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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 30/06/2017

Income Statement

Financials

Balance Sheet

Financials

Review Of Performance

Review Of Profit And Loss

Semiconductor industry review

Based on statistics compiled by the Semiconductor Industry Association (SIA), the global semiconductor industry has been growing impressively during the first six months of 2017. World-wide chip sales in the second quarter of 2017 increased 23.7% to a quarterly record of US$97.9 billion. Semiconductor sales of US$190.5 billion during the first half of 2017 were 20.8% higher than the same period in 2016.

The SIA said the market's growth has been consistent across all major regional markets and semiconductor product categories. It believes that conditions are favorable for continued market growth in the months ahead.

In response to the industry's strong sales, the World Semiconductor Trade Statistics (WSTS) did, on 6 June 2017, raise its 2017 sales growth forecast for the second time this year to 11.5% from 6.5% previously. WSTS said the higher forecast reflects expected growth in all major categories, led by memory products.

Group Revenue

Financials

For the 12 months ended 30 June 2017 (FY2017), the Group achieved record revenue of S$57.2 million, an increase of 11.7% from S$51.3 million reported in FY2016. This was driven mainly by higher sales achieved in all of our geographical markets with the exception of Europe.

For the three months ended 30 June 2017 (4Q17), the Group's revenue increased 19.5% to a quarterly record of S$15.4 million from S$12.9 million in 4Q16, reflecting the strong growth of the global semiconductor industry since the beginning of 2017. On a quarter-on-quarter (qoq) basis, Group revenue increased by 8.5% to S$15.4 million in 4Q17 from S$14.2 million in 3Q17.

Revenue breakdown by Geographical Market

Financials

In FY2017, the Group witnessed broad-based sales increases in all of our geographical markets except for Europe. Sales in China increased 3.6% to S$14.8 million, weighed down by the translational impact of a 5% depreciation of the Chinese Renminbi against Singapore Dollar. Nonetheless, China accounted for 26% of Group revenue to remain our largest market. Sales from our second largest market, Malaysia, increased by 11.9% to S$11.9 million to account for 21% of Group revenue.

Sales in the USA increased by 16% to S$9.1 million and was our third largest market in FY2017, contributing 16% to the Group's revenue. Sales to customers in Singapore increased by 58% to S$4.7 million while sales in the Philippines grew 10% to S$5.1 million.

Capacity Utilisation

Financials

Our average capacity utilisation rate in FY2017 increased to 58% from 54% in FY2016, in tandem with the increase in Group sales.

Gross Profit (GP) Margin

Financials

The Group's gross profit increased by 12.8% to S$32.9 million in FY2017. Gross profit margin improved to 57.4% from 56.9% in FY2016 due mainly to higher capacity utilisation as mentioned above, as well as cost, productivity and cycle time improvements across our worldwide manufacturing operations.

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

Financials

We continued to keep a close watch on our expense structure. Distribution expenses increased 7.8% to S$3.2 million in FY2017 from S$2.9 million in FY2016 due mainly to higher commissions and sales incentives paid, which was in line with the growth in revenue. Administrative expenses increased 7.3% to S$8.6 million in FY2017 from S$8.0 million in FY2016 due mainly to annual salary adjustments and an increase in performance bonus costs. Other operating expenses increased slightly to S$3.3 million in FY2107 from S$3.2 million in FY2016.

Other income increased 5.5% to S$725k in FY2017 from S$687k in FY2016 due mainly to a net foreign exchange gain of S$173k. In addition to invoicing in various currencies, the Group uses currency hedging to mitigate the effect of currency fluctuations.

Our total administrative, distribution and other operating expenses (net of other income) was S$14.4 million in FY2017 as compared to S$13.4 million in FY2016. As a percentage of sales, these overhead expenses decreased to 25.1% in FY2017 from 26.2% in FY2016.

Profit before Tax and Net Profit

Financials

The Group's profit before tax increased 17.9% to S$18.5 million in FY2017 from S$15.7 million in FY2016.

After deducting income tax expenses of S$3.7 million in FY2017 (S$3.8 million in FY2016), the Group reported a record net profit of S$14.8 million in FY2017, an increase of 24.2% from S$11.9 million in FY2016. The Group's net profit margin increased to 25.8% in FY2017 from 23.2% in FY2016.

For FY2017, the Group's effective tax rate fell to 20.2% from 24.3% in FY2016, mainly due to improved operating results at our USA factory, as well as various investment and development incentives granted to our plant in Singapore.

