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Full Year Results Financial Statement And Related Announcement

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Unaudited Full Year Financial Statements Announcement for the year ended 30/06/2018

Income Statement

Financials

Balance Sheet

Financials

Review Of Performance

Review Of Profit And Loss

Semiconductor industry review

According to statistics compiled by the Semiconductor Industry Association (SIA), worldwide chip sales in the first six months of 2018 grew 20.4% to US$229.0 billion, compared to the first half of 2017. The SIA said global chip sales have increased year-on-year by more than 20% for 15 consecutive months on the back of higher sales in every major product category.

In its latest Semiconductor Market Forecast released on 5 June 2018, the World Semiconductor Trade Statistics (WSTS) forecasts global semiconductor sales in 2018 to grow at a more moderate annual rate of 12.4% to a record US$463 billion. It expects sales to be driven by growth of 26.5% in Memory products and a 9.5% increase in Analog products. All geographical regions are also expected to grow during 2018. For 2019, WSTS projects chip sales to grow at a slower 4.4% to US$484 billion,

Group Revenue

Financials

For the 12 months ended 30 June 2018 (FY2018), the Group reported record revenue of S$65.1 million, an increase of 13.8% from S$57.2 million in FY2017. This was driven by higher sales achieved in our major geographical markets on the back of strong growth in the global semiconductor industry.

For the three months ended 30 June 2018 (4Q18), Group revenue increased a marginal 1.5% to S$15.7 million from S$15.4 million in 4Q17. On a quarter-on-quarter (qoq) basis, Group revenue eased 2.5% to S$15.7 million in 4Q18 from S$16.1 million in 3Q18.

Revenue breakdown by Geographical Market

Financials

In FY2018, the Group witnessed sales increases in the majority of our geographical markets, particularly in China, the USA and the Philippines. Sales in China increased 21.1% to S$18.0 million to remain as our largest market with a contribution of 27.5% to Group revenue.

The Group's sales in the USA increased 33.3% to S$12.2 million. As a result, the USA has become our second largest market with a revenue contribution of 19% in FY2018. Sales in Malaysia increased 2.3% to S$12.1 million and accounted for 18% of Group revenue. Sales to customers in the Philippines improved by 27.1% to S$6.4 million while sales in the Singapore market grew 9% to S$5.1 million.

Capacity Utilisation

Financials

Our average capacity utilisation rate in FY2018 increased to 61% from 58% in FY2017, in tandem with the increase in Group sales.

Gross Profit (GP) Margin

Financials

The Group's gross profit increased by 12.8% to S$37.1 million in FY2018. The Group's GP margin in FY2018 was relatively steady at 57.0% when compared to FY2017. GP margin in 4Q18 eased to 54.6% from 59.4% in 4Q17 due mainly to an increase in 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

Financials

The Group registered a 7.2% increase in other income to S$777k due mainly to a net gain of S$248k on the disposal of various machines.

We continued to keep a close watch on our expense structure. Our distribution costs of S$3.2 million in FY2018 were steady when compared to FY2017. Administrative expenses increased 7.7% to S$9.3 million in FY2018 from S$8.6 million in FY2017 due mainly to an increase in headcount, annual salary adjustments, interest expense from rights of assets in-use and costs related to maintenance of the Group's premises. Other operating expenses increased marginally to S$3.5 million in FY2018 from S$3.3 million in FY2017, attributable to higher performance bonus expenses and the absence of foreign exchange gain of S$173k recorded in FY2017.

In aggregate, the Group's administrative, distribution and other operating expenses (net of other income) increased 6.1% to S$15.2 million in FY2018 from S$14.4 million in FY2017. As a percentage of sales, these overhead expenses decreased to 23.4% in FY2018 from 25.1% in FY2017.

Profit before Tax and Net Profit

Financials

The Group's profit before tax increased 18.1% to S$21.9 million in FY2018 from S$18.5 million in FY2017.

After deducting income tax expenses of S$4.7 million in FY2018 (S$3.7 million in FY2017), the Group reported a record net profit of S$17.1 million in FY2018, an increase of 16.1% from S$14.8 million in FY2017. Net profit margin in FY2018 increased to 26.3% compared to 25.8% in FY2017.

For FY2018, the Group's effective tax rate was 21.5% compared to 20.2% in FY2017. The tax expenses included S$617k for withholding tax paid and an additional S$222k for withholding tax accrued on dividends from various overseas subsidiaries

Correspondingly, the Group's earnings per share grew to 12.33 cents in FY2018 from 10.62 cents in FY2017.

Balance Sheet

As at 30 June 2018, the Group remained in a sound financial position with a balance sheet that had total assets of S$73.3 million, shareholders' equity of S$60.3 million, cash and cash equivalents of S$21.1 million and no bank borrowings.

Long Term Assets

As at 30 June 2018, non-current assets stood at S$35.7 million as compared to S$26.6 million as at 30 June 2017. This increase was partly due to the recognition of right-of-use assets which amounted to S$2.3 million (net of depreciation) in relation to the various factories that the Group occupies following the adoption of FRS116 Leases in the current financial year and the purchase of new equipment for our five factories.

