I talked about UMS latest full year results a day ago. I have to update that I may have missed out on a pretty important piece of information.
“UMS 4Q2012 gross material margin declined to 41% from 54% in 4Q2011. This decline in margin was mainly due to inventory adjustment made during the quarter as well as UMS extending price discount on some products lines. The price discount was made in return for a 5 year contract extension of the Semicon Integrated System business with a key customer”.
Gross Material Margin = (Revenue – COGS)/Revenue
COGS = (Change in inventory + Raw material purchases and sub-contractors charges)
Simply put, taking out the impairment, exchange differences and one time gain, the result is even worse.
I believe we can bear that this industry is not always smooth sailing, but what I missed out was probably a severe impairment to margins.
If it’s a negotiated 5 year contract with AMAT to supply at a lower margins, that would likely mean UMS having to deliver more to make up for the current cash flow.
In that situation, this would make current estimation of cash flow look very different from mine a few days ago.
It will also make my purchase price look a tad unsafe.
Simply put, I have email the IR to see if they are miscommunicating this. And my positions will change based on what they reveal.
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