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First Quarter Results Financial Statement And Related Announcement

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Unaudited First Quarter Financial Statements Announcement for the period ended 30/09/2018

Income Statement

Financials

Balance Sheet

Financials

Review Of Performance

Review Of Profit And Loss

Semiconductor industry review

The semiconductor industry has shown signs of moderating sales growth heading into the second half of 2018 after rising 20.4% during the first six months of the year. Based on statistics compiled by the Semiconductor Industry Association (SIA), worldwide semiconductor sales in July and August 2018 increased 16.3% to US$79.7 billion compared to the same two month period in 2017. The SIA said that while year-on-year growth has moderated somewhat, sales remained strong across every major product category and regional market, with the China and Americas markets standing out with the largest year-on-year growth.

The World Semiconductor Trade Statistics (WSTS) has updated its Semiconductor Market Forecast on 16 August 2018. WSTS now expects global semiconductor sales in 2018 to grow at a moderate annual rate of 15.7% to a record US$477 billion. It expects sales of all products to grow with the largest growth coming from memory, analog ICs, discretes, and optoelectronics. It also forecasts all regions to continue growing in 2018.

Group Revenue

Financials

For the three months ended 30 September 2018 (1Q19), the Group reported revenue of S$16.9 million. This was a decline of 4.6% from S$17.7 million in 1Q18, which marked our highest ever quarterly revenue, due mainly to lower sales contribution from the Singapore and Malaysia markets.

On a quarter-on-quarter (qoq) basis, however, Group revenue in 1Q19 increased 7.7% from S$15.7 million in 4Q18 due mainly to higher sales in the majority of our geographical markets, particularly in China and Malaysia.

Revenue breakdown by Geographical Market

Financials

The Group recorded sales of S$5.5 million in China during 1Q19, which were increases of 5.5% year-on-year (yoy) from 1Q18 and 31% qoq from 4Q18. As a result, China contributed 32.6% of Group revenue in 1Q19 and remains as our largest market.

We registered sales of S$3.1 million in Malaysia during 1Q19, which was a decline of 11.4% yoy from 1Q18 but was an increase of 7.0% qoq from 4Q18. Malaysia was our second largest market in 1Q19 and accounted for 18.1% of Group revenue.

Sales in the USA increased 8.3% to S$3.0 million in 1Q19 which stood as our third largest market with a contribution of 17.7% to the Group’s revenue. Sales in Singapore decreased 42.8% to S$1.0 million in 1Q19 due to less orders received from customers.

Capacity Utilisation

Financials

Our average capacity utilisation rate decreased to 58% in 1Q19 compared to 64% in 1Q18, due to the decrease in Group sales as well as our investments for additional production capacity during FY2018.

Gross Profit (GP) Margin

Financials

The Group’s gross profit (GP) decreased by 6.8% to S$10.0 million in 1Q19 from S$10.8 million in 1Q18. Our GP margin in 1Q19 eased to 59.5% in 1Q19 from 60.9% in 1Q18 due mainly to an increase in production headcount and higher depreciation expenses for machines purchased during FY2018. On a qoq basis, our GP margin in 1Q19 improved from 54.6% in 4Q18.

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

Financials

Other income in 1Q19 increased 5.3% to S$135k from S$128k in 1Q18. This was due mainly to foreign exchange gain of S$19k as compared to the foreign exchange loss of S$2k recorded in 1Q18. In addition to invoicing in various currencies, the Group uses currency hedging to mitigate the effect of currency fluctuations.

We continued to keep a tight rein on our expense structure during 1Q19. Distribution costs increased 8.0% to S$894k due mainly to higher expenses incurred for sales and business development purposes. Administrative expenses decreased 3.6% to S$2.4 million from S$2.5 million due mainly to lower bonus incentive accruals which was partially offset by higher salary and related benefits. Other operating expenses were relatively stable at S$847k.

In aggregate, our administrative, distribution and other operating expenses (inclusive of other income) in 1Q19 decreased 0.7% to S$4.0 million from S$4.1 million in 1Q18. As a percentage of Group sales, these overhead expenses increased to 24.0% in 1Q19 from 23.0% in the same period a year ago.

Profit before Tax and Net Profit

Financials

As a result of the above factors, the Group’s profit before tax decreased 10.5% to S$6.0 million in 1Q19 from S$6.7 million in 1Q18.

After deducting income tax of S$1.5 million (S$1.5 million in 1Q18), the Group reported a net profit of S$4.5 million in 1Q19. While this was a decrease of 12.9% yoy from S$5.2 million in 1Q18, net profit in 1Q19 increased 13.9% qoq from S$4.0 million in 4Q18. The Group’s net profit margin was 26.7% in 1Q19 as compared to 29.2% in 1Q18 and 25.2% in 4Q18.

The effective tax rate for 1Q19 was 24.8% as compared to 22.8% for 1Q18. Tax expense for the quarter included a provision of S$216k for withholding tax on dividends to be remitted to Singapore from various overseas subsidiaries.