Trade Receivables

Financials

Total trade receivables as at 30 June 2018 was S$10.9 million, as compared to S$11.0 million as at 30 June 2017. Of this, S$534 was outstanding for 90 days or more (S$8.2k at end of 30 June 2017). The Group did not incur any bad debt expenses during FY2018 and FY2017.

Trade & Other Payables

As at 30 June 2018, our trade payables totaled S$798k with zero outstanding for 30 days or more. Non-trade payables totaled S$1.8 million. Other accrued expenses stood at S$4.5 million. With the adoption of the new accounting standard FRS116 Leases at the beginning of the current financial period, the Group recorded current lease liabilities outstanding of S$0.9 million.

Long term liabilities

As at 30 June 2018, the deferred tax liabilities was S$1.5 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 non-current lease liabilities outstanding of S$1.3 million.

Inventory

The Group continuously manages its inventory to avoid over-stocking and minimise write-offs. As a percentage of annualised sales, our inventory of S$4.6 million at the end of FY2018 (S$3.7 million at end-FY2017) was 7.0% (6.4% at end of FY2017). Inventory written off in FY2018 totaled S$111k, as compared to S$102k in FY2017.

Capital Expenditure

Financials

During FY2018, the Group had capital expenditure totalling S$12.1 million. This included investments of approximately S$10.6 million for new equipment to increase the manufacturing capacity and capabilities of our five factories.

Cash Flow Analysis

The Group generated net cash from operations of S$22.4 million in FY2018 (S$18.1 million in FY2017). After deducting net investing activities of S$11.4 million and S$13.6 million for financing activities mainly for the payment of dividends in respect of FY2017 and 1H18, we closed the year with a cash balance of S$21.1 million including S$0.2 million in pledged deposits.

Dividend Payment

The Board of Directors is recommending a final dividend of 5 cents and a special dividend of 1 cent per share (one tier tax-exempt) in respect of FY2018. If approved by shareholders at the Annual General Meeting to be held on 29 October 2018, the dividend will be paid on 20 November 2018.

Together with the interim dividend of 4.0 cents per share (one tier tax-exempt) paid on 13 February 2018, the Group's total dividend for FY2018 would be 10 cents per share (one tier tax-exempt). The total payout for FY2018 will amount to S$13.9 million (S$11.1 million in FY2017).

Commentary On Current Year Prospects

Financial and Operating Review

During FY2018, Group revenue increased 13.8% to a record S$65.1 million from S$57.2 million in the previous year. 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 maintain a strong GP margin by focusing on various strategies, such as 24/7Machining, IT automation and department integration to improve efficiency and operational effectiveness. In spite of ongoing cost pressures, these and other efforts helped keep our GP margin relatively steady in FY2018 at 57.0% compared to 57.4% in FY2017.

We also worked diligently throughout the year to maintain a tight rein on overhead expenses. During FY2018, our total distribution, administrative and other expenses including other income increased by just 6.1% to S$15.2 million from S$14.4 million in FY2017. When measured as a percentage of sales, the Group's overhead expenses declined to 23.4% from 25.1% during FY2017.

We have also been able to maintain a lean manpower structure as a result of our many improvement initiatives. Although we added 19 people to end FY2018 with a headcount of 485, these new personnel were mainly in nonsupervisory and production roles aimed at strengthening our core manufacturing and delivery responsiveness. As we move forward, we intend to continue automating our operations and enhancing our processes.

After deducting taxes of S$4.7 million (S$3.7 million in FY2017), the Group reported a record net profit of S$17.1 million during FY2018, an increase of 16.1% from S$14.8 million during the previous year. For 4Q18, the Group's net profit was S$4.0 million, down 13.1% from S$4.6 million in the same quarter a year ago.

With no bank borrowings to service and a careful watch over inventory and receivables, net cash generated from operating activities during FY2018 totaled S$22.4 million (S$18.1 million for FY2017). After net investing activities of S$11.4 million (S$4.9 million in FY2017), primarily for the purchase of new equipment, and paying interim and final dividends totalling S$12.5 million (S$9.7 million during FY2017), the Group maintained a strong financial position at the end of FY2018 with S$21.1 million in cash (including S$0.2 million held as security deposits) and no bank borrowings.

As China continues to develop into a major center for global chip manufacturing, we remain focused on building our operations there to ensure fast, effective and local support. As a result, the Group has benefited from multi-year sales growth in China. In FY2018, our China sales stood out with an increase of 21% to S$18.0 million. At 27% of Group sales (26% during FY2017), China remains our largest geographical market.

During FY2018, our revenue in the USA increased 33% to S$12.2 million from S$9.1 million during the previous year. At 19% of Group revenue, the USA has overtaken Malaysia's contribution of 18% to become the Group's second-largest geographical market. Together with the Philippines (10%), Singapore (8%) and Taiwan (7%), these six countries represent nearly 90% of the Group's business. With factories in China, the USA, Malaysia, the Philippines, Singapore and our sales office in Taiwan, the Group is well-positioned to provide fast, effective and local support to our customers in these major market areas.

