ChipMOS TECHNOLOGIES INC. — FY 2017 Form 20-F
Filing and period: Annual report filed April 19, 2018, covering the fiscal year ended December 31, 2017. It is not a standalone 2017 Q4 report; quarterly Q4 results are not clearly provided in the filing text. Financial statements are prepared under IFRS in New Taiwan dollars (NT$); U.S. dollar amounts are convenience translations.
Business context and reporting period
ChipMOS provides semiconductor assembly and test services, display-driver assembly and test, and wafer bumping. Its principal operations are in Taiwan. In March 2017, it sold a 54.98% stake in ChipMOS Shanghai and retained 45.02%; Shanghai became an equity-method associate rather than a consolidated subsidiary. The 2017 results therefore include discontinued-operation results and a disposal gain, which materially affect the year’s reported profit.
Financial and operating metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | NT$17,940.9 million (US$605.3 million) | NT$18,387.6 million |
| Gross profit / margin | NT$3,237.1 million / 18.0% | NT$3,642.1 million / 19.8% |
| Operating profit / margin | NT$2,239.9 million / 12.4% | NT$1,998.6 million / 10.9% |
| Profit before tax | NT$1,532.4 million | NT$1,700.4 million |
| Continuing-operations profit attributable to Company shareholders | NT$981.9 million | NT$1,829.3 million |
| Total profit for the year | NT$2,796.9 million | NT$1,401.2 million |
| Operating cash flow | NT$4,157.3 million | NT$3,688.0 million |
| Capital expenditures | NT$4,849.3 million | NT$4,691.0 million |
Total 2017 profit includes NT$1,815.0 million from discontinued operations, principally the NT$1,843.2 million gain on disposal and remeasurement of the retained ChipMOS Shanghai investment, partly offset by the unit’s operating loss. The recurring continuing-operations result was substantially lower than total reported profit.
- Cash and liquidity: Cash and cash equivalents were NT$8,035.7 million at year-end, compared with NT$7,571.4 million in 2016. Current assets were NT$14,201.0 million and current liabilities NT$6,943.0 million. Operating, investing and financing cash flows were respectively NT$4,157.3 million, negative NT$3,493.4 million and negative NT$550.8 million; exchange-rate effects were negative NT$38.6 million.
- Debt: Bank debt was approximately NT$10,611 million, comprising NT$9,642 million of long-term loans (including current maturities) and NT$969 million of short-term loans. All outstanding debt was variable-rate; the reported long-term loan rate was 1.7895%. NT$7,175 million of indebtedness was secured by collateral. Management reported compliance with loan financial covenants.
- Other balance-sheet measures: Total assets were NT$33,259.9 million, equity NT$18,120.9 million and total liabilities NT$15,139.0 million. Property, plant and equipment was NT$15,265.3 million; investment in associates was NT$3,433.3 million.
- Shareholder earnings and distributions: Basic and diluted EPS were NT$3.30 and NT$3.23, respectively, including discontinued operations; continuing-operations basic EPS was NT$1.16. The 2017 distribution was NT$1.00 per share, comprising NT$0.30 dividend and NT$0.70 distribution from capital surplus.
Material changes versus FY 2016
- Revenue declined 2.4%. Memory assembly revenue fell 18%, primarily due to lower selling prices and demand; memory testing rose 10%. Logic/mixed-signal assembly rose 52%, while display-driver revenue fell 3% and bumping revenue increased 2%.
- Gross profit fell NT$405 million and gross margin declined 1.8 percentage points. Memory assembly reported a gross loss of NT$93.3 million and a negative 2.1% segment margin, compared with positive gross profit of NT$346.2 million and a 6.6% margin in 2016.
- Operating profit increased despite lower gross profit, supported in part by other operating income of NT$692.8 million, including NT$486.9 million of insurance compensation and NT$132.8 million of gains on property disposals. Research and development expense increased 18% to NT$985.9 million; general and administrative expense decreased 22% to NT$639.8 million.
- Profit before tax decreased 10%. Higher tax expense (NT$550.5 million versus NT$177.1 million) and other non-operating expenses of NT$490.2 million—including foreign-exchange losses and losses from associates—reduced continuing-operations profit.
- Total profit increased largely because of the ChipMOS Shanghai disposal gain. The sale generated cash consideration of NT$2,230.5 million; the company also invested NT$1,373.5 million in the associate during 2017.
Outlook, risks and unusual items
- The filing gives no numerical revenue or earnings guidance. Management describes continued investment in advanced assembly, testing and bumping technologies, with 2018 R&D priorities including WLCSP, MEMS, fingerprint-sensor and flip-chip products, 300mm wafer bumping and manufacturing-yield improvements.
- Management expected cash, operating cash flow and available credit facilities to cover capital spending and other needs through the end of 2018, while cautioning that economic conditions could impair forecasting. Capital commitments for property, plant and equipment were NT$2,178.3 million at year-end.
- On March 15, 2018, the board approved a proposed 15% capital reduction, with an indicated return of approximately NT$1.50 per common share or NT$30 per ADS, subject to shareholder and regulatory approval.
- Key risks include semiconductor cyclicality and pricing pressure, high fixed costs and capacity utilization, memory-market exposure, concentration among major customers (top five represented 61% of 2017 revenue), and debt and variable-rate exposure. A 1 percentage-point interest-rate increase was estimated to raise annual interest expense by about NT$106 million.
- Other risks include foreign-exchange movements, reliance on suppliers and specialized equipment, Taiwan/China political and regulatory conditions, natural disasters, environmental compliance, and uncertainty around the performance of ChipMOS Shanghai as an associate. The filing also discusses ROC technology-transfer regulation; company counsel viewed the approved arrangements as compliant, but the filing notes interpretive uncertainty.
- Auditors issued an unqualified opinion on the IFRS financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2017. No material litigation was reported for 2017 or as current at filing.
Important facts for investors to verify
- Separate recurring continuing-operations earnings from the one-time ChipMOS Shanghai disposal and remeasurement gain when assessing 2017 profitability.
- Review the causes and expected persistence of the negative gross margin in memory assembly, and the decline in overall gross margin.
- Confirm the status and cash impact of the proposed 15% capital reduction, including required shareholder and regulatory approvals.
- Assess refinancing and covenant risk, variable-rate debt exposure, collateral pledged, and availability/expiry of undrawn credit facilities.
- Monitor the associate’s results: ChipMOS Shanghai reported a 2017 loss of NT$348.5 million, while ChipMOS recorded its share of associate losses.
- Check subsequent-period results and disclosures against the filing’s assumptions on customer demand, utilization, pricing, capital commitments and 2018 liquidity.