United Microelectronics Corporation: FY2019 Form 20-F Summary
Business and reporting period. UMC is a Taiwan-based semiconductor foundry that manufactures wafers to customer designs, with operations in Taiwan, Singapore, China and Japan. This is an audited annual report for the fiscal year ended December 31, 2019, not a standalone fourth-quarter report. Financial statements are prepared under IFRS as issued by the IASB; amounts below are in NT$ unless stated otherwise. The independent auditor issued an unqualified opinion.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | NT$148.2bn (US$4.95bn) | NT$151.3bn |
| Gross profit / margin | NT$21.3bn / 14.4% | NT$22.8bn / 15.1% |
| Operating income / margin | NT$4.9bn / 3.3% | NT$5.7bn / 3.8% |
| Net income, consolidated | NT$4.6bn | NT$3.2bn |
| Net income attributable to parent shareholders | NT$8.2bn | NT$7.7bn |
| Basic / diluted EPS | NT$0.71 / NT$0.65 | NT$0.65 / NT$0.60 |
| Operating cash flow | NT$54.9bn | NT$50.9bn |
| Capital expenditures | NT$17.8bn | NT$19.6bn |
| Cash and cash equivalents at year-end | NT$95.5bn | NT$83.7bn |
| Total assets / liabilities / equity | NT$366.3bn / NT$163.3bn / NT$202.9bn | NT$362.6bn / NT$158.2bn / NT$204.4bn |
Parent-attributable earnings exceed consolidated net income because non-controlling interests recorded a NT$3.6bn loss in 2019. Cash flow from investing activities was negative NT$31.7bn, including NT$16.5bn for property, plant and equipment and NT$12.8bn net cash paid to acquire a subsidiary. Financing activities used NT$9.9bn. Cash increased NT$11.8bn during the year.
At year-end, short-term loans were NT$12.0bn, bonds payable NT$38.8bn and long-term loans NT$33.9bn (including current portions). Lease liabilities were NT$6.0bn following adoption of IFRS 16. UMC reported NT$64.2bn of unused short-term credit lines. Current assets of NT$153.8bn exceeded current liabilities of NT$73.0bn.
Changes versus prior comparable periods
- Revenue declined 2.0% from 2018. Wafer shipments rose 1.1%, but average selling price fell 2.9%; management also cited lower other operating revenue and currency effects.
- Gross margin fell 0.7 percentage points and operating margin fell 0.5 points, reflecting price erosion and lower utilization. Average capacity utilization declined to 88.7%, from 93.1% in 2018 and 94.4% in 2017.
- Parent-attributable net income rose 6.2% to NT$8.2bn. Consolidated net income rose to NT$4.6bn from NT$3.2bn, partly reflecting improved non-operating results and a NT$171.6m bargain-purchase gain on USJC.
- Non-operating loss narrowed sharply to NT$77m from NT$3.6bn in 2018. Other comprehensive income was NT$2.8bn, including unrealized investment gains, partly offset by foreign-currency translation losses.
- Operating cash flow increased to NT$54.9bn. Capital spending was below 2018, while the acquisition of USJC raised investing cash outflows.
Outlook, commentary, risks and unusual items
- UMC said it expected existing cash and short-term investments to cover working capital and capital expenditure needs at least through the end of 2020. It planned to moderate leading-edge capacity expansion and focus on broadening logic and specialty-technology offerings. The filing does not provide quantified revenue or earnings guidance.
- The board proposed a dividend of approximately NT$0.75 per share for 2019 earnings, subject to shareholder approval. The reported 2019 dividend of NT$0.5899 per share relates to the prior approved distribution.
- UMC acquired the remaining 84.1% of Japan-based USJC on October 1, 2019 for JPY54.4bn. USJC contributed NT$4.3bn of revenue and NT$305m of pretax profit after acquisition. Integration costs, fab yields, customer retention and realization of expected synergies remain execution risks.
- UMC disclosed ongoing Taiwan and U.S. proceedings concerning alleged Micron trade-secret misappropriation, the DOJ indictment and related U.S. export restrictions, as well as a U.S. shareholder class action. The criminal proceedings were ongoing and the civil complaint stayed; UMC said outcomes and potential impacts could not be assessed. The company reported significant legal costs and potential further costs or penalties.
- COVID-19 was identified as a subsequent-event risk that could affect 2020 operations, demand and supply chains; the extent of impact was uncertain. UMC also disclosed a February 2020 subsidiary resolution for a staged USCXM investment of RMB3.5bn.
- Other key exposures include semiconductor cyclicality and pricing pressure, customer concentration (top ten customers represented 51.3% of 2019 revenue), competition and capacity utilization, foreign exchange, Taiwan-China geopolitical risk, climate-related energy and water costs, and manufacturing disruption from natural disasters or utility interruptions.
- Unusual reporting considerations include adoption of IFRS 16 leases in 2019 and USJC’s inclusion in the consolidated statements while its internal controls were excluded from management’s and the auditor’s 2019 internal-control assessment. Management and the auditor nevertheless concluded that internal control over financial reporting was effective in all material respects, subject to that scope exclusion.
Important facts for investors to verify
- Review wafer ASP, shipment growth, utilization and gross-margin trajectory; these drove the decline in 2019 operating performance.
- Reconcile consolidated net income with parent-attributable income and assess the recurring versus nonrecurring contributions, including non-controlling interests, investment gains and the USJC bargain-purchase gain.
- Check debt maturities and refinancing needs, including NT$20.1bn of bonds and NT$4.7bn of long-term loans classified as current at year-end, against cash, credit facilities and planned investment.
- Track USJC integration, utilization, customer retention and profitability, and the outcome and funding of the planned USCXM investment.
- Monitor developments in the Micron/DOJ matters and shareholder litigation, including potential legal costs, penalties, operating restrictions and customer effects.
- Confirm shareholder approval and payment of the proposed NT$0.75 dividend, and monitor COVID-19 impacts and subsequent 2020 disclosures.