Frequently Asked Questions - Answers to Common Questions from Investors about Micro-Mechanics

In its latest Spring 2022 forecast, WSTS (World Semiconductor Trade Statistics) has reduced its growth estimates for global chip sales in 2022 from 16.3% to 13.9%. The annual growth forecast for 2023 was also trimmed from 5.1% to 4.6%.

We believe the global semiconductor market is still poised for long term growth albeit experiencing short-term fluctuations that are typical of this industry. According to a recent study by chip industry group SEMI, new chip-fabrication plants are expected to sprout in Asia and the USA. There have also been efforts to turn Singapore and Malaysia into hubs for semiconductor equipment manufacturing. With the Group's decentralised structure, which includes plants in Singapore, Malaysia, China, the Philippines and the USA, we are in a strong position to capitalise on the future growth of the industry.

We are also continuing to strengthen our competitive advantages. As the semiconductor industry continues to grow and develop new equipment and processes for manufacturing chips with device geometries below 10 nanometers, we think only a handful of suppliers will have the capabilities to meet the increasingly stringent requirements of the industry. Our goal is to become a leading Next Generation Supplier.

Operating conditions were challenging for MMUS especially during the second half of FY2022 due to inflationary cost pressures. The cost of raw materials used to make our wafer fabrication equipment products, not to mention labor costs, were rising faster than the rate we could pass these costs on to customers through increases in our selling prices. Due to this unavoidable time lag, MMUS experienced some pressure on its profit margin. We are currently working hard to deal with the inflationary environment and to get our profit margin back to where we want it to be.

The Group has made capital investments of close to S$12 million over the last two financial years. The immediate increase in depreciation expenses that resulted from these investments had an impact on our GPM. The machines we added for capacity expansion usually take between 6 to 12 months to come fully onstream and begin contributing to the Group's revenue.

The Group witnessed an unexpected sharp increase in the cost of raw materials during 4Q22 which affected our GPM. However, we were still able to maintain a GPM above our threshold of 50%. We plan to maintain our relentless focus on working to strengthen GPM through initiatives that enhance our cost structure, increase automation of our manufacturing operations, and improve our overheads-to-sales ratio by better utilizing our resources.

The improvement in the Group's net profit margin can be attributed to our continual efforts to keep a tight rein on our expense structure and our stringent process for determining and approving major expenses and investments.

All the Group's worldwide factories are presently operating at normal levels. During FY2021, we had a short closure at our factory in Malaysia for sanitization purposes due to a few positive cases among employees there. There was also some disruption to our operations in the Philippines as curfews in certain areas restricted our employees from getting to our factory there. However, these problems were partially mitigated by our ERP system which enables most of our people to work seamlessly from home.

The Group's goal is to become a leading Next Generation Supplier of parts and tools used in critical processes for semiconductor assembly and wafer-fabrication.

For the wafer-fabrication business, our strategy is to develop unique competences in select areas where the functionality of the part is critical to the specific process. We focus on identifying and devising solutions for parts that other suppliers are finding increasingly difficult to manufacture due to stringent requirements of customers especially for precision, consistency and cleanliness.

We have also invested in machines that can run 24/7 which help to make our operations more efficient than competitors in terms of both cost and cycle time. We believe customers value the Group’s ability to provide them with repeatability and scalability. Ultimately, we aim to become an elite supplier for critical parts used in semiconductor wafer-fabrication.

As the Group has been making steady investments to improve our factories over the last few years, we now have sufficient capacity to meet the expected growth of our business. Hence, we expect that only a modest level of capital expenditure is required and this will focus more on improving our manufacturing capabilities, automation and processes. For FY2022, we estimate a capital expenditure budget of approximately S$6 million.

The Group does not have a practice of providing forward guidance or financial forecasts as this would amount to selective disclosure of price sensitive information. Nonetheless, we remain positive of the semiconductor industry's long-term prospects. We believe the 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. There is also reason for optimism in the near-term as the semiconductor industry is currently showing good forward momentum and many of our customers have been increasing their production capacity.

The Group’s factories in Singapore, Malaysia and China are presently operating at normal levels while our factory in the USA is also back to its normal level as of several weeks ago. At our factory in the Philippines, machines continue to run at normal levels; however our workforce is currently below normal staff level due to the resurgence of COVID-19 in the country.

We have noticed a change in the purchasing pattern of customers, particularly in China. Previously, customers would generally buy our products on a Just-In-Time basis as and when required for their manufacturing. However, in the past months, we have seen some customers ordering additional stock of our products in case of future disruptions in the supply chain. This pattern may be a temporary shift depending on industry conditions and the COVID-19 situation. While price pressure is part and parcel of doing business in the semiconductor industry, we have not seen much erosion in our product prices due to the present firm market demand.

The Group’s philosophy has always been to provide local-to-local support to the customers in our primary markets. As such, our factory in Suzhou primarily serves customers in the domestic market and does not export products out of China. However, the Group could be indirectly affected by the USA’s restriction as some of our customers export their products out of China. Having said that, the Group’s sales in China still grew 9% in FY2020.

Although China is our largest single market with a contribution of 29% to Group sales in FY2020, our sales to customers located in Southeast Asia is bigger. In FY2020, our combined sales in Singapore, Malaysia, the Philippines and Thailand amounted to 36% of the Group’s sales. Hence, we are in a good position to benefit if customers shift their manufacturing activities to Southeast Asia as we can continue to serve them from our factories in these countries.

We are closely observing the Taiwan market. This market focuses more on wafer fabrication, while most of the chip packaging activities take place in China. Hence, there may not be a requirement for the Group to start a new facility in Taiwan.

Yes, this is a significant project and milestone for our USA operations. We have developed unique competencies for this project and are focusing on areas that many suppliers are finding increasingly difficult to do. Indeed, our qualification over the customer’s long-time incumbent supplier was based on the superior quality and lower cost of our products. Production of the parts is expected to commence during 1Q21. Ultimately, our aim is to become an elite supplier for critical parts used in semiconductor wafer-fabrication.

Our factory in Suzhou is a strategic market location for the Group as China continues to develop into a major hub for semiconductor manufacturing. It does not function as a low-cost manufacturing base for the Group to address the export market. Our sales there are mainly targeted at customers in the domestic market which comprises of multinational companies and local enterprises. As a result, the Group’s sales in China remained relatively steady during FY2019 despite the ongoing trade tensions.

At Micro-Mechanics, we have a consistent focus on our gross profit margin as we believe it is a key indication of our competitive strength and the value that we bring to customers. During FY2018 and FY2019, the Group made investments totaling S$15.5 million on new equipment to improve the efficiency and productivity of our worldwide operations. Amid the downturn in the semiconductor industry in FY2019, slower sales coupled with the higher depreciation costs arising from these capital investments caused a slight dip in the Group’s gross profit margin.

