29,830 28,716 212 27 62,910 68,364 Non-current assets Derivatives – cash flow hedges 1,466 634 Trade and other receivables 1,165 1,260 Property, plant and equipment 17,234 16,912 Intangible assets 14,850 14,547 Investment in associate 10,315 8,697 Interest in joint venture 6,798 7,015 Deferred tax asset 6,538 7,425 58,366 56,490 121,276 124,854 3,931 6,088 15 139 17,526 21,759 3 103 Derivatives – cash flow hedges 813 911 Derivatives – interest rate swaps 330 112 Total non-current assets Total assets Liabilities Current liabilities Bank overdraft Borrowings Trade and other payables Derivatives – held for trading Provisions 414 1,071 23,032 30,183 421 752 Borrowings 12,000 12,013 Provisions 2,361 2,098 34 399 14,816 15,262 37,848 45,445 83,428 79,409 Share capital 173,881 173,881 Other reserves (20,793) (26,543) Accumulated losses (69,660) (67,929) 83,428 79,409 Total current liabilities Non-current liabilities Derivatives – cash flow hedges Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Total equity The accompanying notes form an integral part of these financial statements. 5 Statement of Cash Flows For the year ended 31 March 2016 2016 $000s 2015 $000s 119,026 134,364 Operating activities Cash provided from Receipts from customers Interest received - 7 205 - Dividend received from joint venture 1,253 1,048 R&D grants received 3,064 1,981 Income tax refund Other income received 147 221 123,695 137,621 Payment to suppliers and others (70,217) (91,062) Payment to employees (44,478) (48,216) (1,081) (1,280) (634) (636) (116,410) (141,194) 7,285 (3,573) Sale of property, plant and equipment - 2,146 Cash was provided from investing activities - 2,146 Purchase of property, plant and equipment (3,377) (2,823) Purchase of intangibles (1,954) (2,924) Investment in shares & associates Cash provided from operating activities Cash was applied to Interest paid Income tax paid Cash was applied to operating activities Net cash flow from operating activities Investing activities Cash was provided from Cash was applied to (1,663) - Cash was applied to (6,994) (5,747) Net cash flow from investing activities (6,994) (3,601) - 711 - 711 Financing activities Cash was provided from Proceeds from borrowings Cash was provided from financing activities Net cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year - 711 291 (6,463) 378 433 (1,230) 4,800 (561) (1,230) 3,370 4,858 (3,931) (6,088) (561) (1,230) Composition of cash and cash equivalents Cash and cash equivalents Bank overdraft Total cash and cash equivalents The accompanying notes form an integral part of these financial statements. 6 Statement of Cash Flows For the year ended 31 March 2016 2016 $000s 2015 $000s (1,731) 3,190 Depreciation expense 3,945 6,103 Amortisation expense Reconciliation of net (loss)/profit to net cash flows from operating activities Reported net (loss)/profit after tax Items not involving cash flow 2,675 1,835 (Decrease)/increase in estimated doubtful debts (24) 56 Provision for restructure 195 (334) 81 58 Employee share based payments Movement in foreign currency (68) (1,323) 2,131 (2,106) Deferred tax 160 (2,656) Loss/(gain) on disposal of property, plant and equipment 115 (1,180) Share of profit and dividends from joint venture and associate Loss/(gain) on disposal of intangibles Total items not involving cash flow 1 288 9,211 741 5,464 (537) Impact of changes in working capital items Trade and other receivables Provision for restructure (850) (4,676) Inventories (1,114) (126) Trade and other payables (4,060) (1,858) Tax provisions 365 (307) Total impact of changes in working capital items (195) (7,504) Net cash flow from operating activities 7,285 (3,573) The accompanying notes form an integral part of these financial statements. 7 A. General information Rakon Limited (‘the Company’) and its subsidiaries (‘the Group’) designs and manufactures frequency control solutions for a wide range of applications. Rakon has leading market positions in the supply of crystal oscillators to the telecommunications, global positioning and space & defence markets. The Company is a limited liability company incorporated and domiciled in New Zealand. It is registered under the Companies Act 1993 with its registered office at 8 Sylvia Park Road, Mt Wellington, Auckland. The financial statements of the Group have been presented in a new structure designed to improve their usefulness and clarity. All amounts are presented in New Zealand dollars unless otherwise indicated. The financial statements have been approved for issue by Rakon’s Board of Directors (‘the Board’) on 19 May 2016. B. Calculation of key numbers B1. Segment information The chief operating decision maker assesses the performance of the operating segments based on a non-GAAP measure of ‘Underlying EBITDA’ defined as: “Earnings before interest, tax, depreciation, amortisation, impairment, employee share schemes, non-controlling interests, adjustments for associates and joint ventures share of interest, tax & depreciation, loss on disposal of assets and other non-cash items (Underlying