ASX

Business Context and Reporting Period

Company: Advanced Semiconductor Engineering, Inc. (ASE)

Filing Type: Form 6-K (Report of Foreign Private Issuer)

Reporting Period: Three months ended March 31, 2014 (Q1 2014)

Business Overview: ASE is a leading provider of semiconductor packaging, testing, and electronic manufacturing services (EMS). The company operates globally with significant facilities in Taiwan, China, and other regions. The financial statements are prepared in accordance with Taiwan-IFRS and reviewed by Deloitte & Touche.

Key Financial Metrics (Q1 2014)

Note: US$ amounts are translated at the rate of NT$30.45 to US$1.00 as of March 31, 2014.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by 13.5% year-over-year, driven primarily by a 30.4% surge in EMS revenues and a 7.3% increase in packaging revenues.
• Profitability Expansion: Net profit attributable to owners rose 54.1% to NT$3.44 billion. Operating margin improved to 9.2% from 7.5% in the prior year.
• Margin Improvement: Gross margin expanded to 18.9% from 17.2%, largely due to stronger growth in the higher-margin packaging segment and reduced raw material costs as a percentage of revenue.
• Non-Operating Impact: Net non-operating expenses increased significantly (from NT$444M to NT$786M) due to valuation losses on derivative contracts and foreign exchange losses, offsetting some operational gains.
• Balance Sheet: Cash and cash equivalents increased significantly to NT$43.6 billion. Total debt remained relatively stable, with a slight decrease in short-term borrowings offset by long-term borrowings.

Outlook, Risks, and Contingencies

• Recent Monthly Results: Unaudited revenues for April and May 2014 were NT$19.0 billion and NT$20.1 billion, respectively, suggesting continued momentum.
• Environmental Contingency: In December 2013, the Kaohsiung Environmental Protection Bureau suspended operations at the K7 Plant's wafer-level process and imposed a fine of NT$110 million due to an accidental wastewater discharge. The company filed an administrative appeal in January 2014. Trial operations were approved to resume in April 2014. A criminal case regarding the violation is pending in the Kaohsiung District Court.
• Financial Risk Management: The company utilizes derivative instruments to hedge foreign currency and interest rate risks. A 1% fluctuation in USD/JPY against NT$/CNY could impact pre-tax profit by approximately NT$28 million.
• Capital Commitments: Outstanding commitments to purchase property, plant, and equipment were approximately NT$12.6 billion as of March 31, 2014.

Investor Verification Checklist

• Environmental Litigation Status: Verify the final outcome of the administrative appeal and the criminal case regarding the K7 Plant wastewater incident to assess potential future fines or operational restrictions.
• Derivative Valuation: Review the specific composition of the NT$786 million non-operating loss to understand the sensitivity of future earnings to foreign exchange rate fluctuations and derivative contract performance.
• Real Estate Exposure: Confirm the progress and profitability of the real estate business segment, which holds significant inventory (NT$20.8 billion) and contributes to the "Others" segment.
• Debt Covenants: Ensure continued compliance with financial covenants (current ratio, debt ratio, interest coverage) required by syndicated bank loans and bond agreements.
• Segment Mix: Monitor the sustainability of the EMS revenue growth (up 30.4%) given its lower gross margin (9.4%) compared to packaging (22.8%), and its impact on overall profitability.