Going forward, we will maintain our focus on gross profit margin by continuing to work on enhancing the efficiency of our operations and focusing on parts and tools that offer opportunities for attractive profit margins.

We plan to spend about one third of our capital expenditure budget on machines that will increase our production capacity and strengthen our manufacturing capabilities. The remainder will be spent on replacement and maintenance of older production-related machines, as well as office IT systems and equipment to continue enhancing the overall efficiency of our worldwide operations.

The Group’s capacity utilisation measures the usage of all our production equipment including supporting machines that are not constantly in use. Because our manufacturing involves many different types of processes which are not easily modeled into a single denominator, we consider our capacity utilisation rate to only be a very rough guide to our overall factory efficiency.

As the semiconductor industry transitions to 10-nanometer and below device geometries, chip fabrication is becoming increasingly more difficult. The Group is working constantly to improve our manufacturing of the critical tools and parts that our customers require to achieve their production goals. Hence, we believe it is important that the Group continually invests to upgrade our capabilities to meet the increasing demands of our customers, even though it can be difficult to align our investments in new equipment to short-term industry conditions.

Ultimately, we believe that only a handful of suppliers will possess the unique capabilities, skilled personnel and intellectual property to meet the critical manufacturing requirements of the semiconductor industry.

While the Group serves primarily the semiconductor industry, we do not see a perfect correlation between the global semiconductor sales and our revenue. This can be partly attributed to the flow in the supply chain as the tools and parts we manufacture are typically purchased by our customers well before the sale of the finished chip is recorded. As a result, the Group's revenue growth generally tends to indicate the future direction of the semiconductor industry. Indeed, our top line growth slowed to 1.5% during 4Q18 compared to the same quarter a year ago which reflects the World Semiconductor Trade Statistic's projection for industry growth to slow to around 4% to 5% in the second half of 2018.

As such cyclicality is typical for the semiconductor industry, our approach is to focus on its long term trends and not to get sidetracked 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.

As chips get smaller, they are increasingly more sensitive to contamination. This is a challenge for our semiconductor tooling business as customers are placing greater emphasis on factors such as cleanliness, low or zero electrostatic discharge (ESD), high temperature and high pressure bonding. Micro-Mechanics is working to be prepared for the opportunities in this “Nano” world of semiconductor manufacturing. Our R&D team in Singapore has already produced several proprietary materials that we believe are essential for 10 nanometer and below device geometries. 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.

About half of the Group's investments on new equipment in FY2018 was to expand the production capacity of our worldwide factories, particularly our plant in the USA. For FY2019, our capital expenditure budget will be focusing more on raising the productivity of our operations through automation and replacing/upgrading our existing machines, rather than on expanding capacity.

MMUS has made encouraging progress during FY2018 following our decision to focus its business on serving the wafer fabrication equipment makers. Sales at MMUS increased 29.6% to S$12.3 million in FY2018 which enabled it to turnaround with a modest net profit of S$0.5 million compared to a loss of S$0.6 million in FY2017. During 4Q18, our engineers in California completed the development of a critical part used in the wafer-fabrication process. While this engineering initiative involved more than 18 months of difficult and costly work, we expect our efforts to begin generating initial revenue during FY2019.

Although MMUS has a much larger addressable market compared to our semiconductor tooling business, it also faces competition from entrenched suppliers including some of the world's biggest contract manufacturers. As a result, we are working hard to become a new breed of supplier with competitive advantages so far not seen in terms of quality, repeatability and efficiency. With its encouraging performance, growing customer engagement and the positive long term outlook for the semiconductor industry, we see exciting opportunities ahead for MMUS.

To achieve sustainable growth over the long-term, we continue to keep our focus on our customers in the semiconductor industry and the value that we bring to their businesses. We are continually enhancing our capabilities to deliver market-relevant tools and parts that meet our customers' exacting requirements.

Semiconductors are becoming increasingly complex with device geometries now moving towards and below 10 nanometers. To prevent reliability issues and other processing defects, our customers in the chip assembly and test industry require tools with smaller features, tighter tolerances and greater precision, as well as new materials and processes that are geared to control the cleanliness of the tools.

These market trends towards miniaturization, greater precision, flawless quality and reliability mean that it is no longer sufficient for suppliers to be just good at machining.

At Micro-Mechanics, we are continuously developing advanced machining processes such as laser cutting, electrical discharge machining, high-speed milling and elastomer molding, while also improving our supporting processes including new materials, testing, cleaning and packaging. To this end, we have established an Applications and Process Engineering Centre, R&D Centre for Materials and Micro-Machining and a Corporate Centre for Machining Excellence to drive continuous improvement and ensure the Group maintains our competitive edge.

Micro-Mechanics operates in the global semiconductor industry which is keenly competitive and constantly evolving as a result of disruptive technologies and shifts in the business environment.

Our semiconductor tooling business is primarily centred in Asia and serves a world-wide base of customers. 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, we do face a variety of competitors ranging from small local machine shops to a few larger multi-national companies. In the "nano" world of the semiconductor industry, it has become increasingly challenging to manufacture the tools and parts to support the demanding needs of customers. One of our Group's core strategies is to focus on continually enhancing our competitive edge in this relatively small market niche for high precision tools in the semiconductor supply chain.

The Group's initiative to manufacture process-critical parts for wafer-fabrication equipment makers faces different competitive challenges. While this space offers a much larger addressable market size, there are also stronger competitors as we have to compete against the large global contract manufacturers in addition to small machine shops. As a result, we are working to become a new breed of manufacturer with competitive advantages so far not seen by others in terms of quality, repeatability and efficiency.

In essence, Micro-Mechanics' key competitive advantages include our proprietary design capabilities and manufacturing know-how; our sound financial position which enables the Group to invest in automation and advanced equipment; as well as our ability to provide fast, effective and local support to our global customers.

Semiconductors are becoming increasingly complex with device geometries now moving towards and below 10 nanometers. In this Nano world of manufacturing, it is no longer enough for suppliers to just be good at machining. To prevent reliability issues and other processing defects, our customers in the chip assembly and test industry require tools with smaller features, tighter tolerances and greater precision, as well as new materials and processes that are geared to control the cleanliness of the tools.

With our capital and engineering resources, Micro-Mechanics is well positioned to support the more complex design and manufacturing capabilities required for this Nano world. We are continuously developing advanced machining processes such as laser cutting, electrical discharge machining, high-speed milling and elastomer molding, while also improving our supporting processes including new materials, testing, cleaning and packaging.

Our capacity utilization measures the usage of all the equipment in our five factories including supporting machines that are not constantly in use. Because our manufacturing involves many different types of processes which are not easily modeled into a single denominator, we consider capacity utilization rate to only be a rough guide of our overall factory efficiency.