Balance Sheet

As at 30 September 2018, the Group remained in a sound financial position with a balance sheet that had total assets of S$76.5 million, shareholders’ equity of S$64.2 million, cash and cash equivalents of S$23.9 million and no bank borrowings.

Long Term Assets

As at 30 September 2018, non-current assets decreased to S$34.7 million from S$35.7 million as at 30 June 2018.

Trade Receivables

Financials

Total trade receivables as at 30 September 2018 increased to S$12.0 million, as compared to S$10.9 million as at 30 June 2018. Of this, 0.02% was outstanding for 90 days or more (0% at end of 30 June 2018). There was no bad debt expense during 1Q19 and 1Q18.

Trade & Other Payables

As at 30 September 2018, our trade payables totaled S$721k, of which S$1k was outstanding for 30 days or more. Non-trade payables totaled S$1.4 million. Other accrued expenses was S$3.9 million.

Long term liabilities

As at 30 September 2018, the deferred tax liabilities was S$1.7 million as compared to S$1.5 million as at 30 June 2018. The lease liabilities was S$2.1 million as at 30 September 2018 as compared to S$1.3 million as at 30 June 2018 due to the renewal of factory lease.

Inventory

As a percentage of annualised sales, our inventory of S$4.8 million as at 30 September 2018 (S$4.6 million as at 30 June 2018) was 7.1% (7.0% as at 30 June 2018). Inventory written off in 1Q19 totaled S$21k, compared to S$48k in 1Q18.

Capital Expenditure

Financials

We incurred capital expenditure of S$0.7 milion in 1Q19 which was mainly for new machines for our factories in Singapore, Malaysia and China. For FY2019, we expect to incur capital expenditure of approximately S$6 million.

Cash Flow Analysis

The Group generated net cash from operations of S$3.9 million in 1Q19 (S$4.4 million in 1Q18). After deducting net cash used for investing activities of S$639k and net cash used for financing activities of S$229k, we ended the quarter with cash of S$23.7 million which includes S$0.2 million in pledged deposits.

Commentary On Current Year Prospects

During 1Q19, Group sales declined 4.6% to S$16.9 million from the quarterly record of S$17.7 million achieved in 1Q18. 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 improve our GP margin by focusing on various strategies, such as 24/7 Machining, IT automation and department integration to improve productivity and operational efficiency. Based on these and other efforts, our GP margin in 1Q19 remained steady at 59.5% compared to 60.9% in the same period a year ago.

We are also continuing to work diligently to keep a tight rein on overhead expenses. Total distribution, administrative and other expenses including other income declined slightly to S$4.0 million from S$4.1 million in 1Q18. As a percentage of sales these overhead expenses increased to 24.0% from 23.0% in 1Q18.

As a result, the Group’s profit before tax declined 10.5% to S$6.0 million from S$6.7 million in the same quarter a year ago. After deducting taxes of S$1.5 million (S$1.5 million in 1Q18), the Group reported a net profit of S$4.5 million in 1Q19 compared with our highest-ever quarterly profit of S$5.2 million in 1Q18.

At the end of 1Q19, the Group employed 498 great people worldwide, an addition of 27 people from a year ago. As the Group grows, we plan to continue 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 1Q19 totaled S$3.9 million (S$4.4 million for 1Q18). After using net cash for investing activities of S$0.6 million (S$2.1 million in 1Q18) which was primarily for new equipment, the Group ended our first quarter in a strong financial position with S$23.9 million in cash (including S$165k held as security deposits) and no bank borrowings.

Market, Industry and Competitive Conditions

According to statistics compiled by the SIA, world-wide chip sales increased 21.6% during 2017. Although the chip industry’s strong growth has continued into 2018 with worldwide sales up 19.7% in the first eight months, the WSTS now expects growth to moderate to about 15.7% for the whole of 2018. This implies a slower industry growth rate of about 9% for the last four months of 2018.

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. 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 side-tracked by short-term variations. We continue to 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 on new equipment to expand the productivity of our worldwide operations. 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 1Q19, which fell S$0.7 million to S$4.5 million, included S$0.2 million in additional depreciation expenses compared to the same quarter a year ago.

During 1Q19, we spent S$0.7 million mainly for new equipment compared with S$2.2 million in 1Q18. For all of FY2019, we expect a lower capital expenditure of about S$6.0 million which will focus on raising the productivity of our operations through automation and upgrading of our exising machines.

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 believe 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 have begun deriving maiden revenue from these iniatives during 1Q19, we believe that this pattern of longer and more costly development cycles will become 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.

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. At the 19th Investors' Choice Awards 2018 on 25 September 2018, the Group was also conferred the Shareholder Communications Excellence Award (Small Cap) 2018 and Singapore Corporate Governance Award (Small Cap) 2018 by Securities Investors Association Singapore. Including these awards, the Group has received recognition 29 times for our good corporate governance and transparency practices since our listing in 2003.

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. 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. Together with an interim dividend of 4 cents per ordinary share (one-tier tax exempt), 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.