At the beginning of FY2017 we announced the cessation of our efforts at our subsidiary in the USA (“MMUS”) to make parts for equipment makers in a variety of industries. After evaluating the engineering and investment requirements for success in each of these different market segments, and after making promising inroads with several leading makers of semiconductor wafer-fabrication equipment, we decided to align our efforts at MMUS with the Group's core business of manufacturing process critical parts and tools primarily for the semiconductor industry. During FY2018, sales at MMUS increased 29.6% to S$12.3 million while its net profit rose to S$0.5 million from a loss of S$0.6 million during FY2017.

With these encouraging results, growing customer engagement and positive long-term outlook for the semiconductor industry, we believe our strategy of focusing the Group's five plants on the semiconductor industry is the right approach.

Market, Industry and Competitive Conditions

According to statistics compiled by the SIA, world-wide chip sales during 2017 increased 21% to US$405 billion from US$335 billion during 2016. Although the chip industry's strong growth has continued into 2018 with worldwide sales up 20.4% in the first six months, the WSTS expects the industry's growth to moderate to about 12.4% for all of 2018, implying a much slower 4 – 5% growth rate for the second-half of the year.

Because the tools and parts we manufacture are typically purchased by our customers well before the sale of the finished chip is recorded, the Group's revenue growth generally tends to reflect the future direction of the semiconductor industry. Indeed, during 4Q18, our top line growth slowed to 1.5% compared to the same quarter a year ago which is in line with industry projections for slower growth in the second half of 2018. As such cyclicality is typical for the semiconductor industry, we prefer to focus on the industry's long term trends and try not to get preoccupied by short-term variations. We believe the semiconductor industry is poised for a prolonged period of solid growth as chips are becoming increasingly embedded in nearly every aspect of modern life from today's smart phones to tomorrow's driverless cars. Hence, the key to the Group's success lies in our continuing ability to seize long-term opportunities and correctly identify the initiatives and investments that bring value to our customers.

During FY2018, we invested a record S$10.6 million in new equipment. Because the time to specify, order and qualify new equipment can easily stretch beyond a year, it can also be difficult to align our investments in new equipment to short-term industry conditions. For example, our net profit in 4Q18, which fell S$0.6 million to S$4.0 million, included S$0.5 million in additional depreciation expenses compared to the same quarter a year ago. During FY2019, we expect capital expenditures of about S$6 million.

At the same time, we are always working to develop new materials and processes based on the long-term needs of our customers for greater precision, repeatability and reliability. For example, during 4Q18, our engineers in California completed the development of a critical part used in the wafer-fabrication process while our R&D team in Singapore produced several proprietary materials we belive are essential to the industry at 10 nanometer and below device geometries. Both of these engineering efforts involved more than 18 months of difficult and costly engineering work. While we will begin to see revenue from this initiative during 1Q19, we believe that this pattern of longer and more costly development cycles is becoming the norm as the chip industry moves below 10 nano device geometry and into increasingly difficult processing methods. Although the landscape is more challenging due to the ever-changing nature and increasingly stringent demands of the semiconductor industry, we believe these requirements play well to our technical, financial and managerial strengths and our focus on building stakeholder value that is sustainable.

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 a way that synchronize 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 2H18, 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 our many efforts to build and safeguard stakeholder value.

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.

Transparency and Governance

On 18 July 2018, our CEO, Christopher Borch, received the Best CEO Award at the Singapore Corporate Awards (SCA) 2018 for the category of companies with a market capitalization up to S$300 million. Including this recent award, the Group has received recognition 27 times since our listing in 2003 for our good corporate governance and transparency practices.

In addition to these awards, in the Singapore Governance and Transparency Index (SGTI) released on 7 August 2018, Micro-Mechanics received a score of 97 points to rank 23rd out of 589 companies (excluding 43 Reits and Business Trusts) listed on the Singapore Exchange. The top 25 companies in the SGTI are mainly large capitalisation companies.

Transparency and good governance are more than just ticking boxes. Indeed, 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.

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 the half year ended 31 December 2017, the Group paid an interim dividend of 4 cents per ordinary share (one-tier tax exempt). Subject to approval at the upcoming Annual General Meeting on 29 October 2018, we plan to distribute a final dividend of 5 cents and a special dividend of 1 cent per ordinary share. This will bring the total dividend payment for FY2018 to 10 cents per ordinary share compared with 8 cents per ordinary share for FY2017.

Including the proposed final dividend and special dividend, we will have distributed a total of 63.9 cents per share to our shareholders since 2003. Based on dividends alone, this translates into a return of about 347% for our shareholders who bought Micro-Mechanics shares at our Initial Public Offer.

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

We look forward to continuing to work together to build value for all our stakeholders.