During 4Q17, some of our machines were highly utilized while supporting machines were only around 10% utilized. As we view cycle time as one of the Group’s key competitive advantages, we always ensure there is sufficient buffer for us to fulfil our customers’ orders for semiconductor tools within a target timeframe of 6 to 8 days.

About half of the Group's investments on new equipment in fy2017 was to expand the production capacity of our worldwide factories, particularly our plant in the USA. For FY2019, our capital expenditure budget will be focusing more on raising the productivity of our operations through automation and replacing/upgrading our existing machines, rather than on expanding capacity.

It was a good decision as MMUS has made steady progress in every quarter of FY2017. In 4Q17, revenue at MMUS increased 55.8% year-on-year to S$2.9 million to record a profit of S$0.2 million. With these encouraging results, growing customer engagement and the positive outlook for the semiconductor industry, we believe there are exciting opportunities ahead for MMUS.

The focus at MMUS is to supply the critical parts that regulate the wafer-fabrication processes. As the requirements for making such parts become increasingly complex and stringent, we believe there will not be many suppliers that have the capability, resources and vision to thrive in this demanding arena.

In local currency terms, sales of semiconductor tools in China and Malaysia grew in FY2016. The revenue generated from these markets in FY2016 would have been higher if not for the depreciation of the Renminbi and Malaysia Ringgit against our reporting currency in Singapore dollars. China remained as the Group's largest market with a revenue contribution of S$14.3 million or 28% of total sales. Sales from our second largest market, Malaysia, were S$10.6 million in FY2016 and accounted for 21% of Group sales.

Our efforts to build a separate CMA division geared towards the manufacture of parts for equipment makers in the multiple industries have been challenging. After evaluating the engineering and investment requirements to achieve a meaningful level of progress and success in each of these different market segments, we believe the right strategy going forward will be to concentrate our efforts on several leading makers of semiconductor wafer-fabrication equipment with whom we have already made promising inroads. In this respect, our goal is to focus on manufacturing parts and tools used in process-critical applications where flawless quality, on-time delivery and cost-effective pricing create a compelling offering for our customers.

As mentioned in section 10 of our SGXNet dated 29 August 2016, we have ended our efforts to build a separate CMA division. Instead of working to build a business segment serving multiple industries, our plant in the USA will join the Group's four plants in Asia and focus on manufacturing parts and tools for process-critical applications mainly for customers in the semiconductor industry. Our decision is based primarily on market rather than cost-saving factors.

The Group's products are manufactured through machining processes. This is "subtractive manufacturing" as opposed to "additive manufacturing" which is the process used in 3D printing. At present, 3D printing is used mainly to manufacture products that have two requirements - fast cycle time and parts with shapes that are not achievable using subtractive manufacturing. As 3D printing is unable to achieve the high precision levels required for our process-critical parts and tools, we do not presently view it as a threat to our business. Moreover, we have also been continuously improving our cycle time.

The Group is currently focused on growing our business through organic initiatives.

If approved by shareholders at our Annual General Meeting on 28 October 2016, the final dividend of 3.0 cents per share and special dividend of 1.0 cent per share will bring our total dividend for FY2016 to 6.0 cents per share compared to the dividends of 5.0 cents paid for FY2015.

Since listing in 2003, the Group has had a consistent practice of rewarding shareholders through regular dividend payments every year despite the ups and downs of the business cycle. The Group currently has a dividend policy to pay annual dividends of not less than 40% of the consolidated net profit as stated in the audited report, subject to the Group's retained earnings, financial position, capital expenditure requirements, future expansion, investment plans, and other relevant factors. For FY2016, the total dividend distributed to shareholders translated to a pay-out ratio of 70%.

As the semiconductor industry becomes increasingly driven by consumer applications, there has been an acceleration in the trends towards miniaturization and densification. As a result we see our customers demanding more stringent requirements in terms of higher precision, smaller feature sizes and shorter delivery lead time.

At Micro-Mechanics, we are continually looking forward to ensure that we are ready for new industry requirements and to keep up with the fast-changing requirements of our customers. For example, we set up a Research & Development department about four years ago that focuses on developing specialised materials and processes to manufacture our tooling products. Through the use of more automation in our operations, we have also been able to achieve greater consistency in the quality of our products, while improving our efficiency to lower cost and shorten cycle time.

Malaysia and China are our two largest geographical markets, with each accounting for 21% and 26% of Group revenue respectively in FY2015. As the Group’s reporting currency is the Singapore dollar (SGD), our revenue in FY2015 would have been higher if not for the depreciation of the Malaysian ringgit and Chinese yuan against the SGD.

However, we do not see foresee any major impact unless the Malaysian ringgit and Chinese yuan falls substantially against the SGD. This is because the invoices and costs of our Malaysia and China operations are mostly denominated in local currencies.

The Group’s gross profit margin expanded to 55.0% in FY2015, from 50.7% in FY2014. This is attributable mainly to our semiconductor tooling business which benefited from higher GP margin of 62.6% as a result of our continuous efforts to improve cost, productivity and cycle time of our manufacturing operations.

The improvement in the Group’s net profit margin to 23.0% in FY2015, from 17.6% previously, was due to higher gross profit margin coupled with our tight control of overhead expenses.

The gross profit margin of our CMA division declined to 14.2% from 23.2% in FY2014 due mainly to an increase of about S$0.4 million for non-cash depreciation expenses following the investment in a second 24/7 Machining Line at our CMA factory in the USA.

During FY2015, we completed one of the last phases of our plan to build a 24/7 Machining facility at our CMA factory in the USA. Having completed much of the most difficult and challenging engineering work, our team in the USA is now in a good position to place greater focus on developing innovative and cost-effective processes for new parts, growing CMA revenue and meeting the needs of our customers.

While China’s economic growth is expected to moderate, the country remains as a large and important market for the semiconductor industry due to sustained demand for consumer electronic devices. Over the past two years, the Group has steadily broadened our customer base and expanded our sales to gain a larger share of this key market for semiconductor tools. We will continue to leverage on our stronger position in this market to seek new sales opportunities.

The final dividend of 2.0 cents per share and special dividend of 1.0 cent per share in respect of FY2015 is subject to the approval of shareholders at our Annual General Meeting on 28 October 2015. If approved, our total dividend of 5.0 cents for FY2015 will comprise interim and final dividends of 3.0 cents per share as well as special dividends of 2.0 cents per share.

Since listing in 2003, the Group has paid consistent and regular dividends every year despite the ups and downs of the business cycle. In line with good governance practices and in response to feedback from our shareholders, the Group announced on 2 September 2015 that we have adopted a dividend policy of paying annual dividends of not less than 40% of the consolidated net profit as stated in the audited report, subject to the Group’s retained earnings, financial position, capital expenditure requirements, future expansion, investment plans, and other relevant factors. We believe this new dividend policy is in the best interests of our shareholders and other stakeholders.

