Operating and Financial Review

extracted from the Annual Report 2018

Operational Review

In FY2018, the Group was posted a pre-tax profit of S$3.2 million and revenue was marginally decreased by 0.3% to S$85.9 million from S$86.1 million in FY2017.

The aerospace industry remains to be the main contributor of the Group's revenue, generating S$46.4 million in FY2018 compared to S$42.2 million in FY2017. The aerospace segment continues as the underlying revenue of the Group, the global aerospace industry experienced a solid year as passenger travel demand expected growth rate of 7% annually and aircraft order backlog remains at an all-time high, enticing manufacturers to ramp up production.

The oil and gas sector remains challenging due largely to a shortage of projects despites signs of recovering in oil prices. The Group is on the lookout for positive development opportunities in this sector and have received some small order in FY2018.

The Group will continue to manage costs, actively look for and develop new potential market through strategic partnership to foster our competitiveness and enhancing shareholders' value.

Seletar Aerospace Park

The transition of the operation with full customers' certification was accomplished in the early part of 2018. JEP Precision Engineering Pte Ltd began realizing the benefits of the several Digital Manufacturing initiatives implemented in this new facility, namely the Overall Equipment Effectiveness (OEE), Flexible Manufacturing System (FMS) and Robotics. The implementation successfully improved the overall utilization of the machineries and better use of operational resources.

Surface Engineering Hub (Tanjong Kling)

This facility, after acquiring the NADCAP certification for the shot peening and all other surface chemical treatment processes continues to provide excellent output to meet the customers' demand and stringent regulatory requirements. Fueled by the strong demand in the commercial aircraft sector, the facility demonstrated outstanding turnaround time backed by a committed special process team. The cost efficient facility is ready to venture into new equipment and processes to provide a comprehensive integrated solution to our customers.

Dolphin Engineering Pte Ltd (Loyang)

Dolphin Engineering Pte Ltd, the Group's subsidiaries, main revenue stream derive from semiconductor equipment and contract manufacturing sectors. The revenue in FY2018 contracted by 6% from S$17.5 million in FY2017 to S$16.4 million mainly attributed to a softened demand in both sectors. The Group remains positive on the prospects for these two sectors and confident to achieve growth largely due to our well-diversified customer bases.

JEP Industrades Pte Ltd

JEP Industrades Pte Ltd, the Group's subsidiary. has a principal activity of supplying and marketing cutting tools. The revenue in FY2018 decreased by 9% to S$18.3 million from S$20.0 million in FY2017 primarily due to U.S.-China trade war tension which caused a softened demand from China regions. The Group will continue to actively look for and develop new markets at the Middle East and European regions to diversify its trading segments's customers bases.

 

Financial Review

Financial Performance

For FY2018, the Group's revenue marginally decreased by 0.3% to S$85.9 million as compared to FY2017 revenue of S$86.1 million. This is resulted by the lower revenue posted from Equipment Manufacturing of S$1.1 million and Trading and others segment of S$1,7 million which were offset by the higher revenue from Precision Manufacturing segment of S$2.6 million.

Cost of sales decreased 3.8% or S$3.0 million from S$76.2 million in FY2017 to S$73.2 million in FY2018. The decrease in cost of sales was in tandem with lower revenue from Equipment Manufacturing. Tading and other segments and absence of the one-time expense in relation to leased premises surrendered in December 2017.

The Group's FY2018 gross profit increased by 26.8% or S$2.7 million to S$12.6 million in FY2018 as compared to S$9.9 million in FY2017. The gross margin in FY2018 improved by 3% to 15% from 12% in FY2017 primarily due to higher gross margin profit generated from Precision Manufacturing segment.

Other operating income for FY2018 decreased by S$0.9 million from S$2.1 million to S$1.2 million in FY2018. This was primarily caused by the decreased in gain on disposal of machinery of S$0.2 million in FY2018 due to a lower number of machine being disposed-off and the absence of a gain on sale leaseback of S$0.5 million and gain on foreign exchange difference of S$0.2 million posted in FY2017.

Selling and distribution expenses mainly comprise sales and marketing staff costs outward freight, travelling and marketing expenses, and other related expenses. Selling and distributions expenses in FY2018 was decreased marginally by S$0.1 million to S$2.1 million from S$2.2 million in FY2017.