EBITDA).” Underlying EBITDA is a non-GAAP measure that has not been presented in accordance with GAAP. The Directors present Underlying EBITDA as a useful non-GAAP measure to investors, in order to understand the underlying operating performance of the Group and each operating segment, before the adjustment of specific non-cash charges and before cash impacts relating to the capital structure and tax position. Underlying EBITDA is considered by the Directors to be the closest measure of how each operating segment within the Group is performing. Management uses the non-GAAP measure of Underlying EBITDA internally, to assess the underlying operating performance of the Group and each operating segment. Underlying EBITDA as non-GAAP financial information has been extracted from the financial statements audited for the full year. Except for Underlying EBITDA, other information provided to the chief operating decision maker is measured in a manner consistent with GAAP. The Directors provide a reconciliation of Underlying EBITDA to net profit or loss for the year. B1 a) Accounting policy Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Managing Director, Marketing Director and Chief Financial Officer. B1 b) Segment results 31 March 2016 Sales to external customers Inter-segment sales India Centum NZ $000s 74,661 UK6 $000s 5 France $000s 38,071 T'maker 1 $000s - Rakon 2 $000s - Other 3 $000s - Total $000s 112,737 162 - - - - 55 217 Segment revenue 74,823 5 38,071 - - 55 112,954 Underlying EBITDA 9,526 1,873 (4,481) 217 1,026 847 9,008 Depreciation and amortisation 4,436 745 1,237 - - 202 6,620 342 (253) (1,006) - - 43 (874) Income tax (expense)/credit 4 60,931 10,144 31,279 8,689 6,798 3,435 121,276 Investment in associates - - - 8,689 - 1,626 10,315 Investment in joint venture - - - - 6,798 - 6,798 3,440 729 1,378 - - - 5,547 27,185 671 9,457 - - 535 37,848 Total assets Additions of property, plant, equipment and intangibles Total liabilities 5 8 China - 31 March 2015 Sales to external customers Inter-segment sales NZ $000s 61,002 UK6 $000s 9,759 China - India Centum France $000s 60,656 T'maker 1 $000s - Rakon 2 $000s - Other 3 $000s - Total $000s 131,417 448 6,360 9 - - - 6,817 Segment revenue 61,450 16,119 60,665 - - - 138,234 Underlying EBITDA 4,351 3,646 560 764 5,923 125 15,369 Depreciation and amortisation 5,647 1,118 908 - - 265 7,938 Income tax credit/(expense) 2,309 (362) 26 - - (327) 1,646 65,560 10,307 31,207 8,697 7,015 2,068 124,854 - - - 8,697 - - 8,697 4 Total assets Investment in associates Investment in joint venture Additions of property, plant, equipment and intangibles Total liabilities 5 - - - - 7,015 - 7,015 2,786 1,041 1,881 - - - 5,708 33,303 608 9,831 - - 1,703 45,445 1 Includes Rakon Limited’s 40% share of investment in Chengdu Shen-Timemaker Crystal Technology Co. Limited, Chengdu Timemaker Crystal Technology Co, Limited and Shenzhen Taixiang Wafer Co, Limited. 2 Includes Rakon Limited’s 49% share of investment in Centum Rakon India Private Limited. 3 Includes investments in subsidiaries, Rakon Financial Services Ltd, Rakon UK Holdings Ltd, Rakon Investment HK Limited, Rakon HK Limited and Rakon Limited’s 40% interest in Thinxtra Pty Limited. 4 The measure of assets has been disclosed for each reportable segment as it is regularly provided to the chief operating decision maker and excludes intercompany balances eliminated on consolidation. 5 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 balances eliminated on consolidation. 6 The UK manufacturing facility (in Lincoln) was relocated in 2015 with the transfer of production and sales to New Zealand. B1 c) Reconciliation of Underlying EBITDA to net (loss)/profit for the year Continuing operations Underlying EBITDA Depreciation and amortisation Employee share schemes 2016 $000s 9,008 2015 $000s 15,369 (6,620) (7,938) (81) (58) Finance costs - net (1,125) (1,272) Adjustment for associates and joint venture share of interest, tax & depreciation (2,118) (3,600) (120) (596) Loss on asset sales/disposal Other non-cash items 199 (361) (Loss)/profit before income tax (857) 1,544 Income tax (expense)/credit (874) 1,646 (1,731) 3,190 Net (loss)/profit for the year B2. Profit & loss information B2 a) Revenue Accounting policy Revenue comprises the fair value of amounts received and receivable by the Group for goods and services supplied in the ordinary course of business. Revenue is stated net of goods and services tax (or value added tax) collected from customers. Revenue from the sale of goods is recognised in the statement of comprehensive income when the significant risks and rewards of ownership have been transferred to the buyer and the amount can be measured reliably. Revenue from services rendered is recognised in the statement of comprehensive income, in proportion to the stage of completion of the transaction at the balance date. 9 Breakdown of revenue by goods and services Revenue from all sources is as follows: Sales of goods Revenue from services Total revenue 2016 $000s 111,587 2015 $000s 130,977 1,150 440 112,737 131,417 Breakdown of revenue by region The Group’s trading revenue is derived in the following regions. Revenue is allocated based on the country in which the customer is located. 