While the supply side of the competition equation has remained largely unchanged, the landscape in the semiconductor tooling market is being increasingly dictated by customers' demand for higher precision, smaller feature sizes and shorter delivery lead time (cycle time). Although some of our competitors such as the small workshops may have lower product selling prices than Micro-Mechanics, we believe our value-add to customers lies in our ability to deliver a wide range of "Perfect Tools, On Time, Every Time."

Despite the persistent selling price pressure that is typical in the semiconductor industry, the Group's tooling business has maintained a steady gross profit margin of above 50% over the past five years. This can be attributed to our in-house R&D utilising proprietary materials and automated manufacturing processes which enable Micro-Mechanics to deliver perfect tools and parts with fast cycle time to meet our customers' requirements.

The CMA division's gross profit margin in FY2014 expanded to 23.2%, from 6.3% in FY2013, as a result of a number of factors - higher utilisation due to a 32.9% increase in CMA sales, improved operational efficiency as we gradually moved production to our 24/7 Manufacturing Line, and a shift in sales mix as we steadily exited lower margin products.

We are increasing our focus on our customers and the value that we bring to their business in order to build sustainable long term relationships and grow with our customers. By ensuring we deliver on our mission to supply "Perfect Parts and Tools, On Time, Every Time" based on repeatable, scalable and cost-effective processes, the Group's aim is to engineer new parts for our customers to steadily increase our share of the customer's wallet.

The Group has recommended a final dividend of 2.0 cents per share (one tier tax-exempt) in respect of FY2014. If approved by shareholders at the Annual General Meeting to be held on 27 October 2014, this would bring our total dividend for FY2014 to 3.0 cents per share (one tier tax-exempt). Since the Group's public listing in 2003, we have been paying consistent and regular dividends every year despite experiencing the ups and downs of the business cycle. Including the final dividend for FY2014, we would have distributed a total of 34.9 cents to shareholders over the past 11 years. Our Board of Directors decides on the dividends to be distributed each year after taking into account our expected requirements for working capital, capital expenditure and our aim of remaining debt free.

Yes, the Group's quarterly revenue is still subject to seasonal factors due mainly to our semiconductor tooling segment which serves customers that assemble and test semiconductors. With over half of all semiconductor chips finding their way into consumer applications, revenue from this segment is generally higher in the first and fourth quarters of our financial year (ie. from April to September) as our customers ramp-up production volumes for the year-end festive period.

Our Custom Machining & Assembly (CMA) Division which serves equipment makers in the high-technology aerospace, laser, medical and wafer fabrication industries, also experiences seasonality. CMA sales in the second quarter of our financial year (ie. from October to December) tends to be lower as semiconductor customers halt investments in new equipment to focus on the ramp-up for the year-end festive season.

The decline in GP margin of our semiconductor tooling business since 2003 has been due mainly to the depreciation of the US dollar against the Asian currencies, rising labor and other costs as well as the pricing pressure from customers typical of the semiconductor industry. To counter these cost and pricing pressures, we plan to continue working nonstop to improve our operational efficiency, cost structure and cycle time.

Our CMA business enables the Group to build a business that has more sectoral and geographical diversity. As its customers are mainly in the USA, our CMA business provides a good balance to our semiconductor tooling business which is increasingly centered on customers in Asia. Our customer base has also expanded to include other high-tech industries such as medical, aerospace and laser.

The CMA business has also given the Group access to technologies and new know-how that enable us to refine our manufacturing methodology organisation-wide to better meet customers' needs in an increasingly volatile market environment. Over the past few years, we have been working on a R&D project to develop a unique recipe for repeatable, scalable and cost-effective machining.

The experience and knowledge gained from developing 24/7 Machining at our CMA factory in the USA is also benefiting the operations of our semiconductor tooling business. During FY2013, we began introducing and implementing 24/7 production fundamentals - more automation and less manned operations - at our factories in Singapore and Malaysia. Through this exercise, we are seeing further improvements in our productivity, quality and cycle time.

Our semiconductor tooling business supplies precision tools and parts that are used in the semiconductor assembly and test process. The usage of these tools correlates with the production volume of chips. As the tools and parts are consumable products, our semiconductor tooling business benefits from recurring demand and is therefore less susceptible to the cyclical swings that are typical of the semiconductor sector.

Our CMA business is involved in contract manufacturing of precision parts and assemblies for equipment makers in high technology industries, including the wafer fabrication sector. As a result, its sales tend to experience more volatility in tandem with the up and down cycles of the semiconductor equipment manufacturing industry, as well as the overall climate for capital investment.

We generally purchase our machines from top-tier equipment makers in Japan and Europe. We implement a strict schedule for regular maintenance to ensure our machines remain in excellent working condition and have a long useful life. With some small improvements, many of our machines are still relevant to our precision manufacturing requirements today.

We acquired the assets of our CMA business in the USA in 2008, shortly before the onset of the financial crisis. The transition period to build this business turned out to be more challenging than expected because of the "Great Recession" in 2008.

In the last few years, we focused on programs aimed at enhancing the quality, cost and cycle-time performance of the USA factory. Of significance is our investment in a 24/7 Machining Line, a highly automated system for around-the-clock machining of complex parts which would enable us to meet customers' demand for fast and cost-effective manufacturing. We received our first production order for our 24/7 Machining Line in July 2012.

The CMA business is a key part of our long-term strategy to grow our business beyond our core semiconductor tooling business to achieve wider industry and geographical diversity. The CMA business also helps to accelerate the growth of our engineering and manufacturing knowhow and capabilities.

To-date, we have achieved three key objectives for the CMA business:

  • Expanded and diversified our customer base to equipment manufacturers in four new industries - laser, medical, aerospace and semiconductor-wafer fabrication;
  • Added significantly to our knowhow and capabilities through the people at our CMA operations who brought skills, experience and knowhow not readily available in Asia; and
  • Started developing repeatable and scalable processes focused on the fundamentals of success - quality, cycle time, cost and service.

The next stage for our CMA business is to strengthen our 24/7 Engineering Team and scale our manufacturing volume. We believe our strategy to develop repeatable, scalable and cost-effective manufacturing processes will provide flexibility to maneuver in the volatile business environment.

Presently, the bulk of our core tooling products are used in the traditional technologies of die-attach and wire-bonding processes. Although we are also involved in certain products for flipchip and wafer scale packaging, a signification portion of the semiconductor packaging industry still uses the traditional technologies.

Micro-Mechanics has been producing precision tools for the semiconductor assembly and test industry for 30 years. We continuously follow market trends and develop tools to suit changing requirements. The skill sets we have developed in machining very fine mechanical tools are essentially the same as that required for tools used in newer processes.

