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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 30/09/2017

Income Statement

Financials

Balance Sheet

Financials

Review Of Performance

Review Of Profit And Loss

Semiconductor industry review

Global semiconductor sales continued to grow at a fast pace into the second half of 2017. Based on statistics compiled by the Semiconductor Industry Association (SIA), worldwide chip sales in July and August 2017 increased 24% to US$68.6 billion, compared to US$55.3 billion during the same two-month period in 2016.

The SIA said chip sales in August increased year-on-year (yoy) for the thirteenth consecutive month to reach US$35 billion for the first time. The SIA said every major regional market and semiconductor product category posted gains on both a month-on-month and yoy basis with memory products continuing to be a major driver of overall market growth.

On 18 August 2017, the World Semiconductor Trade Statistics (WSTS) revised its annual semiconductor sales forecast for the third time this year. The WSTS now expects chip sales to grow 17.0% to US$397 billion in 2017 compared to its previous projection of 11.5%. It forecasts sales to rise another 4.3% to US$414 billion in 2018.

Group Revenue

Financials

For the three months ended 30 September 2017 (1Q18), the Group's revenue grew 32.5% to achieve a quarterly record of S$17.7 million as compared to S$13.4 million in 1Q17. This was due to higher demand from customers across the Group's key geographical markets, reflecting the strong underlying growth of the global semiconductor industry since the beginning of 2017.

On a quarter-on-quarter (qoq) basis, Group revenue in 1Q18 increased 14.5% from S$15.4 million in 4Q17 due mainly to higher sales from customers in Malaysia and China.

Revenue breakdown by Geographical Market

Financials

In 1Q18, the Group witnessed broad-based sales increases in all of our geographical markets except for Thailand and Taiwan. Sales in China increased by 48.1% to S$5.2 million and contributed 29.5% of the total Group's revenue to remain our largest market. Our second largest market in Malaysia saw sales increased by 14.3% to S$3.5 million and accounted for 19.5% of the Group's revenue.

Sales in the USA increased 58.5% to S$2.8 million and was our third largest market with a contribution of 15.6% to the Group's revenue. Sales to customers in Singapore increased by 85.6% to S$1.7 million while sales in the Philippines grew 38.0% to S$1.7 million.

Capacity Utilisation

Financials

Our average capacity utilisation rate increased to 64% in 1Q18 from 56% in 1Q17, in tandem with the increase in Group sales.

Gross Profit (GP) Margin

Financials

The Group's gross profit (GP) increased by 40.6% to S$10.8 million in 1Q18 which was a faster pace as compared to the 32.5% of revenue growth during the quarter.

As a result, our GP margin increased to 60.9% in 1Q18 as compared to 57.3% in 1Q17. This was due mainly to the increase in our capacity utilisation, 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

Other income in 1Q18 decreased 54.8% to S$128k from S$283k in 1Q17. This was due mainly to the absence of foreign exchange gain of S$190k recorded in 1Q17. 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 1Q18. Distribution costs increased 12.5% to S$828k mainly due to higher commissions and sales incentives paid. Administrative expenses increased 30.4% to S$2.5 million from S$1.9 million due mainly to higher salary and related benefits as well as higher bonus incentive accruals. Included in the administrave expenses was interest expense on the unwinding of lease liabilities amounting S$24k. Other operating expenses increased 11.0% to S$846k.

In aggregate, our administrative, distribution and other operating expenses (inclusive of other income) in 1Q18 increased by 29.2% to S$4.1 million from S$3.2 million in 1Q17. However, as a percentage of Group sales, these overhead expenses decreased slightly to 23.0% in 1Q18 from 23.6% in the same period a year ago.

Profit before Tax and Net Profit

Financials

As a result of the above factors, the Group recorded a 48.7% increase in profit before tax to S$6.7 million in 1Q18 from S$4.5 million in 1Q17.

After deducting income tax of S$1.5 million (S$1.1 million in 1Q17), the Group reported its highest-ever quarterly net profit of S$5.2 million in 1Q18, an increase of 53.0% from S$3.4 million in 1Q17. The Group's net profit margin in 1Q18 improved to 29.2% as compared to 25.3% in 1Q17. Correspondingly, the Group's earnings per share increased to 3.72 cents in 1Q18 from 2.43 cents in 1Q17.

The effective tax rate for 1Q18 was 22.8% as compared to 24.9% for 1Q17. Tax expense for the quarter included a provision of S$191k for withholding tax on dividends to be remitted to Singapore from various overseas subsidiaries.

Balance Sheet

As at 30 September 2017, the Group remained in a sound financial position with a balance sheet that had total assets of S$73.7 million, shareholders' equity of S$60.0 million, cash and cash equivalents of S$25.4 million and no bank borrowings.