2016 $000s 2015 $000s Asia 48,725 65,252 North America 23,927 17,793 Europe 37,217 45,576 Others 2,868 2,796 112,737 131,417 2016 $000s 2015 $000s Telecommunications 53,422 71,318 Global Positioning 31,451 30,351 Space and Defence 25,265 23,051 Total revenue by region Breakdown of revenue by market segment Other Total revenue by market segment 10 2,599 6,697 112,737 131,417 B2 b) Other operating income Accounting policy Dividend income is recognised when the right to receive payment is established. Royalty income is recognised on an accruals basis in accordance with the substance of the relevant agreements. Breakdown of other operating income Dividend income 2016 $000s 1 2015 $000s 1 Rental income 23 16 Other income 101 233 Total other operating income 125 250 2016 $000s 2015 $000s B2 c) Operating expenses Operating expense by function Selling and marketing costs 10,377 9,797 Research and development 12,059 11,149 General and administration 25,330 25,300 47,766 46,246 Depreciation – inclusive of depreciation included in cost of sales 3,945 6,103 Amortisation 2,675 1,835 Research and development expense 14,779 13,285 Research and development tax credit, and government grant (2,720) (2,136) 195 (334) 2,281 2,261 (131) (79) 360 360 382 369 Total operating expenses Operating expenses include Restructure cost Rental expense on operating leases Costs of offering credit Bad debt write-offs Governance expenses Directors' fees Auditors' fees Principal auditors Audit fees for current year Share registry audit 3 3 Treasury advisory services 25 25 Audit services other auditors 20 18 3 3 Sundry expenses Donations 11 B2 d) Other gains – net 2016 $000s (117) 2015 $000s 892 275 713 3,000 Total foreign exchange gains – net 988 2,949 Total other gains – net 871 3,841 (Loss)/gain on disposal of property, plant, equipment and intangibles 1 Foreign exchange gains/(losses) – net Forward foreign exchange contracts Held for trading Gains on revaluation of foreign denominated monetary assets and liabilities 2 (51) 1 Includes £593,000 gain from the sale of land and buildings at Sadler Road, Lincoln, UK completed subsequent to the relocation of Rakon’s manufacturing facility in 2015. 2 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. B2 e) Employee benefits expenses Accounting policy Employee entitlements to salaries, wages and annual leave to be settled within 12 months of balance date represent present obligations resulting from employee’s services provided up to the balance date. These are calculated at undiscounted amounts based on remuneration rates that the entity expects to pay. Breakdown of employee benefits expenses 2016 $000s 41,870 2015 $000s 43,010 Contributions to defined contribution plans 576 531 Increase in liability for French retirement indemnity plan (note D3 b)) 248 269 Increase in liability for long service leave (note D3 b)) 102 52 Redundancy cost (note D3 b)) 195 (334) Employee share scheme (note D6) 81 58 Total employee benefits expenses 43,072 43,586 Wages and salaries B2 f) Net finance (costs)/income Accounting policy Interest income is recognised in the statement of comprehensive income as it accrues, using the effective interest method. Breakdown of finance (costs)/income 2016 $000s 2015 $000s 3 4 (1,128) (1,276) (1,125) (1,272) Financial income Interest income Financial expenses Interest expense on bank borrowings Net finance (costs) 12 B2 g) Income tax expense 2016 $000s (713) (161) (874) Current tax Deferred tax (expense)/credit Income tax (expense)/credit 2015 $000s (1,010) 2,656 1,646 The tax on the Group's result before tax differs from the theoritical amount that would arise using the weighted average tax rate applicable to the results of the consolidated entities. Reconciliation of income tax expense (Loss)/profit before tax Tax calculated at domestic tax rates applicable to profits in the respective countries Foreign exchange difference in income tax calculation Expenses not deductible Non-taxable income Expenses deductible for tax purposes Income taxable for tax purposes Prior year adjustment Associate and joint venture results reported net of tax Forfeited non resident withholding tax and branch foreign tax Recognition and utilisation of previously unrecognised tax losses Tax losses for which no deferred income tax asset was recognised Income tax (expense)/credit 2016 2015 $000s (857) 459 (10) (47) 41 (83) (447) (153) 1,148 (1,782) (874) $000s 1,544 304 14 45 90 2,312 306 (94) (1,331) 1,646 The weighted average applicable tax rate was -86% (2015: -106%). B3. B3 a) Goodwill Accounting policy Goodwill acquired in a business combination is initially measured at cost and is the excess of the consideration transferred over the fair value of the Group’s net identifiable assets acquired and liabilities assumed. If this consideration transferred is lower than the fair value of the net identifiable assets of the acquired subsidiary, associate or joint venture, the difference is recognised in profit or loss. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisition of associates and joint ventures is included in ‘interest in associates/interest in joint ventures’ and is tested for impairment as part of the overall balance. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash generating units (“CGUs”) for the purpose of impairment testing. The allocation is made to those cash generating units or groups of cash generating units that are expected to benefit from the business combination in which the goodwill arose. Expenditure on internally generated goodwill and brands is recognised in the statement of comprehensive income as an expense as incurred. B3 b) Critical accounting estimates and assumptions – impairment of goodwill The Group tests annually whether goodwill has suffered any impairment. The recoverable amounts of cash generating units have been determined based on ‘value in use’ calculations. These calculations require the use of estimates. Key assumptions used in ‘value in use’ calculations Cash flows beyond the five year period are extrapolated using the estimated growth rates stated below. The sales volume growth rates do not exceed the long-term average growth rate for the frequency control products business in which the CGUs operate. New Zealand United Kingdom France China India Growth rate 2016 2015 Discount rate 2016 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 15.0% 13.7% 14.7% 14.3% 27.4% 2015 12.8% 11.0% 9.7% 10.0% 20.4% 13 Discount rates – Discount rates reflect management’s 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 forecast year. Sales growth – Management have determined sales to grow over the period of the cash flow projection, due to a combination of factors including industry forecasts for the key market segments in which Rakon operates, future product innovation and estimations of its own share of the market reflective of the quality of its product range and technology advantages. Gross margin – Management determined budgeted gross margin based on past performance and its expectations of market development also taking into account gradual decline in average selling prices. Anticipated industry trends, product innovations, manufacturing efficiency and raw material cost improvements have also been factored into these gross margin assumptions. These assumptions have been used for the analysis of each CGU within the business segment. The discount rates used are pre-tax and reflect specific risks relating to the relevant segments. Impairment tests for goodwill Goodwill is allocated to the Group’s cash generating units identified according to country of operation. A geographical level summary of the goodwill allocation is presented below: France 2016 2015 ($000s) ($000s) 594 562 India – OCXO products transferred from France 1,741 1,647 Goodwill recognised in intangible assets 2,335 2,209 The recoverable amount of a CGU is determined based on ‘value in use’ calculations. These calculations use pre-tax cash flow projections based on financial forecasts covering a five year period due to product life cycles, pricing trends and longer term expected currency trends. Due to an increase in data traffic, investment into new network infrastructure is expected from telecommunication operators. With Rakon maintaining a leading technology position, the Group is expected to benefit from this investment, with the future cash flow projections continuing to support the carrying of goodwill balances for the France and India CGUs, where network infrastructure is a prime or significant market. B4. Impairment The Group, as required by NZ IFRS, has assessed as at 31 March 2016 whether any indicators of impairment exist. In doing so management and the Directors have considered factors including the current profitability of the Group and the market capitalisation value of the Company in comparison to the Group's net asset value. In undertaking such an assessment, no impairment was identified and the Directors consider the net asset value of the Group to be appropriate. 14 pwe Independent Auditors? Report to the shareholders of Rakon Limited Report on the Consolidated Financial Statements We have audited the consolidated ?nancial statements of Rakon Limited (?the Company?) on pages 3 to 45, which comprise the balance sheet as at 31 March 2016, the statement of comprehensive income, the statement of changes in equity and the statement of cash ?ows for the year then ended, and the notes to the ?nancial statements that include a summary of signi?cant accounting policies and other explanatory information for the Group. The Group comprises the Company and the entities it controlled at 31 March 2016 or from time to time during the ?nancial year. Directors?Responsibility for the Consolidated Financial Statements The Directors are responsible on behalf of the Company for the preparation and fair presentation of these consolidated financial statements in accordance with New Zealand