The two key drivers for our semiconductor tooling business remain unchanged, which are the volume of chips produced, and the miniaturization and densification of semiconductors. As semiconductors become thinner and more delicate with more functions packed onto a smaller area, the tools required for chip packaging would require an even higher degree of precision than before. To cite an example, precision feature size could mean 20 microns 20 years ago but today, the definition of precision is in the range of 3 to 5 microns.

At Micro-Mechanics, we have developed new micro-manufacturing processes to produce tools with feature sizes previously out of reach or too costly to bring to market. We believe this ability will further improve our competitive position as more demanding industry requirements raises entry barriers and could lead to exit of players who are unable to invest in technology and skillset upgrades.

We are increasing our focus on customers through better understanding of their continually changing needs. For example, customers expect shorter delivery lead time these days. We need to continue targeting the right areas to fulfill customers' expectations. We are also increasing our focus on implementing automated processes that are repeatable, scalable and cost effective to reduce our dependence on skilled labour and increase our manufacturing flexibility.

The Group has also started an in-house learning centre to enhance strategic thinking, planning and leadership skills of our people. Our courses are targeted at helping our people improve their decision-making through a deeper understanding of our customers and the market place. With our initiatives, we believe Micro-Mechanics has the ability to grow at a faster pace than the industry.

We are not replicating in Asia the same equipment we have in the USA factory. Through the experience we had with our USA operations, we learned and gained know-how of 24/7 machining processes. We are currently introducing and implementing the 24/7 production fundamentals - more automation and less manned operations - at our plants in Malaysia and Singapore using existing equipment. In the past two financial years, we have already invested in equipment to expand and strengthen the manufacturing capacity and capabilities of our factories in Asia. Our focus in FY2013 is to incorporate the 24/7 principles into our manufacturing processes by using our existing machines more effectively to lower cost, and improve cycle time and product quality.

As we move towards the last few months of 2012, the mood of our customers is generally cautious. For our semiconductor tooling business, expectations are for the chip industry to end the year on a flat note. In addition, our Custom Machining & Assembly division serves the capital equipment industry which is experiencing a slowdown especially for semiconductor equipment.

While market conditions are generally slower, we see this period as an opportunity for Micro-Mechanics to work on our initiatives to strengthen our competitive advantage. Besides enhancing our performance and productivity, including investments in equipment to achieve repeatable, scalable and cost-effective processes, we are also aiming to strengthen our business planning system and increase our focus on customers.

In the face of prevailing cost challenges, it is also important that we continue to effectively manage our costs. In FY2012, our fixed overheads (selling, admin and other operating expenses) remained steady at S$12.2 million despite having to incur costs of repair for our Thailand factory which was affected by the floods in 2Q12; additional cost related to our ERP system which was fully implemented in FY2012; and increased operating costs in China after we doubled the size of our Suzhou factory.

We do not have backlog of orders for our semiconductor tooling business as the lead time from order to delivery is usually less than a week. Generally speaking, sales in the first and fourth quarters of our financial year are seasonally higher compared to the second and third quarters which are affected by the Christmas and Chinese New Year holiday seasons.

Besides market demand, the sequential improvement in 4Q12 also reflects the recovery of our Thailand operations (which were affected in 2Q12 and 3Q12 by the floods) and the positive results from some of our business initiatives.

We presently have a bigger focus on the laser industry. In June 2012, we announced an order of almost S$1 million for parts used in lasers manufactured by Newport Corporation which is a global leader in the photonics industry. Our CMA division also focuses on the medical equipment sector apart from the wafer fabrication equipment makers.

While increasing demand for tablets and smartphones is expected to drive the chip industry, this may be offset by the reducing market for notebooks and PCs. This is evident from the trend of global semiconductor sales in 2012.

Our semiconductor tools and parts are used in the semiconductor assembly and test process of our customers, who are global chip makers and chip packaging companies. It is difficult for us to estimate the percentage of Group sales derived from smartphones and tablets as the packaged semiconductors can be for a wide range of product lines and various applications.

Our capital expenditure has generally been lower in the past. However, in FY2011 and FY2012, we invested a higher amount on equipment that enables the Group to increase our capacity and capabilities in Asia and the USA. For example, by reducing our machine set-up time, we are able to increase our manufacturing productivity. In our USA factory, we have invested in a 24/7 Machining Line which is an automated system for around-the-clock machining of complex parts. With this system, we are able to reduce the delivery lead time and have greater flexibility to meet customers' orders and delivery schedules.

In FY2013, we intend to reduce our capital expenditure to around S$2.5 million, of which the bulk of the spending will be on ancillary equipment to enhance productivity.

Our operating cashflow in FY2012 was healthy and in fact, higher than in FY2011. Moreover, we own several of our properties and do not have any borrowings to service. Hence, we believe the Group should not suffer a drain in our cash balances.

Our aim is to provide complete, timely and accurate information at the end of every quarterly reporting period to enable shareholders and investors to make good investment decisions. Nonetheless, it is not our practice to provide sales forecasts or earnings guidance.

Several elements of the new manufacturing line will be built to specifications which we have designed. Together with various processes we are developing to minimize the time needed to switch from one part to another, we believe the main benefit of this investment will be a new platform that enables Micro-Mechanics to efficiently manufacture a large mix of complex parts. With market volatility and limited order visibility from customers, we believe this type of "flexible manufacturing" is the right strategy for the future.

About two years ago, we acquired the assets of a company in the Silicon Valley which we used as the basis to start our CMA manufacturing plant in the USA. Although many of our current customers are based in the USA, we believe there are excellent growth opportunities in Asia for our CMA business

The GP margin of our CMA business is presently much lower than the GP margin for our semiconductor tooling business, which has affected the Group's overall GP margin. However, the CMA division is still a fairly new business and our aim is to improve its GP margin to somewhere in the range of 30%. Together with ongoing efforts to improve our semiconductor tooling business and keep overhead costs low, we believe both businesses support our overall aim of delivering steady, sustainable and profitable growth.

By our estimates, the market for semiconductor tools is about S$190 million per year driven mainly by the growth of the worldwide semiconductor industry. Our aim is to grow by both expanding our range of products and by improving our share of the market. Both are important but in the short-term - after a period of rapid industry growth -- our growth is more likely to come from improving our focus on our existing customers, which are served primarily through our five plants in Asia

During the last two years (after acquiring the assets of AMP3 LLC), we have focused on improving the fundamental factors that determine competitiveness and profitability - Quality, Cost, Cycle-Time and Service. By focusing and making steady progress in each of these areas, we have seen our results improve including our first month of profitability in September 2010. However, the single most important factor in becoming profitable is the contribution and commitment of our team at our USA subsidiary who have worked tirelessly to build a foundation for profitability and growth.

