UMS Holdings Limited

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Extracted from Annual Report 2015

Operations Review

As these initiatives continue, the Group will be in a good position to enjoy good levels of profit margin. The Group will continue to explore ways to reduce its overall manufacturing costs, further increase its competiveness as well as maximizing profits.

Operations Review

The global semiconductor equipment industry remained relatively stable despite weakness in the global economy. Chip makers worldwide continued their investments and that underpin the business activities of players in the value chain. Similarly, UMS' major customer enjoyed a relatively healthy stream of orders, which resulted in UMS' steady performance in FY2015.

In terms of seasonality, the Group's 1Q2015 revenue picked up from a slower 4Q2014 and grew stronger as the year progressed towards 2Q2015 and 3Q2015. Towards the last quarter of the year, the Group experienced slower orders and this is expected to continue into the first half of FY2016 as the slowdown in global economy continues.

Efficient Cost Structure

The Group had always been actively pursuing a sustainable and effective strategy to reduce its costs without compromising on the standard of its products. Over the years, UMS had developed the numerous manufacturing activities such as secondary process and specialized welding to establish itself as a one-stop integrated manufacturing platform. This allows the Group to minimize subcontracting cost and retain most of the operating margins, as well as ensuring a good quality control over its products.

The Group started the transfer of a substantial portion of its machining activities to its Penang operations several years ago and this endeavor is completed towards the end of the year. In November 2015, the Group did not renew its lease at 25 Changi North Rise, Changi North Industrial Estate and relocated its administrative functions to 23 Changi North Crescent in order to better utilize its factory space. This allowed the Group to achieve cost savings in terms of lower energy costs and rental expense.

As these initiatives continue, the Group will be in a good position to enjoy good levels of profit margin. The Group will continue to explore ways to reduce its overall manufacturing costs, further increase its competiveness as well as maximizing profits.

Sufficient Capacity for Growth

The Group's current manufacturing utilization rate is still relatively low and has ample capacity for its future organic growth. The Group believes that there is no immediate requirement for any major capital expenditure.

UMS has in the past been exploring opportunities to diversify its business to reduce its dependency on the semiconductor segment. In January 2016, the Group signed a definitive agreement with All Star Fortress Sdn Bhd ("ASF") to invest in the company which will allow it to make inroads into the Malaysian and regional aerospace manufacturing industry. In line with the shareholder agreement, ASF will relocate its manufacturing operations to UMS' Penang facilities. UMS will lease out part of its manufacturing premises to ASF and this helps the Group to increase the utilization of its Penang factory space.

UMS' strong financial and operational capabilities will add value to this collaboration. The aerospace industry is an area that UMS can enter into with similar scope of services and capabilities. Both require a high level of precision engineering and robust quality assurance processes.

Outlook

The relatively weaker 4Q2015 is likely to continue into the first half of FY2016 as the global economic uncertainties lingers on. Although the industry may remain resilient in FY2016, the global semiconductor equipment industry is still dependent on the chip makers investment programs.

The Group's major customer had not indicated any major downward revisions to its orders at the current moment and there have been industry experts even commenting that the global semiconductor equipment industry may grow in FY2016, albeit nominally.

As such, the Group remains cautiously optimistic that business activities will be satisfactory and FY2016 will be a profitable year.

Financial Review

Financial Review

Despite the relatively flat revenue, the Group posted an excellent net profit of S$34.3 million in FY2015, growing 38% from S$24.9 million a year ago. FY2015 was the Group's most profitable year till date. Gross material margin grew significantly from 54% in FY2014 to 60% in FY2015.

Revenue

Despite the global economy remaining challenging with lots of lingering uncertainties, UMS' revenue stood relatively flat at S$111.1 million in FY2015 compared to S$109.8 million a year ago. In 1Q2015, the Group revenue grew 24% sequentially to S$27.5 million compared to S$22.1 million in 4Q2014. This was a result of foundries pushing back their 4Q2014 investments into the first quarter of FY2015. During this time, UMS' major customer had also indicated that FY2015 will be a "back-end" loaded year with most demand coming in the second half of the year.

The robustness of orders accelerated earlier than expected and the Group's 2Q2015 revenue grew sequentially 13% to S$31.0 million. Following the increase in business activities during 2Q2015, the momentum continued into 3Q2015 with UMS achieving S$30.7 million for the quarter.

Subsequently, as most of the orders from UMS' major customer were fulfilled ahead of time as well as the increasing weakness in global economy, the Group's business activities in 4Q2015 experienced a slowdown. This resulted in UMS' 4Q2015 revenue declining 29% quarter on quarter to S$21.9 million.

Geographically, the Singapore market remained as the Group's largest market, contributing S$54.6 million in FY2015 while the US and Others regions both grew 18% each to S$26.6 million and S$28.3 million respectively. Revenue from the Malaysia region decreased 44% to S$1.6 million in FY2015. Additionally, UMS experienced higher contribution from its component business compared to its integrated system sales. The Group's component business has always enjoyed higher margins and is driven mainly by consumables parts.

Profitability

Despite the relatively flat revenue, the Group posted an excellent net profit of S$34.3 million in FY2015, growing 38% from S$24.9 million a year ago. FY2015 was the Group's most profitable year till date. Gross material margin grew significantly from 54% in FY2014 to 60% in FY2015. This was a result of appreciation of the US dollar, lower raw material costs and better product mix.

While the Group saw employee benefits expense increased 11% to S$13.5 million in FY2015, depreciation expense and Other expenses in the same period declined 4% and 3% to S$7.4 million and S$11.8 million respectively. Other credits grew from S$0.3 million in FY2014 to S$2.5 million in FY2015 mainly as a result of foreign exchange gains.

In January 2016, UMS signed a definitive agreement with All Star Fortress Sdn Bhd ("ASF") to invest in the company to participate in the Malaysia and regional aerospace manufacturing industry. This will be a long term investment with significant growth potential as part of the Group's diversification strategy. The investment amount as well as subsequent performance of this investment will not have any material impact to the Group's financial performance in FY2016.

Under the collaboration, UMS will subscribe 10% equity in ASF for a consideration of RM0.145 million as well as extending secured interest bearing convertible loans totaling up to USD7.5 million for its future expansion plans. UMS will also be renting its Penang premises on a commercial basis to ASF.

Cashflow

Keeping up with its good track record of robust cash generation abilities, UMS had generated a positive operating cash flow of S$35.8 million and free cash flow of S$31.3 million in FY2015, as compared to S$35.6 million and S$28.9 million respectively in FY2014.

As at 31 December 2015, the Group remained debt-free with no bank borrowings and had managed to accumulate net cash and cash equivalent of S$38.9 million, yet another all-time high milestone for the Group.

Dividend

In view of UMS' outstanding financial performance and in recognition of shareholders' unwavering support of the Group, the Board had proposed a final dividend of 2.0 Singapore cents per ordinary share and special dividend of 1.0 Singapore cent per ordinary share (tax-exempt one-tier) for FY2015. This brings the total dividend proposed and declared to 6.0 Singapore cents per share which includes dividends of 1.0 Singapore cent per ordinary share already paid out in each preceding quarters from 1Q2015, 2Q2015 and 3Q2015.