A MINDSET FOR INNOVATION, THE DRIVE TO EXCEL, AND THE HEART TO MAKE A DIFFERENCE ENGINEERING WITH PASSION ANNUAL REPORT 2016 contents 04 24 61 Financial Highlights Operating Review & Outlook Sustainability Report 06 / 43 78 Letter to Shareholders Corporate Information Corporate Governance 12 / 44 / 104 Interview with CEO Financial Review Financial Report 16 / 57 273 Board of Directors Investor Relations Shareholding Statistics 22 / 59 IBC Senior Management Awards Contact Information ENGINEERING WITH PASSION .01 In 2017, ST Engineering celebrates our 50th anniversary. Since ST Engineering began 50 years ago, we have been passionate about wanting to make a difference, to have an impact. We have been doing this by harnessing our hard-won experience, our leading edge expertise and the latest technology to develop creative solutions that assist our customers and leave a better world for our children to inherit. We believe that this passion, coupled with a drive to excel and a deep and abiding desire to make a difference, will create a better future for our customers, our stakeholders and our employees. ST ENGINEERING .02 ANNUAL REPORT 2016 HIGHLIGHTS OF THE YEAR BUILDING NEW A MINDSET FOR CAPABILITIES Littoral Mission Vessels by ST Marine are designed to be smarter, innovation faster and sharper. that SHAPES OUR PLANET COOL INVENTION THE DRIVE ST Engineering’s subsidiary, Innosparks launched Airbitat, the TO EXCEL world’s first evaporative cooler designed for high humidity tropical climates. towarDS A Better toMorrow CONTINUOUS INNOVATION ST Kinetics launched Terrex 3, the latest iteration of its 8X8 infantry fighting vehicles. ENGINEERING WITH PASSION .03 THE NEXT FRONTIER ST Electronics’ TeLEOS-1, the first made-in- Singapore commercial Earth Observation Satellite, commenced commercial imagery service. NURTURING TALENT, SUPPORTING LIFELONG LEARNING We awarded 12 scholarships to outstanding students, and sponsored nine employees for undergraduate and graduate studies. THE HEART TO MAKE A DIFFERENCE SUSTAINABILITY IN ALL We believe in doing business in a responsible that WE DO and sustainable manner. ST ENGINEERING .04 ANNUAL REPORT 2016 FINANCIAL REVENUE BREAKDOWN HIGHLIGHTS 35% Defence BY CUSTOMER REVENUE NET PROFIT TYPE $6.68b $484.5m 65% Commercial 5.5% 8.4% 7% EARNINGS PER SHARE DIVIDEND PER SHARE Others 9% Europe 15.60¢ 15.0¢ - 8.5% BY LOCATION OF CUSTOMERS 25% US 59% Asia OPERATING CASH FLOW ORDER BOOK $0.76b $11.6b 7% 1% 63.0% 1.3% Europe Others 23% US RETURN ON EQUITY RETURN ON SALES BY COUNTRY OF INCORPORATION 22.2% 7.4% 69% 2.6% PTS 1.0% PTS Asia / : FY2016 vs FY2015 ENGINEERING WITH PASSION .05 REVENUE BY SECTOR 2016 2015 $2.48b 37% $2.09b 33% $1.88b 28% $1.71b 27% $1.31b 19% $1.40b 22% $0.84b 13% $0.96b 15% $0.17b 3% $6.68b $0.18b 3% $6.34b EBITDA BY SECTOR 2016 2015 $353.4m 49% $293.5m 42% $237.4m 33% $218.6m 31% $27.5m 4% $86.2m 12% $92.0m 13% $101.4m 15% $8.1m 1% $718.4m 0% ($2.1m) $697.6m NET PROFIT BY SECTOR 2016 2015 $234.4m 48% $226.7m 43% $174.5m 36% $163.0m 31% $12.7m 3% $55.7m 10% $67.8m 14% $85.7m 16% -1% ($4.9m) $484.5m 0% ($2.1m) $529.0m Aerospace Electronics Land Systems Marine Others ST ENGINEERING .06 ANNUAL REPORT 2016 LETTER TO DEAR SHAREHOLDERS, 016 was a year when the global SHAREHOLDERS 2economy lacked the tailwinds to support and sustain strong growth. It was also a year of continued technology advances, bringing in its wake more digitisation and business disruptions. It was certainly not a year for complacency. Fortunately, for ST Engineering, we are pleased to report L Mr Kwa Chong Seng that despite these challenges, we have Chairman achieved a commendable performance. R Mr Vincent Chong As an engineering and technology President & CEO Group, we are also well positioned to tap into the many opportunities that come with the new digital economy. The Group closed 2016 with a revenue of $6.68b, up 6% from $6.34b in 2015. Profit before tax (PBT) was $590.6m, down 6% from $630.3m the previous year. Net profit attributable to shareholders (net profit) was 8% lower at $484.5m compared to $529.0m in 2015. The lower profits were mainly a result of a one-off charge consisting of an impairment of asset carrying values and provision for closure costs for JHK*, the Land Systems sector’s road construction equipment business in China. At the business sector level, revenue for the Aerospace sector was 19% higher at $2.48b from $2.09b a year ago, mainly driven by the contribution of EFW*, our joint venture with Airbus which became a subsidiary after the increase in our shareholding from 35% to 55%. Its PBT was $300.3m compared with $290.6m the year before. The Electronics sector posted higher revenue of $1.88b, up 10% from $1.71b, and a 9% increase in PBT to $207.8m from $191.0m a year ago. Revenue for the Land Systems sector was down 7% year-on-year