Moving forward, we think it is essential to engage with our key customers on a strategic basis. World-class manufacturing requires a long-term approach and with close customer cooperation, we believe we will make much better investment and personnel decisions.

We manage our currency risk by hedging using foreign exchange forward contracts. We also attempt to reduce our USD exposure by requesting customers at various locations to be billed in local currency. These measures however were unable to fully buffer us from the sharp plunge of the USD during 1Q11. We are presently studying ways that can help us further minimise the future impact of currency fluctuations.

Changing the Group's reporting currency to USD may not be feasible as there are considerations under the Financial Reporting Standards (FRS) that need to be taken into account. Such a change would also not provide flexibility for us to revert back to SGD reporting currency in the future.

We are investing about S$1 million in FY2011 to outfit a new factory in Suzhou which is twice the size of our existing facility. This is a long-term initiative to ensure we have sufficient floor space to smoothly expand our operations there over the next several years to capitalize on the continuing growth of China's semiconductor industry.

We already employ a 'ship from overseas' concept for our semiconductor tooling business. In addition to serving customers in their respective domestic markets, our plants in Asia also provide inter-company manufacturing support depending on the consumable tools and parts required.

Our capex expenditure is not only for increasing production capacity but also to enhance our capabilities in areas such as design, precision manufacturing and quality inspection. Our capacity utilization measures the usage of all equipment including some that are not constantly in use, as well as machinery related to our CMA business in the USA which is still recovering from the impact of the recent global recession. Because our manufacturing involves many different types of processes which are not easily modeled into a single denominator, our capacity utilization rate is a very rough guide to factory efficiency. We view gross profit margin as a better reflection of the Group's management of cost, our ability to create value and our competitiveness in the market place.

A. While customers in Singapore account for only 5% of the Group's revenue, our Singapore factory is a key production base to serve our customers in Singapore and other geographical markets. In FY2010, sales from our Singapore factory to external customers accounted for 21% of Group revenue. Although the migration of the semiconductor industry to lower cost locations has resulted in a shrinking domestic market, our Singapore factory has a commanding position in the development of higher value products that involve significant know-how and a high level of automation.

We are building Singapore as our Product Development Centre and see it playing a critical role in developing our knowledge and capabilities in cutting-edge 'micro' and 'nano' technologies. This will strengthen our position in the semiconductor industry and also allow us to explore opportunities in other industries that require high precision micro tools.

A. The main disadvantage facing Micro-Mechanics in Europe is that customers are located a number of time zones away from our technical people and manufacturing facilities in Asia. This has made it more challenging to meet the technical and cycle-time requirements compared to our competitors in Europe.

With the ongoing shift of electronic manufacturing to Asia, little growth prospect for our core semiconductor business in Europe and a concern that our operations there was becoming a distraction, we decided in May 2010 that it would be more effective to close our subsidiary in Switzerland and support customers in Europe with product distribution directly from our factories in Asia and the USA. Besides enabling us to eliminate S$1 million in annual cost in FY2011, this decision is also allowing us to redirect the energies of our factory in Malaysia on better serving customers in the Asian time zone.

Our board continually looks at the effectiveness of our capital structure and we have deliberated the use of debt to finance our expansion plans. With our track record of generating positive cash flows and relatively modest capital expenditure needs, we believe there is more value at this time to fund our growth using internal resources.

As there is higher volatility in today's business environment, we intend to continue our practice of maintaining a strong balance sheet which is key to being able to execute long-term initiatives that create value for shareholders.

The decrease in Group revenue in 3Q09 was to a large extent caused by a sharp slowdown in order flows from customers as a consequence of the depressed business conditions in the global semiconductor industry. While there has been some price attrition for some of our consumable tools and parts, the effect is not substantial as our customers place greater importance on short delivery lead time over price.

Over the years, we have worked tirelessly to improve our product quality and cycle time. Our operating model is to offer customers a well-engineered product at a fair price and short turnaround time. We believe this value proposition has enabled Micro-Mechanics to gain considerable competitive edge in the semiconductor tooling segment.

Many companies have downsized their operations in response to the weak market environment, but we have not witnessed this trend of in-house manufacturing of semiconductor tools amongst our customers.

As we have accumulated significant expertise and efficiency in the design and manufacture of precision tools, we find that customers would rather obtain their supplies from us than manufacture in-house. We are working even more closely with our customers during this period to understand their current requirements pertaining to price and other aspects, as well as explore opportunities for tooling products in new areas such as solar cells.

Many of the customers that we serve are large and public corporations. About 90% of the products of our CMA operations in the USA are related to capital equipment for various sectors such as aircraft, wafer fab and disk drive industries. After securing a multi-year order of US$2 million for precision aircraft components, we have recently received a volume order for a consumable surgical tool which has good potential for repeat orders.

A major portion of the cost savings in 3Q09 was related to personnel expenses. During the quarter, we asked our people at all levels (led by a voluntary base-pay reduction of 40% by CEO) to help lower costs through a combination of pay, benefits and working-hour reductions. We are continuing to keep a close watch on our cost base to bring it in line with the current business environment. However, when business starts to recover, our personnel expenses will adjust in tandem with the level of orders and production.

When we started the CMA division several years ago, our goal was to create a significant business unit that would both leverage and complement our core semiconductor tooling division. With the commencement of our CMA-related manufacturing plant in the USA on 31 May 2008 following our S$2.5 million acquisition of substantially all the assets of California-based AMP3, our CMA division has grown from less than 10% to nearly 30% of Group revenue. We see exciting long-term growth opportunities for both these businesses and aim to continue building our operational capabilities to grow both our divisions.

We are very excited about the steps we are taking to build our CMA business. While our new plant in the USA is not yet profitable and exerted some drag on the performance of our GP margin and net profit during 1Q09, we believe it would have cost considerably more and taken many years to develop if we had started the plant from scratch. By acquiring AMP3's assets, we have brought in a great team of 45 people with valuable skills and know-how, as well as gained immediate access to new customers in aerospace, medical and instrumentation that could otherwise have involved lengthy marketing and qualification periods. In addition, this modest S$2.5 million acquisition is giving us an opportunity to learn and evaluate this way of enhancing the Group's growth.

Although initially drawn to Asia as a place for low-cost manufacturing, chip manufacturers have since made Asia a center for not only 'backend' manufacturing but also 'frontend' wafer-fabrication processing. With our existing plants in Singapore, Malaysia, China, Thailand and the Philippines, and direct sales personnel in Taiwan, Korea and Indonesia, we are in a strong position to benefit from this industry trend towards relocation to Asia, particularly China which has become our largest and fastest-growing market for semiconductor tools.

