UMS Holdings Limited

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Extracted from Annual Report 2016

Operations Review

Robust spending by chip makers worldwide underpins the business activities of players in the value chain. UMS being a strategic vendor of the biggest semiconductor equipment maker in the world, benefitted from this trend.

SEMI, the global industry association representing more than 2,000 companies in the electronics manufacturing supply chain, reported in their SEMI Year-end Forecast released in December 2016 that worldwide sales of new semiconductor manufacturing equipment are projected to increase 8.7 percent to $39.7 billion in 2016.

Taiwan and South Korea are projected to remain the largest spending regions, with China joining the top three for the first time. Rest of World (essentially Southeast Asia), will lead in growth with 87.7 percent, followed by China at 36.6 percent and Taiwan at 16.8 percent.

Robust spending by chip makers worldwide underpins the business activities of players in the value chain. UMS being a strategic vendor of the biggest semiconductor equipment maker in the world, benefitted from this trend.

In terms of seasonality, the Group experienced slower orders in 1H2016 but activities picked up from 3Q2016 and grew stronger as the year progressed, as global semiconductor equipment industry resumed its growth and global chip makers pick up pace on their capital expenditure programs.

Streamlining operations to improve cost efficiencies

In addition to a lower tax environment resulting from the pioneer tax incentive, the facility in Penang, Malaysia also enjoys reduced overheads such as lower labour costs and lower electricity tariffs, which helped to maintain the profitability of the Group. UMS has been transiting the majority of its Singapore precision machining operations to Penang over the years and this effort was completed towards the end of last year.

With the recent renewal of its integrated system business contract with its key customer for another 3 years, with the option to further extend another 3 years, the Group will also be moving this systems integration work to Penang. This allows the Group to leverage on its facility and capability in a low cost environment to enhance its value proposition to its key customer, thus cementing the strategic relationship.

Available Capacity to meet additional demand

The Group's component manufacturing utilisation rate has been relatively low and part of the reason was the stiff competition posed by other regional players. With the current ramp up in demand from semiconductor equipment makers globally, we are seeing more opportunities to offer this unutilised capacity to these equipment makers. The Group is taking focused steps to grow its components business this year.

Integration with new group companies

In January 2016, the Group signed a definitive agreement with AllStar Manufacturing Sdn. Bhd. ("Allstar") to invest in the company to make inroads into the Malaysian and regional aerospace manufacturing industry. Allstar has since relocated its manufacturing operations to UMS's Penang facilities, obtained the necessary Aerospace certifications and has been qualified by a major Tier 1 Aerospace vendor to supply aircraft components.

The Group announced on 24 February 2017 that it had entered into a conditional subscription agreement with Kalf Engineering Pte Ltd ("Kalf"), a water and chemical engineering solutions company. Key tasks in 2017 will be to integrate Kalf's operational activities with that of the Group and to leverage on UMS's strengths to grow its business.

Financial Review

Financial Review

Overall, the Group posted a creditable financial performance for FY2016. The Group generated comparable cash flows despite lower revenue and profits as compared to FY2015, and accumulated net cash and cash equivalents of S$42.6 million, surpassing last year's record of S$38.9 million.

Revenue

For the year ended 31 December 2016, UMS revenue remained relatively flat at S$104.2 million, compared to S$111.1 million a year ago.

Revenue from Semicon segment declined by 8% to S$101.4 million in FY2016 (FY2015: S$110.1 million). As compared to FY2015, Semiconductor Integrated System sales increased by 19% from S$42.6 million to S$50.5 million whereas revenue from component sales decreased by 25% from S$67.6 million to S$50.9 million due to stronger competition from other regional players. Revenue from Others increased 190% from S$1.0 million in FY2015 to S$2.8 million in FY2016, mainly due to contract manufacturing work for Kalf Engineering Pte Ltd ("Kalf") with regards to the fabrication of water disinfection systems.

Over the same period, UMS revenue from Singapore in FY2016 increased by 23% from S$54.6 million in FY2015 to S$67.2 million in FY2016. Revenue in US decreased by 59% in FY2016 to S$10.8 million from S$26.6 million in FY2015, while revenue from Others geographies decreased by 14% from S$28.3 million in FY2015 to S$24.3 million in FY2016.

The Group experienced a weak first half in 2016 for the Semicon equipment sector. UMS's revenue in 1H2016 declined 25% to S$43.7 million, compared to S$58.5 million in the previous corresponding period. Sequentially, UMS 2H2016 revenue grew 15% to S$60.5 million from S$52.6 million in 2H2015. This was attributed to the upturn in demand in the second half of 2016, as global semiconductor equipment industry resumed its growth and global chip makers pick up pace on their capital expenditure programs.

Profitability

For FY2016, UMS's gross material margin decreased to 54% as compared to 60% in FY2015 as a result of change in product mix. Employee benefits expense decreased by 15% from S$13.5 million in FY2015 to S$11.5 million in FY2016. Depreciation expense decreased from S$7.4 million in FY2015 to S$5.4 million in FY2016.

Other expenses saw a decrease of 15% from S$11.8 million in FY2015 to S$10.1 million in FY2016. Other credits/charges recorded a charge of S$4.7 million in FY2016 as compared to a credit of S$2.5 million in FY2015. The charge was a result of a partial impairment on the goodwill arising from the acquisition of Integrated Manufacturing Technologies Inc (S$1.6 million), inventory provisions of S$3.7 million, S$0.8 million of inventory written off, partially offset by exchange gain of S$1.2 million resulting from the appreciation of USD against SGD during the year.

In FY2016, the management assessed the recoverability of the investment in Integrated Manufacturing Technologies Inc ("IMT-US"). In view of the underperformance of the company, a goodwill impairment of S$1.6 million was calculated based on the recoverable amounts of IMT-US, value in use calculation using forecast earnings and cash flows at that time. The additional inventory provision made was in accordance to the Group's inventory provision policy.

In line with the lower profit, income tax expense has also decreased. The higher effective tax rate in FY2016 when compared to that of FY2015, was mainly due to lower PIC tax benefits claimed in FY2016 as compared to FY2015.

As a result of the above, UMS recorded a net profit of S$22.6 million for FY2016, a 34% decrease from S$34.3 million in FY2015.

Cashflow

Although profitability had declined in FY2016 compared to FY2015, the Group generated comparable cash flows. The Group generated a positive operating cash flow of S$33.9 million and free cash flow of S$31.2 million, as compared to S$35.8 million and S$31.3 million respectively in FY2015. The Group was able to generate comparatively high cash flow mainly because many expenses recorded in the income statement were non-cash in nature.

As of 31 December 2016, after paying dividend of S$25.7 million, the Group achieved net cash and cash equivalents of S$42.6 million, surpassing last year's record of S$38.9 million.

As with the preceding years, the Group believes its ability to continue maintaining strong free cash flow will give it the necessary balance sheet strength to perform merger and acquisition activities as well as to undertake new projects as and when suitable opportunity arises.

Dividend for FY2016

In view of the Group's healthy performance and in recognition of shareholders' support of the Group, the Board has proposed a final dividend of 2.0 Singapore cents per ordinary share (tax-exempt one-tier) and special dividend of 1.0 Singapore cent per ordinary share (tax-exempt one-tier), bringing the total dividend declared and proposed for FY2016 to 6.0 Singapore cents per share. This includes dividends of 1.0 Singapore cent per ordinary share already paid out in each of the preceding quarters from 1Q2016, 2Q2016 and 3Q2016.