Federal answers SGX’s queries

SGX wanted clarification as to how trade receivables increased when Federal International (2000) Ltd’s revenue fell.

Federal International (2000) Ltd had this to say:

SGX’S QUERY 1:
We note on Pg 5 of the results announcement that “Trade Receivables” increased by 21% from S$30.2m to S$36.6m, when “Revenue” decreased 26.8% from S$180.1m to S$131.9m. The Company disclosed that the increase in “Trade Receivables” was due to higher sales transacted near the year-end date of FY2011. In respect of the above, to provide the following information:-
(i) Quantify the amount of trade receivables attributable to higher year-end sales;

(ii) Trade receivables turnover ratio for the current financial year as compared to the previous financial year, and elaborate on material variance, if any; and

(iii) Directors’ views on whether provision for doubtful debt is adequate and the basis for their views.

COMPANY’S RESPONSE TO QUERY 1
As at 31 December 2011, the amount of trade receivables attributable to higher year-end sales, amounted to S$15.2 million.

The trade receivables turnover ratio for FY 2011 was 93 days, as compared to 72 days for FY 2010. The higher turnover days for FY 2011, was due mainly to higher sales closed in the last quarter of FY 2011, as compared to last quarter of the corresponding financial year.

The Management has evaluated all existing trade receivables of the Group as at 31 December 2011 for recoverability issue and has recognised provision for doubtful debt accordingly. As such, the Directors are of the view that the provision for doubtful debt is adequate.

SGX’S QUERY 2:
We note that “Amounts due from related parties” increased from S$2.2m to S$6.1m. The Company disclosed that the increase was due to a loan made to a shareholder of a subsidiary. In respect of the above, please provide the following information:-
(i) Identify the shareholder, the amount of loan granted, and the purpose of the loan; and

(ii) Provide details of the repayment terms of the loan.

COMPANY’S RESPONSE TO QUERY 2
The name of the shareholder is Falcon Energy Group Limited (“Falcon”) and the subsidiary concerned is Federal Offshore Services Pte Ltd (“FOS”). FOS is a 60% owned subsidiary of the Company, with the remaining 40% being held by Falcon.

As announced on 9 May 2011 by the Company, FOS, upon disposal of its vessel, ‘Federal I’, has disbursed net proceeds of US$11.601 million, as loans to shareholders. Out of the total loans of US$11.601 million, US$4.640 million was granted to Falcon with the remaining balance being granted to the Company.

As highlighted in the said announcement, the shareholders of FOS have undertaken to repay the loans on demand if FOS so requires to the use the amount of the loans (or any part thereof) for its working capital purposes.

The loans were granted to the shareholders of FOS for their funding requirements.

These loans are interest-free and are payable on demand.

SGX’S QUERY 3:
The Company disclosed that “it changed its method of estimation on inventory provisioning” in FY2011, to enable the Company to “arrive at its provision in a more systematic manner”. Please elaborate on the revised method of estimation on inventory provisioning, and explain how the revised method allows the Company to “arrive at its provision in a more systematic manner”.

COMPANY’S RESPONSE TO QUERY 3
One of the Group’s business model is to establish itself as a stockist of metal flowline control products (valves, pipes, tubings) and ancillaries, and maintaining an inventory of a wide range of such products readily on hand will strengthen the Group’s position in the market. These products typically have shelf lives of at least 5 to 10 years, and the quality can be maintained beyond the first 5 to 10 years with minor repairs and spare parts replacement. The Group has its own team of in-house quality assurance/quality control personnel to service/re-test the products as and when the need arises.

In the past, the inventory provisioning was based on a certain percentage of the total value of inventory of the Group as well as review of specific inventory items.

With effect from FY 2011 onwards, the revised method adopted is to review inventory items of 10 years and above in age, for its condition, its marketability (being the sales and sales enquiry history for the previous 2 financial years), for impairment issues. The Company believes such an approach allows its inventory provisioning to be in a more systematic manner.

SGX’S QUERY 4:
In respect of Appendix 7.2 Paragraph 13, please comply and disclose whether the Company has obtained a general mandate from shareholders for IPTs. If no IPT mandate has been obtained, a statement to that effect must be disclosed.

COMPANY’S RESPONSE TO QUERY 4
The Group did not obtain a general mandate from shareholders for interested person transactions for the period under review.

SGX’S QUERY 5:
We note that the Company provided profit guidance on 27 February 2012 in respect of its FY2011 financial results. Noting that the FY2011 financial results was announced 3 days later on 1 March 2012, to explain why the Company did not deem it necessary to provide the profit guidance much earlier.

COMPANY’S RESPONSE TO QUERY 5
The Company recognises its responsibility of providing information on a timely basis.

The Group’s results for FY 2011 were adversely affected by impairment issues which, by nature, are judgemental in nature. Up to 27 February 2012, there were developments which impacted on how the Company should recognise and measure certain impairments and the Company was still in discussions with its auditors as to how to resolve the impairment issues.

Hence, the Company was unable to provide the profit guidance any earlier.