With over half of all semiconductor chips finding their way into consumer applications, there has been an acceleration in the trend towards miniaturization. To capitalize on this, the Group has developed several new tools with feature sizes below 0.10mm - which is one definition of 'nano-technology.' One such tool, for example, is used to assemble a hearing aid that uses a 'MEMS' chip.

We intend to continue implementing strategies that will maintain MM's strong competitive position in the semiconductor tooling business. Our long-term product strategy is to continue widening our range of consumable tools and parts to offer our semiconductor customers with a "one-stop" solution for all their requirements. To this end, we have developed several new tools with feature sizes below 0.10mm to capitalize on the semiconductor industry's trend towards miniaturization,. Our wide-reaching direct presence in Asia and offices in Switzerland and the USA also position us to provide our global customers with fast and effective local support.

To help diversify the Group's revenue from the cyclicality of the semiconductor industry, we also intend to continue building our CMA business to explore opportunities in other high-tech industries. In 1Q09, our CMA business quadrupled to account for almost 30% of Group sales.

With the increasing likelihood of a global economic recession, we think it is essential to implement consistent and practical growth strategies that are based on our core competencies and competitive strengths.

In the near term, we have taken steps to minimize our credit risk. We are performing credit evaluations on all customers who require credit above a certain quantum and are reviewing all outstanding monies on an ongoing basis. This enabled us to reduce our trade receivables that were outstanding for more than 90 days to just 0.9% of sales in 1Q09, compared to 2.2% at the end of 1Q08.

We will also be keeping a close watch on our overhead expenses. In 1Q09, these expenses increased 7.5% to S$2.9 million. As a percentage of total sales however, our overhead expenses declined to 25.0% in 1Q09, from 28.5% in 1Q08. Our aim will be to continually work to reduce these costs as a percentage of total sales. We also intend to keep our total headcount steady and defer some previously-planned capital spending.

We do not have the practice of providing specific financial forecasts. While the outlook for FY2009 is challenging, our main goal for FY2009 will be to improve the gross profit margin of our CMA business by working to bring our new manufacturing operations in the USA to profitability.

With 574 great people and a balance sheet that includes S$23 million in cash and receivables, less than S$1 million in trade payables and no borrowings, we remain cautiously optimistic and feel ready to make the most of the challenges and opportunities that come our way.

Typically, the January-to-March quarter is a seasonally slower period for the semiconductor industry. Together with prevailing concerns over excess inventory in the chip industry, this resulted in the Group's slower sales.

However, the Group anticipates sales in 4Q07 to be higher compared to 3Q07, given our sales for April 2007 and taking into consideration that the typical April-to-June period is seasonally better than the preceding quarter.

The steeper decline in net profit was due mainly to increased costs arising from our investments in capital equipment and production personnel. During the first nine months of FY2007, we invested S$4.5 million in new equipment and added about 100 direct production personnel which resulted in higher depreciation and personnel costs of about S$384,000 in 3QFY07.

However, we believe these investments in equipment and personnel are the correct strategy to enhance our utilization, cycle time and capability, especially for our fledgling Custom Machining and Assembly division.

The decision to add to our production headcount was made after the Group reported a record quarterly revenue of S$8.9 million in 1Q07 to ensure we would be ready to capitalise on the semiconductor industry's growth momentum into 2007 and its longer term prospects. The new personnel are mainly production operators and machinists at our plants in lower cost locations such as Malaysia, China and the Phillippines.

As we move into the last quarter of FY2007 and into FY2008, we foresee limited need for additional capital spending or new hiring. Our focus will now be on developing our personnel, optimising capacity utilization and improving operational capability and efficiency. This will ensure that Micro-Mechanics is better placed to ride the long term growth prospects of the semiconductor industry.

Sales to the Singapore market was down 25.2%, compared to 3Q06, due partly to seasonality as well as the ongoing trend of companies relocating their assembly and test operations to lower cost regions. As the Phillippines is considered a sub-contracting market for semiconductor manufacturing, the industry slowdown during the quarter had a more pronounced effect there. As a result, our sales in this market declined 29.8% in 3Q07. In Thailand, our sales fell by 25.5%, mostly due to customers slowing down their production volumes.

We continue to make encouraging progress with our fledgling CMA business, which notched up year-on-year sales growth of 31.8% in 3Q07. While the bulk of our CMA sales are still geared towards the semiconductor industry, we have also been successful in diversifying our sectoral exposure by securing orders from companies that are involved in handling systems as well as the medical and precision machining industries. Our strategic alliance with D&H Manufacturing Company is also progressing well. Our CMA division has already begun sending product shipments to D&H, which is a direct supplier to a leading semiconductor equipment manufacturer.

We manage our currency risk by hedging using foreign exchange forward contracts. The cost of purchasing these forward contracts was included in the exchange loss for FY2006. In addition to this, we also attempt to reduce our USD exposure by requesting our customers at various locations to be billed in local currency.

Our products are made from specialized materials, such as stainless steel, carbide, vespel and tool steel. While we experienced price increases for some raw materials during FY2006, our constant focus on improving quality, cost and cycle time helped to mute these pressures. In fact, as a percentage of sales, we were able to reduce direct material costs to around 9% in FY2006, compared to 10% in FY2005.

Having already completed a S$1.9m investment in our CMA business last November, we intend to use the capex budget of $3m for FY2007 to make incremental increases to our capacity and to further upgrade the manufacturing capabilities of our core product segments at our existing manufacturing facilities.

At this time, we expect capex for our core segments to remain fairly stable over the next few years. Depending on our progress as we step up our CMA marketing efforts, we may consider making further investments to increase capacity and enhance capability of this division post-FY2007.

We have over 120 customers in China.

In general, the US market will not be a big market for volume manufacturing but it is significant to us for working with chip companies that are doing R&D there. This gives us the opportunity to be involved in those efforts before manufacturing shifts to Asia for volume.

In FY2006, we achieved encouraging progress for the CMA division, which accounted for 6% of Group sales. In November 2005, we completed a S$1.9m investment in our CMA business that has increased the division's capacity by 140%. We are currently intensifying our sales efforts to extend our customer base to new sectors such as medical, instrumentation and other high-tech fields. For competitive reasons, we presently do not divulge the margins for the CMA business, separately from our core product segments.

We were encouraged by our FY2006 with sales growth of 19.2% y-o-y. This was in line with the Group's sales CAGR of 20.3% as measured from FY2003 to FY2006.

During FY2005, we expect total capital expenditures, including outlays for our new plant in Suzhou, China, to be in this spending range. Although we have not finalized our investment plans for FY2006, we intend to watch capital spending carefully since these have a direct and significant impact on cash flow and earnings.

Micro-Mechanics does not have a dividend policy at present. The payout depends on our assessment of the capital we require to support growth. In FY2005, we generated operating cash flow of S$7.0 million, while our total proposed dividend (including an interim dividend paid in March 2005) is S$3.3 million. Our dividend payout reflects a balance between our strong emphasis on maintaining a solid balance sheet and the efficient use of capital. This approach strikes a balance between shareholder returns and funding (future) growth.