to $1.31b from $1.40b, and its PBT declined 66% to $22.2m from $65.0m the year before, mainly a result of the one-off charge for JHK. Weaker shipbuilding performance in our Singapore and US operations led to lower revenue and PBT for the Marine sector, with its revenue down 12% to $841m from ENGINEERING WITH PASSION .07 now deployed in Gardens by the Bay, and we are making good progress We continue to take“ a long-term view of with the development of a fleet of autonomous vehicles for trial in our business performance unencumbered Sentosa, Singapore. by short-term aberrations. We have As organisations adapt to the digital stayed the course despite uncertain times world, we have been enhancing in the global economy. our cyber security solutions and technologies to meet their need for greater cyber intelligence and insights. In May, ST Electronics set up a $44.3m ” Cyber Security Laboratory with the Singapore University of Technology $958m and its PBT down 15% to $75.1m its various business segments, which and Design. The Lab has since begun from $88.3m a year ago. included a new EFW facility to grow the research into solutions for insider component manufacturing business; threat detection. Other focus areas Group revenue in 2016 continued to and a new ST Electronics facility, its fifth of the Lab include Big Data analytics, show a healthy diversification across in Singapore, to house its expanding as well as monitoring and mitigating business sectors, geographical regions operations. techniques. The company has also and customer type. The spread of broadened its cyber security offerings. Group revenue by sector was 37% We ended the year with $1.4b in cash These include its Advanced Security from the Aerospace sector, 28% from and cash equivalents including funds Operations Centre, cyber security the Electronics sector, 19% from the under management. analytics solutions, and cyber security Land Systems sector and 13% from the for industrial control systems to protect Marine sector. Your Board of Directors proposes a Final critical infrastructure such as utilities Dividend of 10 cents per share for this and metro rail. In terms of geographic distribution, year. Moving forward, Special Dividends 69% of Group revenue was accrued will be proposed only when there are ENHANCING capabilities, moving from business units in Asia (including one-off events, unlike past practices UP THE value CHAIN Singapore), 23% from the US, and 7% when they were paid out yearly. from Europe. Revenue split between Together with the Interim Dividend of At the Aerospace sector, its A330 and commercial and defence remained 5 cents per share paid in August 2016, A320/321 passenger-to-freighter (P2F) steady at 65%:35%. the total dividend for the full year will be conversion programmes are on track. 15 cents per share representing a total Securing DHL Express, a world class The Group’s return on equity was 22.2% payout of $467.6m to our shareholders. express and logistics company, as a and our earnings per share amounted to The dividend yield for 2016 would be launch customer for its A330-300 P2F 15.60 cents. 4.81% compared to 4.68% for 2015. conversion programme speaks volumes of the confidence the industry places The Group’s revenue pipeline remains CONTINUOUS FOCUS ON in our aerospace business and freighter healthy, with an order book of $11.6b, NEW growth AREAS conversion capability. This winning broadly comparable to the 2015 close partnership will attract more customers of $11.7b. We expect to realise $3.7b of Our core businesses in the air, land, to our conversion programmes. What this order book into revenue in 2017. sea and electronics segments are makes us stand out in these conversion fundamentally sound. To further programmes is that we have the Our strong balance sheet allowed strengthen these core businesses, we support of Airbus at every step of our us to continue to invest across will continue to invest in them and programme development, including business cycles. Capital expenditure at the same time, devote additional data and certification support, resulting for 2016 was $252m (2015: $293m). resources to other new high growth in better understanding of the intricacies A significant amount was invested areas such as robotics and cyber of the aircraft’s design. Our customers into the Aerospace and Electronics security. As an update to last year’s are thus ensured an integrated, sectors for capacity expansion across report, our autonomous vehicles are optimised and reliable solution. * EFW: Elbe Flugzeugwerke * JHK: Jiangsu Huatong Kinetics Co., Ltd and Jiangsu Huaran Kinetics Co., Ltd (collectively known as JHK) ST ENGINEERING .08 ANNUAL REPORT 2016 Singapore, the Littoral Mission Vessel LETTER TO programme progressed in line with its construction and testing schedules.