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Third Quarter Results Financial Statement And Related Announcement

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Unaudited Third Quarter Financial Statements Announcement for the period ended 31/03/2018

Income Statement


Balance Sheet


Review Of Performance

Review Of Profit And Loss

Semiconductor industry review

Following record annual sales of US$412.2 billion in 2017, worldwide chip sales for the two months of January and February 2018 registered an increase of about 22% to US$74.4 billion, compared to US$61.0 billion in the corresponding period of 2017, according to statistics compiled by the Semiconductor Industry Association (SIA).

The SIA said the global semiconductor market continued to demonstrate substantial and consistent growth in February 2018, notching its 19th consecutive month of year-on-year sales increases and growing by double-digit percentages across all major regional markets. It also said year-on-year chip sales were up across all major semiconductor product categories.

In its latest Semiconductor Market Forecast released on 28 February 2018, the World Semiconductor Trade Statistics (WSTS) projects worldwide chip sales to be strong with 9.5% growth to US$451 billion in 2018. The WSTS said the largest growth during 2018 is expected across memory, optoelectronics and logic with all products contributing to growth. All regional markets are also expected to show growth in 2018.

Group Revenue


For the three months ended 31 March 2018 (3Q18), the Group's revenue increased 12.9% year-on-year (yoy) to S$16.1 million from S$14.2 million in 3Q17. This was driven mainly by higher sales in China, the Philippines and the USA.

On a quarter-on-quarter (qoq) basis, Group revenue in 3Q18 increased 2.7% from 2Q18 due mainly to higher sales to customers in China, Taiwan and the USA.

For the nine months ended 31 March 2018 (9M18), Group revenue increased 18.3% to S$49.4 million from S$41.8 million in 9M17 due mainly to higher sales in Singapore, China, the Philippines and the USA.

Revenue breakdown by Geographical Market


In 3Q18, the Group witnessed improved yoy sales in the majority of its markets, particularly in China, the Philippines and the USA. Sales in China increased 18.3% to S$4.4 million in 3Q18 to remain as our largest geographical market with a 27.2% contribution to Group revenue. Sales in the USA recorded an increase of 29.5% to S$3.2 million in 3Q18, making it our second largest market with 19.6% of Group revenue.

Sales in Malaysia was maintained at S$2.8 million in 3Q18 and accounted for 17.7% of Group revenue. Sales to customers in the Philippines increased 28.3% to $1.6 million while sales to the Japan market increased 25.8% to S$0.3 million.

For 9M18, China was our largest market with a contribution of 27.7% to Group revenue, followed by Malaysia and the USA with revenue contributions of 18.7% and 18.0% respectively.

Capacity Utilisation


Our average capacity utilisation rate remained at 59% in 3Q18 compared to 3Q17 as additional production equipment had been installed over the course of the two periods.

Gross Profit (GP) Margin


The Group's gross profit increased 9.6% to S$9.0 million in 3Q18 from S$8.2 million in 3Q17. The Group's GP margin in 3Q18 eased to 55.8%, as compared to 57.4% in 3Q17, attributable mainly to an increase in our production headcount as well as higher depreciation expenses for additional machines and the recognition of right-of-use assets.

Other income, Distribution Cost, Administrative Expenses and Other Operating Expenses


The Group recorded other income of S$290k in 3Q18 due mainly to a net gain of S$126k from the disposal of various machines. We maintained tight control over our expense structure during 3Q18. Our distribution costs of S$811k and other operating expenses of S$882k were comparable to their respective amounts in 3Q17. Administrative expenses increased 10.2% to S$2.3 million in 3Q18 from S$2.1 million in 3Q17 due mainly to an increase in headcount and performance bonus expenses. In aggregate, our administrative, distribution and other operating expenses (inclusive of other income) in 3Q18 reduced to S$3.7 million from S$3.9 million in 3Q17. As a percentage of Group sales, these overhead expenses decreased to 23.2% in 3Q18 from 27.1% in the same quarter a year ago.