In the semiconductor industry, rapid business upswings are typical. To retain customers and expand market share, we think it is essential to be ready for such increases. Our investment plan includes both capacity additions, primarily for our new plant in China, and equipment that enhances capability, particularly at our new Custom Machining and Assembly (CMA) division.

There is little, if any, third-party market information about the segment of the semiconductor industry in which we compete. However, based on our continual focus on cost and quality, we think we compare favourably with our rivals. One measure of competitiveness is gross profit, which for Micro-Mechanics, was 60.4% in FY2005.

We look at cycle time in two key areas. In general, inventory is needed to accommodate planning and manufacturing inefficiencies. Therefore, to the extent that planning and manufacturing become more efficient, the need for inventory is reduced. We ended FY2005 with inventory of S$0.7 million, up slightly from S$0.6 million in the previous year. However, when measured as a percentage of annual sales, our inventory value declined to 2.7% from 2.8% in FY2004. Another measure we use is the time to deliver each customer order from receipt to shipment. Through a constant focus on improving our operations, we aim to improve this delivery cycle and thereby enhance our competitiveness in the market place.

We are optimistic. In addition to our core semiconductor business, we would like to build a division that goes beyond the semiconductor industry, allowing us to explore other industries where precision manufacturing is needed. During FY2005, sales at our CMA division more than doubled to S$1.4 million, and included orders from new customers from the medical, instrumentation and high-tech equipment fields. In the long term, we believe CMA will be a valuable component of our growth and profitability.

As MM begins a new financial year, we are encouraged both by the improving outlook for the semiconductor industry, and our prospects for another year of steady, sustainable and profitable growth. To reward our shareholders for their support and confidence, the Board of Directors has proposed a one-for-four bonus issue. The bonus issue may also improve trading liquidity.

First of all, our sales grew 28% to $23.2 million aided by a recovery in the semiconductor industry as well as our growing strength in key markets such as China, where sales jumped 43% during the year. Secondly, we have worked continuously to counter-balance price pressures by focusing on quality, cost and operational improvements. Coupled with a higher plant utilisation rate of 78% in FY04, up from 61% in FY03, our gross profit margin increased to 63%, from 61% in FY03. Finally, the performance is also due to our efforts to maintain a sensible expense structure. During the year, we kept the increase in total expenses before tax to 10%. When measured against sales, these expenses fell from 43% to 37%. In a nutshell, our strong profit growth was achieved through healthy growth, operational improvements and sensible controls.

Our performance improved steadily during FY2004 as the semiconductor industry recovered from one of the worst downturns in its history. On a quarterly basis, sales rose from $4.7 million in Q1 to $5.3 million in Q2 and $6.0 million in Q3. In Q4, our sales reached $7.2 million, representing growth of 53% over Q1 sales. At the same time, we managed to improve our gross profit margin by a full 2 percentage points to 63% by staying focused on quality, cost and operational improvements as well as containing expense growth to around 10% of sales.

During FY04, our business in China increased 43%. A few years ago, we established local presence through a sales office in Shanghai. This helped us gain access to local customers and enabled us to support our international customers' new factories in China. To further develop the potential of this exciting market, we are setting up a plant in Suzhou that will start manufacturing by the end of 2004. While China is often in the spotlight, we are also pleased with the strong double-digit growth of our manufacturing subsidiaries in Singapore, Malaysia, Thailand and the Philippines. Together with our sales offices in Taiwan, Switzerland and the United States, we are well placed to support our global customers, locally.

In good times or bad, we believe there is no substitute for a strong balance sheet. During FY04, we generated cash flow from operating activities of $6.4 million. After deducting a dividend distribution of $0.01 per share totaling $1.1 million, $2.0 million in capital expenditures and $1.1 million in income tax, we ended the year with $10.5 million in cash. With $28.1 million in net assets and no bank borrowings, our aim is to have a strong balance sheet and a financial performance that ultimately rewards our shareholders.

FY2004 marked our first full year as a publicly listed company. We achieved a record performance, with sales increasing 28% to $23.2 million and net income surging 64% to $4.7 million. To share our better results, we proposed a higher dividend of 1.5 cents per share. While we have not established a formal dividend policy, our proposal for a higher dividend this year reflects our overall aim of achieving a high level of financial performance that should ultimately reward shareholders.

Competitive risks are a major concern for most companies setting up in China. However, competition is a fact of business life and, when viewed positively, provides the incentive to improve company performance. As a general approach, we believe there is no short cut to long-term success. This applies to Micro-Mechanics, as well as our competitors. Rather, success (and competitiveness) stems from consistent and persistent improvement in quality, cost, cycle time and service. When combined with well-engineered products that meet customer requirements, we think there will be market share opportunities for Micro-Mechanics in China and throughout the world. At the same time, we are taking practical approaches in China, such as ensuring veteran personnel hold key management positions and limiting access to our know-how, to minimize competitive risks.

Unlike our current products for die-attach and wire-bonding, the consumable tools required in the encapsulation process require primarily fine grinding and EDM manufacturing techniques. In addition to lengthy customer qualification periods, our biggest challenge is to develop these manufacturing capabilities. Although it is difficult to provide a specific time line, our aim is to develop a comprehensive product range. When combined with the wide range of products from our existing die-attach and wire-bond businesses, we would like to be one of the few companies that can offer an integrated solution for the semiconductor assembly and test processes.

During our first full year for CMA in FY2004, we recorded sales of about $500,000. During the first six months of FY2005, CMA sales exceeded $700,000. While we are encouraged by this sales growth, our primary aim presently is to build capability and explore opportunities in the medical, instrumentation or other industries that require precision components and assemblies. Recently, we received a first order to manufacture components for a company manufacturing laser equipment.

We intend to continue our approach to building a sensible expense structure. Recently, for example, we introduced internet-based telephony. In less than six months, we reduced our overseas telephone costs by over 50%. Together with our "hawker-style" approach to keeping things simple - and a constant focus on quality, cost and operational improvements - we believe the key to keeping costs low is more about operating style and culture than accounting control.

During 1H2005, we had a foreign exchange loss of S$129,000, representing about 1% of sales. While using hedging techniques is something we are exploring, we feel our business approach to invoicing in local currencies (S$, M$, Peso, Baht, Yen, US$ and RMB), together with our diversified cost base, will be the most effective strategy for us to maintain such exposure at a manageable level.

During FY2005, we expect total capital expenditures, including outlays for our new plant in Suzhou, China, to be in this spending range. Although we have not finalized our investment plans for FY2006, we intend to watch capital spending carefully since these have a direct and significant impact on cash flow and earnings.

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