Long Term Assets

As at 30 September 2017, non-current assets increased to S$29.7 million from S$26.6 million as at 30 June 2017. This was partly due to recognition of S$1.7 million of net right-of-use assets mainly from its various factories it occupies as a result of the adoption of FRS116 Leases in the current financial year.

Trade Receivables

Financials

Total trade receivables as at 30 September 2017 increased to S$13.6 million, as compared to S$11.0 million as at 30 June 2017. Of this, 2.2% was outstanding for 90 days or more (0.1% at end of 30 June 2017). There was no bad debt expense during 1Q18 and 1Q17.

Trade & Other Payables

As at 30 September 2017, our trade payables totaled S$1.4 million, of which S$53k was outstanding for 30 days or more. Non-trade payables totaled S$2.4 million. Other accrued expenses was S$4.6 million.

Long term liabilities

As at 30 September 2017, the deferred tax liabilities was S$1.6 million as compared to S$1.4 million as at 30 June 2017. The Group adopted the new accounting standard FRS116 Leases at the beginning of current financial period and recorded a lease liabilities of S$1.4 million.

Inventory

As a percentage of annualised sales, our inventory of S$3.9 million as at 30 September 2017 (S$3.7 million as at 30 June 2017) was 5.5% (6.4% as at 30 June 2017). Inventory written off in 1Q18 totaled S$48k, compared to S$29k in 1Q17.

Capital Expenditure

Financials

Our capital expenditure of S$2.2 million in 1Q18 included S$1.9 million for investments in new machines for our factories in China, Malaysia and the Philippines. For FY2018, we expect to incur capital expenditure of approximately S$10.0 million.

Cash Flow Analysis

The Group generated net cash from operations of S$4.4 million in 1Q18 (S$4.3 million in 1Q17). After deducting net investing activities of S$2.1 million, we ended the quarter with cash of S$25.4 million which includes S$0.2 million in pledged deposits.

Commentary On Current Year Prospects

During 1Q18, Group sales increased 32.5% to a quarterly record of S$17.7 million from S$13.4 million in 1Q17. 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 1Q18 increased to 60.9% from 57.3% in the same period a year ago.

We are also continuing to work diligently to keep a tight rein on overhead expenses. Although total distribution, administrative and other expenses including other income increased to S$4.1 million during 1Q18 from S$3.2 million in 1Q17 and S$3.8 million in 4Q17, as a percentage of sales these overhead expenses declined to 23.0% from 23.6% in 1Q17.

As a result, the Group's profit before tax increased 48.7% to S$6.7 million in 1Q18 from S$4.5 million in the same quarter a year ago. After deducting taxes of S$1.5 million (S$1.1 million in 1Q17), the Group reported a record quarterly net profit of S$5.2 million in 1Q18, an increase of 53% from S$3.4 million in 1Q17.

After making steady progress during FY2017 and closing its fourth quarter on a profitable note, the Group's plant in the USA registered a consecutive quarter of profit in 1Q18. We believe this encouraging performance supports our strategy to align the focus of our USA factory with the Group's core business of manufacturing process critical parts and tools for the semiconductor industry.

At the end of 1Q18, the Group employed 471 great people. Compared with our year-on-year sales growth of more than 30% during the quarter, we only added 20 people or 4.4% to the 451 employees with the Group at the end of 1Q17. 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 1Q18 totaled S$4.4 million (S$4.3 million for 1Q17). After net investing activities of S$2.2 million primarily for new equipment, the Group ended the quarter in a strong financial position with S$25.4 million in cash (including S$161k held as security deposits) and no bank borrowings.

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 costcompetitive.

According to statistics compiled by the SIA, world-wide chip sales increased about 20.5% during the eight-month period from January through August 2017. Based on the industry's strong growth, the WSTS recently revised its forecast for world-wide semiconductor sales growth during 2017 to 17% from its previous prediction of 11.5%.

We believe the semiconductor industry's robust growth during 2017 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

Although market and business conditions are continually changing, 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 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 are working to compile a series of textbooks designed to clearly explain the fundamentals of how we are working to run 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.

Transparency and Governance

On 18 July 2017, the Group received two Gold Awards at the Singapore Corporate Awards (SCA) 2017 for Best Managed Board and Best Investor Relations. 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.

At the 18th Investors' Choice Awards 2017 on 19 September 2017, the Group was also conferred the Shareholder Communications Excellence Award (Small Cap) 2017, Singapore Corporate Governance Award (Small Cap) 2017 and Singapore Corporate Governance Award (Information Technology) 2017 by Securities Investors Association Singapore.

Including these awards, the Group has received recognition 26 times for our good corporate governance and transparency practices since our listing in 2003.

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.