Profit before Tax and Net Profit


As a result of the above, the Group recorded a 21.1% increase in profit before tax to S$5.2 million in 3Q18 from S$4.3 million in 3Q17. After deducting income tax of S$1.1 million in 3Q18 (S$0.9 million in 3Q17), the Group's net profit increased 18.7% to S$4.1 million in 3Q18 from S$3.5 million in 3Q17. Net profit margin in 3Q18 improved to 25.6% as compared to 24.3% in 3Q17 and 24.9% in 2Q18.

The effective tax rate for 3Q18 was 21.4% as compared to 19.8% for 3Q17. Tax expense for the quarter included a provision of S$174k for withholding tax on dividends to be remitted to Singapore from various overseas subsidiaries.

For 9M18, the Group's net profit increased 29.2% to S$13.2 million from S$10.2 million in 9M17. Net profit margin improved to 26.7% in 9M18 as compared to 24.4% in 9M17. Correspondingly, the Group's earnings per share grew to 9.48 cents in 9M18 from 7.34 cents in 9M17.

Balance Sheet

The Group remains in a sound financial position. As at 31 March 2018, we had a balance sheet with total assets of S$68.7 million, shareholders' equity of S$56.1 million, cash and cash equivalents of S$18.8 million and no bank borrowings.

Long Term Assets

As at 31 March 2018, the Group's non-current assets increased to S$32.8 million as compared to S$26.6 million as at 30 June 2017.This was partly due to the recognition of right-of-use assets which amounted to S$1.1 million, in relation to the various factories that the Group occupies, following the adoption of FRS116 Leases in the current financial year.

Trade Receivables


Total trade receivables as at 31 March 2018 increased to S$11.7 million as compared to S$11.0 million as at 31 December 2017, in tandem with higher sales in 3Q18. Of this, 0.5% was outstanding for 90 days or more (NIL as at at 30 Jun 2017). The Group also did not incur any bad debt expenses during the nine month period in FY2018 (NIL during FY2017).

Trade & Other Payables

As at 31 March 2018, our trade payables totaled S$1.1 million, of which S$400 was outstanding for 30 days or more. Non-trade payables totaled S$2.6 million. Other accrued expenses stood at S$5.5 million.

Long term liabilities

As at 31 March 2018, the Group's deferred tax liabilities totaled S$1.7 million as compared to S$1.4 million as at 30 June 2017. With the adoption of the new accounting standard FRS116 Leases at the beginning of the current financial period, the Group recorded lease liabilities of S$1.1 million.


As a percentage of annualised sales, our inventory of S$4.3 million as at 31 March 2018 (S$3.7 million as at 30 June 2017) was 6.5% (6.4% as at 30 June 2017). Inventory written off during 9M18 totaled S$84k, as compared to S$71k in the corresponding nine months of FY2017.

Capital Expenditure


The Group made capital investments of S$3.4 million in 3Q18 which was mainly for new machines to increase both the manufacturing capacities and capabilities of our factories in Singapore, Malaysia, the Philippines and the USA. For 9M18, our capital expenditure amounted to S$9.3 million. We expect our capital expenditure to reach approximately S$10.0 million in FY2018

Cash Flow Analysis

The Group generated net cash from operations of S$5.2 million in 3Q18 (S$2.6 million in 3Q17). Net cash used for investing activities amounted to S$3.1 million which was mainly for capital expenditure. After distributing an interim dividend of S$5.6 million during the quarter, we closed the period with cash and cash equivalents of S$18.8 million, including S$170k in pledged deposits.

Commentary On Current Year Prospects

Strategic, Operating and Financial Review

During 3Q18, Group revenue increased 12.9% to S$16.1 million from S$14.2 million during the same period a year ago. Group profit before tax rose 21.1% to S$5.2 million from S$4.3 million during 3Q17.

