Message from the Company President
The electronics manufacturing services (EMS) industry rebounded in 2010 from a contraction in 2009 despite unusual levels of uncertainty in the supply and demand for raw materials and end-products. Instability in the global economy dragged the market demand for electronic products in the first half of 2010 but production volumes began to rise in the latter half as endconsumers gained more buying confidence.
Under these operating conditions, IMI posted US$412.3 million in consolidated revenues, a 4% growth year-on-year bolstered by the sustained strong performance of its China operations and incremental revenues from its acquisition of PSi Technologies Inc. The combined China and Singapore operations generated revenues of US$248.8 million, accounting for 60.4% of total revenues. This represents a 25% year-on-year growth due mainly to larger orders from major customers in the telecommunication infrastructure, industrial, and consumer electronics markets. Our acquisition of a 56% stake in PSi Technologies in October 2010 generated incremental sales of US$19.3 million in the fourth quarter of the year. This acquisition places IMI at the forefront of the growing convergence of power semiconductor assembly and test services (SATS) and EMS as it allows IMI to offer optimized power solutions in multichip modules (MCMs) and serve emerging markets like electric vehicle, smart power, and smart sensor technologies.
While diversification across regions and market segments shielded our revenues from the impact of isolated business downturns in 2010, our net income after taxes declined to US$4.7 million from the previous year’s US$10.1 million. However, operating income was at US$7 million excluding non-recurring items, a 27% growth over the 2009 level of US$5.5 million.
Our Philippine operations continued to suffer from declining consignment or captive business with Japanese original equipment manufacturers (OEMs), resulting in lower factory and equipment utilization. The rising costs of materials and labor in China and the appreciation of the Philippine peso also adversely affected earnings.
In response to these challenges, we intensified our cost-cutting and operational streamlining initiatives, and entered into a simple dollar forward hedging. Thus we managed to post a positive ne income after taxes with a return on equity of 3% and an EBITDA margin of US$27.8 million or 7%.
IMI ended the year with a cash balance of US$40.0 million. Debt-to-equity ratio remained at a healthy level of 0.33:1.0 with adequate credit facilities to support funding requirements for its expansion program.
Market instability will remain a major industry concern in 2011. Tight supply chains will continue to affect the activities of OEMs and EMS providers alike. Moreover, intense competition among OEMs will negatively affect the market projections and pricing strategies of EMS providers.
On the other hand, the growth of emerging sectors particularly in renewable energy, automotive, industrial, and medical electronics provide much optimism for OEMs and EMS firms in 2011. Quite a number have started to explore alternative low-cost locations beyond China. Some have also begun to manufacture closer to their markets in industrialized nations to reduce product-transit time and expense as well as improve responsiveness to customers. As these trends come into play, however, China continues to represent a huge consumer market given its large and growing consuming middle class.
Given these challenges and opportunities, EMS providers like IMI are compelled to continuously re-engineer businesses in order to thrive. For our part, we are restructuring our business processes and retooling our workforce in order to seize opportunities in diverse markets amid the evolving business environment. We have embarked on an organizational structure that utilizes crossfunctional customer-focused teams. This is intended to make each region, division, section and individual accountable and empowered to create a customer experience that will define IMI’s uniqueness relative to its peers in the industry.
While we continue to engage in complex high-volume manufacturing, we are strengthening our capability to serve low-volume, high-mix, high-margin programs prevalent in the automotive, industrial and medical electronics markets. After establishing IMI Energy Solutions’ facility in Fremont, California in 2010 for the development and prototyping of solar or photovoltaic(PV) modules, we are forging ahead with PV module and panel assembly in 2011.
In 2010, we expanded to Chengdu in southwestern China. This was part of our strategy to bring our services closer to OEMs requiring greater capacity in China to supply a large domestic market as well as to manufacture for export markets. As regional manufacturing picks up, we seriously consider expanding our operations to locations near our customers in Europe and the United States for cost and responsiveness advantages.
We are establishing the IMI University to enhance leadership and technical skills needed to better serve our target markets. Its core and functional courses will enhance competencies of our workforce and ultimately empower them to make work improvements and increase productivity. Likewise we remain focused on creating an environment where employees are empowered to work together to respond more briskly to the ever shifting market environment.
After our listing by way of introduction on the Philippine Stock Exchange in January 2010, we have also strengthened our commitment to good governance and prudent execution of our growth strategies. This is equally an integral component of our strategy to respond appropriately in the face of opportunities and challenges brought by a global economy that increasingly depends on electronic devices to meet lifestyle needs and choices.
ARTHUR R. TAN
President and CEO
SURVIVING A DIFFICULT YEAR
Unstable end-market demand, tight materials supply, and rising costs of doing business continued to put pressure on IMI’s operations in 2010. Notwithstanding these conditions, IMI managed to post revenue growth and positive income.
The increase in total revenues was due largely to higher revenues generated from a key European OEM as a result of steady improvement in demand in the automotive and consumer electronics industries.
The strong performance of the China operations compensated for the contraction in sales of the Philippine operations. A leading Chinese OEM in telecommunications continued increasing its orders for infrastructure devices from IMI as it retained its dominant position in the Chinese market and increased its market share in regions outside China. Likewise, a customer in smart grid products dramatically increased its volume requirement as its proprietary technology gained accelerated market acceptance.
IMI Laguna, on the other hand, was set back by the closure of the liquid crystal display assembly operations for a Japanese customer after the latter sold its interest to another company with its own international manufacturing operations.
Materials supply continuity and assurance remained erratic. In dealing with the tight materials supply situation, we have created a Demand Management Team to consolidate several front-end materials activities (order loading, planning, and production control) to allow us to streamline the entire demand management process into a seamless activity, thus affording us speed in buying execution.
To cushion the impact of the lower sales volumes in the Philippines and the rising cost of labor in China, we intensified our company-wide cost-cutting initiatives which included Lean Manufacturing, Manpower Rationalization, and Energy Conservation. While the Philippine operations had to grapple with the peso appreciation against the U.S. dollar, our decision to engage in dollar forward hedging in 2009 resulted in a US$2.3 million foreign exchange gain in 2010. All these efforts resulted in IMI achieving a net income of US$4.7 million for the year.
SEEDING THE FUTURE
IMI’s Design and Development Group undertook the following platform development activities in 2010. The Singapore team developed a grid-connected solar panel inverter platform. Built for high-reliability and high-efficiency, the inverter is suitable for homes and small establishments. The Philippine team developed its second-generation rear-view and front-view automotive cameras for driver assistance. Capitalizing on our expertise in bare die mount and optical test development, these platforms allow us to deliver a complete, cost-effective camera solution to automotive OEMs. Several automotive suppliers have started to engage IMI in automotive camera development projects.
IMI's Global Test and Systems Development Group delivered in 2010 customized test equipment to virtually all of IMI's strategic customers. Moving forward, IMI plans to leverage the engineering capabilities of the group and combine it with a low-volume highmix manufacturing team to form a new business unit to provide manufacturing solutions for OEMs with large, complex products such as semiconductor manufacturing and test equipment.
The IMI Energy Solutions in Fremont has been working with several customers on prototyping PV panels for customized applications like the top of golf carts and alternative roofing materials. The Fremont team will be involved in setting up IMI’s first solar panel production facility. They will also be working closely in supporting IMI’s Design and Development team in developing platforms for controlling the power generated by solar panels.