Equivalents to International Financial Reporting Standards and for such internal controls as the Directors determine are necessary to enable the preparation of consolidated ?nancial statements that are free from material misstatement, whether due to fraud or error. Auditors?Responsibility Our responsibility is to express an opinion on these consolidated ?nancial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (New Zealand) and International Standards on Auditing. These standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated ?nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated ?nancial statements. The procedures selected depend on the auditors? judgement, including the assessment of the risks of material misstatement of the consolidated ?nancial statements, whether due to fraud or error. In making those risk assessments, the auditors consider the internal controls relevant to the Company?s preparation and fair presentation of the consolidated ?nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company?s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the overall presentation of the consolidated ?nancial statements. We believe that the audit evidence we have obtained is suf?cient and appropriate to provide a basis for our audit opinion. We are independent of the Group. Our ?rm carries out other services for the Group in the areas of share registry audit, treasury advisory services and agreed upon procedures over the half year ?nancial statements The provision of these other services has not impaired our independence. PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand T: +64 (9) 355 8000, F: +64 (9)355 8001, pwc.co.nz 15 Independent Auditors? Report Rakon Limited Opinion In our opinion, the consolidated ?nancial statements on pages 3 to 45 present fairly, in all material respects, the financial position of the Group as at 31 March 2016, and its financial performance and cash ?ows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting Standards. Restriction on Use of our Report This report is made solely to the Company?s shareholders, as a body, in accordance with the Companies Act 1993. Our audit work has been undertaken so that we might state those matters which we are required to state to them in an auditors? 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. Kai Chartered Accountants Auckland 19 May 2016 16 Other Information A. Dividends (NZX Listing Rules Appendix 1: 1.3(d)) The Board of Directors has declared that no dividend is to be paid for FY2016. 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. Net Tangible Assets per Security (NZX Listing Rules Appendix 1: 1.3(g)) 31 March 2016 31 March 2015 Net tangible assets $000 68,578 64,862 Number of ordinary securities 000 191,039 191,039 0.36 0.34 Net tangible asset backing per ordinary security $ C. Control gained and lost over Entities (NZX Listing Rules Appendix 1: 1.3(h)) Rakon Limited has gained or lost control over the following entities during the period: During the period there was no change in control through new entities gained or existing entities lost. D. Associates & Joint Ventures (NZX Listing Rules Appendix 1: 1.3(i)) Rakon Limited has the following associate entities and joint venture arrangements. Shareholding Centum Rakon India Private Limited 49% Chengdu Timemaker Crystal Technology Co, Limited 40% Chengdu Shen-Timemaker Crystal Technology Co, Limited 40% Shenzhen Taixiang Wafer Co, Limited 40% Thinxtra Pty Limited 40% The contribution of Centum Rakon India to Rakon Limited’s net results from ordinary activities is a net loss after tax of $103,000 (March 2015: net profit after tax: $3,293,000). The contribution of Chengdu Timemaker, Chengdu Shen-Timemaker and Shenzhen Taixiang to Rakon Limited’s net results from ordinary activities is a net loss after tax of $704,000 (March 2015: net loss after tax $140,000). The contribution of Thinxtra to Rakon Limited’s net results from ordinary activities is a net loss after tax of $95,000 (March 2015: nil). E. Audit (NZX Listing Rules Appendix 1: 1.3(l)) The financial statements have been audited and are not subject to any qualification. F. Business Changes (NZX Listing Rules Appendix 1: 1.3(m)) During the period the company invested $1.7 million in Thinxtra Pty Limited. Thinxtra is a start-up ‘internet of things’ (IoT) company focused on deploying a wireless telecommunications network in Australia and New Zealand. On 4 April 2016 Rakon invested a further AUD $4.2 million in Thinxtra. There have been no other major changes or trends in Rakon Limited’s business, either during the period or subsequent to the financial year end. G. Directors Declaration (NZX Listing Rules Appendix 1, 3.1 & 3.2) The Directors declare that the selected consolidated financial information on pages 4 to 14 has been prepared in compliance with applicable Financial Reporting Standards and extracted from the audited financial statements. 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 each note of the audited financial statements that form part of this announcement. 17