While growing the Group's top line and the value we create for our customers remains a key priority, we have also been working tirelessly to enhance our manufacturing processes, productivity and cost structure by focusing on various strategies, such as 24/7Machining, IT automation and department integration. In spite of ongoing selling-price pressures and increased costs due mainly to additional depreciation and personnel-related expenses, our GP margin in 3Q18 remained healthy at 55.8% (57.4% in 3Q17).

We are also continuing to work diligently to keep a tight rein on overhead expenses. During 3Q18, total distribution, administrative and other expenses including other income totalled S$3.7 million which was a marginal decrease from S$3.9 million during 3Q17. When measured as a percentage of sales, these overhead costs declined to 23.2% from 27.1% during 3Q17. After deducting taxes of S$1.1 million (S$0.85 million in 3Q17), the Group reported a net profit of S$4.1 million in 3Q18, an increase of 18.7% from S$3.5 million in the same quarter a year ago.

At the end of 3Q18, the Group employed 475 great people. Compared with our yoy sales growth of 18.3% during 9M18, this was an addition of just nine people or 1.9% to the 466 employees with the Group at the end of FY2017. As the Group grows, we plan to continue improving our efficiency and productivity by automating our operations, streamlining our processes and using technology to leverage the know-how and skills of our people.

With no bank borrowings to service and a careful watch over inventory and receivables, net cash generated from operating activities in 3Q18 totaled S$5.2 million (S$2.6 million for 3Q17). After net investing activities of S$3.1 million, primarily for new equipment and a dividend payment of S$5.6 million, the Group ended the quarter in a strong financial position with S$18.8 million in cash (including S$0.2 million held as security deposits) and no bank borrowings.

Market, Industry and Competitive Conditions

According to statistics compiled by the SIA, world-wide chip sales during 2017 increased about 21.6% to a record US$412.2 billion from S$334.7 billion in 2016. During this same twelve-month period, the Group's revenue grew 18.9% to S$63.0 million from S$53.0 million in 2016. Although the chip industry's strong growth has continued into 2018 with worldwide sales up 21.8% during the first two months of this year, the WSTS expects the industry's growth to moderate to about 9.5% for 2018.

Indeed, we witnessed a moderation in manufacturing activity in Asia during 3Q18 which resulted in the slower Group sales growth of 12.9%. As we move into 4Q18, we will be watching carefully for further signs of tapering demand. In the long term however, we continue to believe that the semiconductor industry is poised for a prolonged period of solid growth as chips become increasingly embedded in nearly every aspect of modern life from today's smart phones to tomorrow's driverless cars.

Without a doubt, the semiconductor industry is a global battle ground for some of the best and strongest companies in the world. Together with constantly evolving technologies, a shortage of skilled personnel and accelerating cost pressures, the Group operates in a keenly competitive and challenging environment.

Our semiconductor tooling business, which operates from our four plants in Asia, designs and manufactures process-critical precision tools for the assembly of semiconductors and serves a world-wide customer base. While we are not aware of a similar company that is directly comparable to Micro-Mechanics in terms of product range, scale and geographical coverage, our semiconductor tooling business does face a variety of competitors ranging from small machine shops to several multi-national companies.

The Group's initiative to manufacture process-critical parts for makers of wafer-fabrication equipment, which is supported by our factory in the Silicon Valley, faces a different set of competitive challenges. While this business has a much larger addressable market than our semiconductor tooling business, there are also entrenched suppliers including some of the world's biggest contract manufacturers. As a result, we are working to become a new breed of supplier with competitive advantages so far not seen in terms of quality, repeatability and efficiency.

Key Operating Strategies

While short-term business planning and forecasting remains difficult and clouded by a host of political and economic uncertainties, we understand what is required for the Group to sustain its growth over the long term. We will maintain our focus on our customers and the value we bring to their businesses. Whether we design and manufacture a tool for a delicate semiconductor assembly process or machine a part used in a critical waferprocessing application, our mission is to deliver Perfect Parts and Tools, On Time, Every Time based on repeatable, scalable and cost-effective processes.