Correspondingly, the Group's earnings per share increased to 10.62 cents in FY2017 from 8.55 cents in FY2016.

Balance Sheet

As at 30 June 2017, the Group remained in sound financial position with a balance sheet that had total assets of S$65.6 million, shareholders' equity of S$54.8 million, cash and cash equivalents of S$23.4 million and no bank borrowings.

Long Term Assets

As at 30 June 2017, non-current assets stood at S$26.6 million as compared to S$25.6 million as at 30 June 2016.

Trade Receivables

Financials

In tandem with higher 4Q17 sales, total trade receivables as at 30 June 2017 increased to S$11.0 million, as compared to S$9.4 million as at 30 June 2016. Of this, 0.1% was outstanding for 90 days or more (0.1% at end of 30 June 2016). The Group had no bad debt expense during FY2017 (S$11.2k during FY2016).

Trade & Other Payables

As at 30 June 2017, our trade payables totaled S$1.4 million, of which S$64k was outstanding for 30 days or more. Non-trade payables totaled S$1.5 million. Other accrued expenses stood at S$4.9 million.

Deferred Tax Liabilities

As at 30 June 2017, the deferred tax liabilities was S$1.4 million as compared to S$1.3 million as at 30 June 2016.

Inventory

As a percentage of annualised sales, our inventory of S$3.7 million at the end of FY2017 (S$3.3 million at end- FY2016) was 6.4% (6.4% at end of FY2016). Inventory written off in FY2017 totaled S$102k, as compared to S$76k in FY2016.

Capital Expenditure

Financials

During FY2017, the Group's capital expenditures totaled just under S$5.1 million. This included investments of about S$0.3 million on computer hardware and software and approximately S$4.7 million new equipment for our five factories. During FY2016, the Group invested just under S$4.1 million.

Cash Flow Analysis

The Group generated net cash from operations of S$18.1 million in FY2017 (S$16.3 million in FY2016). After deducting net investing activities of S$4.9 million and S$9.7 million for financing activities mainly for the payment of dividends in respect of FY2016 and 1H17, we closed the year with a cash balance of S$23.4 million including S$0.2 million in pledged deposits.

Dividend Payment

The Board of Directors is recommending a final dividend of 4.0 cents and a special dividend of 1.0 cent per share (one tier tax-exempt) in respect of FY2017. If approved by shareholders at the Annual General Meeting to be held on 30 October 2017, the dividend will be paid on 17 November 2017.

Together with the interim dividend of 3.0 cents per share (one tier tax-exempt) paid on 27 February 2017, the Group's total dividend for FY2017 would be 8.0 cents per share (one tier tax-exempt). The total payout for FY2017 will amount to S$11.1 million (S$8.3 million in FY2016).

Commentary On Current Year Prospects

According to data from the Semiconductor Industry Association, worldwide sales of semiconductors during 4Q17 increased 23.7% over the same period last year. In line with the market's growth, Micro-Mechanics reported an increase in Group revenue of 19.5% to $15.4 million during 4Q17 from $12.9 million in the same period a year ago. For the full year, Group revenue increased 11.7% to a record S$57.2 million from S$51.3 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 improve our GP margin by focusing on various strategies, such as 24/7Machining, IT automation and department integration to improve efficiency and operational effectiveness. Based on these and other efforts, our GP margin in FY2017 increased to 57.4% from 56.9% in FY2016.

Similarly, we worked diligently throughout the year to keep a tight rein on overhead expenses. Despite escalating cost pressures in many of the markets where we operate, total distribution, administrative and other expenses including other income increased by just 6.8% during the year to S$14.4 million from S$13.4 million in FY2016. Indeed, when measured as a percentage of sales, the Group's overhead expenses declined to 25.1% from 26.2% during FY2016.

We have also been able to maintain a lean manpower structure as a consequence of our many improvement initiatives. Although we added 34 people to end FY2017 with a headcount of 465, these personnel additions were mainly in non-supervisory and production roles aimed at strengthening our core manufacturing and delivery responsiveness. As we move forward, we intend to continue automating our operations and building improved processes.