Administrative expenses decreased by S$2.4 million or 27.5%, from S$8.7 million in FY2017 to S$6.3 million in FY2018, mainly attributed to the absence of one-time expenses of S$2.2 million in relation to leased premises surrendered in December 2017 and amortisation of intangible assets of S$0.6 million which were partialy offset against retirement packages of S$0.5 million paid to the former Executive Chariman in FY2018.

Other operating expenses was S$0.7 million, this arose from forex exchange loss of S$0.5 million which was attributed to borrowings and finance leases denominated in United States Dollar ("USD") and JapaneseYen ("Yen") and S$0.2 million of reclassification adjustment of translation foreign exchange differences reserve due to completion of liquidation process of the Company's subsidiary incorporated in Thailand.

Finance costs increased by S$0.1 million from S$1.4 million in FY2017 to S$1.5 million in FY2018, mainly due to an increase in borrowings and finance leases and corresponding increased in the costs of finance.

The Group recorded total income tax expense of S$0.9 million in FY2018 as compared to income tax credit of S$0.5 million in FY2017. This was mainly due to tax expenses arose from the origination and reversal of temporary differences.

Balance Sheet

Property, plant and equipment decreased by S$2.9 million from S$54.1 million as at 31 December 2017 to S$51.2 million as at 31 December 2018. This decrease was mainly due to additions of S$3.6 million and depreciation charge of S$5.9 million in FY2018.

Intangible assets decreased by S$0.1 million from S$18.0 million as at 31 December 2017 to S$17.9 million as at 31 December 2018. The decrease was resulted by an amortisation costs incurred in FY2018.

Non-current other receivables comprised of government grants to be received in relation to the Productivity and Value Enhancement Scheme (PAVES) and Technology Innovation under Capability Development Grant (CDG) was reclassified to current asset - other receivables as at 31 December 2018.

Trade and other receivables decreased by S$1.6 million from S$24.3 million as at 31 December 2017 to S$22.7 million as at 31 December 2018. The reduction was mainly due to fluctuations arose from timing of payments made by customers.

Trade and other payables decreased by S$1.0 million, from S$16.5 million as at 31 December 2017 to S$15.5 million as at 31 December 2018. This reduction was mainly due to fluctuations arose from timing of payments made to creditors.

The Group's total obligation under finance lease decreased by S$1.0 million from S$7.6 million as at 31 December 2017 to S$6.6 million as at 31 December 2018. This was attributed to new finance leases of S$0.8 million for new machines and forex translation loss of S$0.2 million before offsetting with the repayment of S$2.0 million in FY2018.

The Group's total loans and borrowings decreased by S$5.2 million, from S$41.8 million as at 31 December 2017 to S$36.6 million as at 31 December 2018. This reduction was due to a repayment of S$12.4 million which was partially offset by additional term loan of S$0.8 million, and revolving credit facilities of S$6.3 million and forex translation loss of S$0.1 million in FY2018. In FY2018, term loan increased S$0.8 million due to term loans drawdown of S$0.5 million to finance factory building and S$0.3 million for clean room facilities situated at Seletar Aerospace Park.

Contingent consideration of S$2.0 million in respect of the acquisition of JEP Industrades Pte Ltd in end August 2015 has been crystallized and paid for in FY2018.

Deferred tax liabilities increased by S$0.8 million, from S$1.3 million in FY2018 from S$0.5 million in FY2017 primarily due to deferred tax expenses arose from the origination and reversal of temporary differences.

Cash Flow

Net cash generated from operating activities of S$10.1 million in FY2018 was mainly due to the improvement in cash generated before movement in working capital by S$6.0 million as compared to FT2017.

Net cash used in investing activities amounted to S$7.2 million in FY2018 which comprised of payment of contingent consideration of S$2.0 million in respect of the acquisition of JEP Industrades Pte Ltd in August 2015, payments for the additions of property, plant and equipment of S$2.6 million, and S$1.8 million spent at an acquisition of subsidiaary shares.

Net cash used in financing activities amounted to S$4.6 million in FY2018. This was mainly due to net borrowing repayments of S$5.2 million and finance lease repayments of S$2.0 million which was partially offset with proceeds from issue of share capital of S$2.6 million in FY2018.

"...we have been gaining strengths in manufacturing components for highly specialized oil and gas components."