CHIPMOS TECHNOLOGIES INC annual report, Q4 FY2018

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ChipMOS TECHNOLOGIES INC. — FY2018 Form 20-F

Business context and reporting period. Filed April 25, 2019; covers the fiscal year ended December 31, 2018. ChipMOS provides semiconductor assembly, testing and bumping services, primarily in Taiwan, across memory, logic/mixed-signal and display-driver products. The filing reports annual results, not standalone 2018 fourth-quarter results; Q4 values are not clearly provided. Financial statements use IFRS as issued by the IASB and are audited by PwC Taiwan, which gave an unqualified opinion.

Financial performance and position

Unless noted, figures are in NT$ millions; US$ equivalents are filing convenience translations.

  • Revenue: 18,480 (US$604), up 3.0% from 17,941 in 2017. Display-driver assembly and test revenue increased 19% to 5,695; bumping rose 9% to 3,316. Memory and logic/mixed-signal assembly declined 11% to 4,680.
  • Profit and margins: Gross profit was 3,430, up 6%; gross margin improved to 18.6% from 18.0%. Operating profit was 2,100, down 6% (11.4% operating margin versus 12.4%). Profit from continuing operations was 1,326, compared with 982 in 2017; basic EPS was NT$1.65. Total profit was also 1,326, down from 2,797 in 2017, which included a 1,843 gain on the Unimos Shanghai disposal. 2018 profit before tax was 1,782; income tax expense was 457.
  • Segment economics: Memory/logic assembly gross margin fell to 3.2% from 5.0%; LCD/display-driver margin rose to 27.2% from 25.5%; bumping improved to 3.7% from 0.6%. Testing margin declined to 33.7% from 35.8%. Overall utilization was mixed year over year: testing 77% (79% in 2017), memory/logic assembly 64% (66%), display-driver services 80% (85%), bumping 72% (69%).
  • Cash flow and investment: Operating cash flow was 4,129, slightly below 4,157 in 2017. Investing cash outflow was 5,129, including 4,946 of capital expenditures; financing cash outflow was 2,400. Cash and cash equivalents fell by 3,393 to 4,643 at year-end.
  • Liquidity and debt: Current assets were 11,888 and current liabilities 5,240 (current ratio about 2.3x). Long-term bank loans, including current portions, totaled 9,790; no short-term bank loans were outstanding at year-end. Loans were floating-rate, at 1.7895%; 8,022 of debt was secured by collateral. Management said cash, operating cash flow and available credit facilities should cover needs for the year after financial-statement issuance, while cautioning that economic uncertainty could affect forecasts. Loan covenants include a current ratio above 1.0x and debt-to-equity limits; the company reported compliance through 2018.
  • Other metrics: Total assets were 33,134 and equity 18,021. The company spent 939 on R&D (5.1% of revenue). Cash dividends were NT$0.30 per share. A roughly 15% capital reduction in November 2018 canceled shares and returned approximately 1,284 in cash to shareholders.

Material changes versus prior comparable period

  • Revenue recovery was modest and uneven: stronger display-driver and bumping activity offset weaker memory/logic assembly. Memory-related assembly and test accounted for 43% of revenue in 2018, down from 46% in 2017.
  • Gross margin recovered from 2017, but operating profit declined as other operating income fell to 148 from 693. The 2017 amount included 487 of insurance compensation and gains on asset disposals.
  • Share of losses from associates increased to 300 from 179, primarily reflecting Unimos Shanghai. ChipMOS owns 45.02% of Unimos Shanghai, which is accounted for as an associate rather than consolidated subsidiary.
  • Cash declined materially despite positive operating cash flow, reflecting investment spending, debt repayments and the capital-reduction payment. Receivables rose to 4,747 from 4,016.
  • IFRS 9 and IFRS 15 were adopted in 2018. IFRS 15 changed timing and presentation for service revenue and introduced contract assets; year-end contract assets were 300. Management’s comparison indicates IFRS 15 increased 2018 revenue by 45 and profit by 25 versus prior accounting policies.

Outlook, commentary, risks and unusual items

  • Management described a semiconductor downturn beginning in Q4 2018, worsening into the first half of 2019, and stated that the industry began recovering in Q2 2019. No quantified revenue, earnings or margin guidance is provided.
  • Management’s stated priorities include improving utilization and efficiency, developing higher-margin packaging and testing technologies, and pursuing long-term capacity agreements while serving smaller customers. It planned continued R&D and capacity investment; 2018 capital expenditures were 4,946 and contracted capital commitments at year-end were 2,509.
  • Customer concentration is significant: the top five customers generated 61% of 2018 revenue; the top three contributed 21%, 14% and 11%. Orders are generally purchase-order based, with many customers providing nonbinding rolling forecasts.
  • Key exposures include semiconductor cyclicality, pricing pressure, high fixed costs, memory/DRAM demand, customer concentration, competition, equipment and supplier availability, Taiwan geopolitical and natural-disaster risks, trade tensions, foreign-exchange movements and reliance on external financing. A 1% interest-rate increase was estimated to raise annual interest expense by about 98; a 5% NT-dollar appreciation was estimated to reduce exchange gains by about 204.
  • Other notable matters: 2018 included an accounting-policy transition under IFRS 9 and IFRS 15. After year-end, the company completed the sale of 9.1% of JMC on April 8, 2019, retaining 10%; it reported a subsequent disposal gain of about 974. No material litigation in 2018 or currently was reported. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2018.

Important facts for investors to verify

  • Obtain quarterly statements or earnings releases to assess standalone Q4 2018 performance; this annual filing does not clearly provide Q4 figures.
  • Check whether the 2019 industry recovery and utilization trends materialized, especially for memory assembly/testing and display-driver services.
  • Monitor customer concentration, order visibility, pricing and the exceptionally low 3.2% gross margin in memory/logic assembly.
  • Reconcile cash generation with capital expenditures, the capital return, debt maturities, collateral and covenant headroom; review availability and renewal of credit facilities.
  • Track Unimos Shanghai’s continued losses and funding needs, and confirm the financial and strategic effects of the JMC stake sale.
  • Assess comparability of 2018 results after IFRS 9/15 adoption and separate recurring operating performance from prior-year disposal and insurance-related gains.