After deducting taxes of S$3.7 million (S$3.8 million in FY2016), the Group reported a record net profit of S$14.8 million during FY2017, an increase of 24.2% from S$11.9 million during the previous year. For 4Q17, the Group's net profit also reached a quarterly record of S$4.6 million, an increase of 60.9% from S$2.8 million during 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 FY2017 totaled S$18.1 million (S$16.3 million for FY2016). After net investing activities of S$4.9 million (S$3.7 million in FY2016), primarily for the purchase of new equipment, and paying interim and final dividends totalling S$9.7 million (S$7.0 million during FY2016), the Group ended the year in a strong financial position with S$23.4 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 an operation there capable of fast, effective and local support. During FY2017, the Group's sales in China increased 4% to S$14.8 million. At 26% of Group sales (28% during FY2016), China remains our largest geographical market.

During FY2017, our revenue in Malaysia increased 12% to S$11.9 million from S$10.6 million during the previous year. At 21% of Group revenue, Malaysia is our second-largest geographical market. Together with the USA (16%), Taiwan (9%), The Philippines (9%) and Singapore (8%), these six countries represent nearly 90% of the Group's business. As such, with factories in China, Malaysia, the Philippines, Singapore, the USA, 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 various industries including semiconductor, aerospace, laser and other hightechnology 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 instead to align our efforts at MMUS with the Group's core business of manufacturing process critical parts and tools primarily for the semiconductor industry.

Due to this common focus, MMUS made steady progress in every quarter of FY2017. In 4Q17, MMUS registered revenue of S$2.9 million (an increase of 55.8% over the same period a year ago) and a profit of S$0.2 million. Although MMUS incurred a full-year loss of S$0.6 million in FY2017, this included non-cash depreciation expenses of S$1.4 million and engineering expenses of S$1.8 million. With these encouraging results, growing customer engagement and an increasingly positive 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

On a short-term basis, business forecasting and planning will remain difficult. Visibility continues to be clouded by a host of political and economic uncertainties while continued unrest in various parts of the world coupled with rapid technological change and the effects of globalization make markets unpredictable, volatile and cost-competitive.

According to statistics compiled by the SIA, world-wide chip sales increased about 20.8% during the six-month period from January through June 2017. The WSTS recently revised its growth forecast for world-wide semiconductor sales to 11.5% from its previous prediction of 6.5% growth and we believe the robust first-half start to the year may indicate a prolonged period of stronger industry growth as chips become increasingly used in nearly every aspect of modern life. While this would be a welcome change from the sluggish industry conditions witnessed during 2016, the semiconductor industry is being increasingly driven by price-sensitive consumer applications. As such we expect to see continued price and cycle-time pressures from our customers. Together with rising costs and a shortage of skilled workers, the operating environment for the Group is expected to remain challenging.

Key Operating Strategies

Despite these market and business conditions, we understand what is required for the Group to sustain its growth over the long term. We are continuing to 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 wafer-processing 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 began a training program several years ago called MM University. Beginning with a series of workshops on Customer Value, Business Planning, 24/7Machining, and The Fundamentals of Value-Driven Decision Making, our initial goal was to help our people understand the need to have a shared framework for making more informed and aligned decisions.

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. Additionally, 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 completed the Group's second textbook during FY2017. This textbook is designed to clearly explain the fundamentals of our repeatable, scalable and cost-effective methodology which we refer to as 24/7 Machining. 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.

Transparency and Governance

On 18 July 2017, we received the Gold Award for Best Managed Board at the Singapore Corporate Awards (SCA) 2017 which was the fourth time Micro-Mechanics has been recognised for our board management by the SCA. The Group also received the Gold Award for Best Investor Relations, which was our seventh award in this category. Including these two awards, the Group has received recognition 23 times since our listing 2003 for our good corporate governance and transparency practices.

In addition to these recent awards, in the Singapore Governance and Transparency Index (SGTI) released on 2 August 2017, Micro-Mechanics received a score of 92 points to rank 19th out of 606 companies listed on the Singapore Exchange The top 20 companies in the SGTI are mainly large capitalisation companies. In recognition of our efforts, the Group received a Special Commendation Award at the Singapore Governance and Transparency Forum 2017 on 1 August 2017.

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 2016, the Group paid an interim dividend of 3 cents per ordinary share (one-tier tax exempt). Subject to approval at the upcoming Annual General Meeting on 30 October 2017, we plan to distribute a final dividend of 4 cents and a special dividend of 1 cent per ordinary share. This will bring the total dividend payment for FY2017 to 8 cents per ordinary share compared with 6 cents per ordinary share for FY2016.

Including the proposed final dividend and special dividend, we will have distributed a total of 53.9 cents per share to our shareholders since 2003. Based on dividends alone, this translates into a return of nearly 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.