At Micro-Mechanics, we are fond of saying that People Make Everything Happen. Dealing with relentless cost pressures, adapting to rapid change and implementing new initiatives to improve key outcomes requires an effective culture. We define this as the way our people make decisions and work together. To be successful over the long-term, it is essential for our people at all levels to understand, embrace and act in ways that are consistent with our vision, mission, goals, strategies and core values. We intend to keep learning how to better harness the enormous potential of every person at Micro-Mechanics to make better decisions, be more effective and thereby enhance the value we create for our customers and other stakeholders.

To support this aim, we have an ongoing training program called MM University to help our people understand the need to have a shared framework for making more informed and aligned decisions. It began with a series of workshops on Customer Value, Business Planning, 24/7Machining, and The Fundamentals of Value-Driven Decision Making.

During the last few years, we have learned that it takes more than a series of workshops to build an effective decision-making framework and culture. The training material needs to be easy for our people at all levels to understand and reference in their daily work and decision making. To this end, we are working to compile a series of textbooks designed to clearly explain the fundamentals of how we are working to run the company.

During 3Q18, we released the second edition of 24/7 Decision MakingTM. This enhanced version of our employee text book includes new training material on Corporate Governance which is our core methodology for guiding and controlling the Group. When practiced with understanding and commitment, we believe Corporate Governance is the nucleus of all of our many efforts to build long-term growth, profitability and stakeholder value.

Indeed, transparency and good governance are more than just ticking boxes. Accurate, complete and timely information is the foundation for sound decision making – not just for investors – but for everyone at Micro- Mechanics from the board room to the shop floor. We intend to continue working to build a strong corporate culture based on transparency, clear metrics of performance, stakeholder accountability and an unwavering commitment to good governance.

In our latest version of 24/7 Decision MakingTM, we have also included additional training material on the importance of safeguarding confidential information, as well as simple best practices for everyone at Micro- Mechanics from the shop floor to the board room with respect to dealing in shares of the Company. Ultimately, we want everyone at Micro-Mechanics to have the tools they can refer to and use every day as they make decisions, take actions and help us build a great company.

On 18 April 2018, Micro-Mechanics was announced as the inaugural winner of a Productivity Award conferred by the Singapore Precision Engineering and Technology Association (“SPETA”) in partnership with Singapore Institute of Manufacturing Technology (“SIMTech”). This award from SPETA and SIMTech is to encourage higher productivity in Singapore's precision engineering industry. Micro-Mechanics was also a winner of the Singapore Productivity Awards 2017 by the Singapore Business Federation (“SBF”) in November 2017. These awards are an endorsement of our continuing efforts to improve efficiency and raise productivity of our operations.

Appreciation and Stakeholder Value

Since our listing we have also maintained a consistent practice of rewarding shareholders for their continuous support of Micro-Mechanics. For FY2017, the Group paid an interim dividend of 3 cents per ordinary share, a final dividend of 4 cents per ordinary share, and a special dividend of 1 cent per ordinary share. As a result, the total dividend payment for FY2017 increased to 8 cents per ordinary share compared to 6 cents per ordinary share for FY2016.

For the half year ended 31 December 2017, the Board declared an interim dividend of 4 cents per ordinary share (one-tier tax exempt) totaling S$5.6 million which was paid on 13 February 2018. Including this interim dividend for 1H18, we have distributed a total of 57.9 cents per share to our shareholders since 2003. Based on dividends alone, this translates into a return of more than 300% for our shareholders who bought Micro-Mechanics shares at our Initial Public Offer.

We would also like to express our appreciation to all of our people at Micro-Mechanics for their vision, teamwork and tireless commitment. Indeed, People Make Everything Happen!

We look forward to continue working together to build value for all our stakeholders.