ASX

SEC Filing Summary: Advanced Semiconductor Engineering, Inc. (ASE)

Business Context and Reporting Period

This Form 6-K, filed on September 7, 2011, presents the reviewed consolidated financial statements for Advanced Semiconductor Engineering, Inc. (ASE) and its subsidiaries for the six months ended June 30, 2011, compared to the same period in 2010. ASE is a leading provider of IC packaging, testing services, and electronic manufacturing services (EMS). The financial statements are prepared in accordance with accounting principles generally accepted in the Republic of China (ROC) and have been reviewed, not audited, by Deloitte & Touche.

Key Financial Metrics (Six Months Ended June 30, 2011)

Note: Debt figures include short-term borrowings, current portion of long-term loans, and long-term bank loans. US$ amounts are translated at NT$28.79 = US$1.00.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 9.9% year-over-year, driven by a full six months of EMS revenue from the USI acquisition (compared to only five months in 2010) and higher sales volumes in packaging and testing due to improved market conditions.
• Margin Compression: Gross margin declined from 20.8% to 19.1%. This was primarily due to higher raw material costs as a percentage of revenue (47.3% vs. 46.7%) and increased depreciation/amortization expenses (11.6% vs. 10.3%) resulting from equipment acquisitions in late 2010.
• Operating Income Decline: Despite revenue growth, operating income fell 10.3% to NT$9.0 billion. This was caused by the gross margin decline and a 15.9% increase in operating expenses, specifically Research & Development (up 16.5%) and General & Administrative expenses (up 14.5%), largely due to increased headcount and share-based compensation.
• Non-Operating Performance: The company shifted from a net non-operating expense of NT$585.8 million in 2010 to a net non-operating income of NT$837.2 million in 2011. This improvement was driven by a significant increase in dividend income (NT$595.9 million vs. NT$8.7 million) and net foreign exchange gains.
• Net Income: Net income attributable to shareholders decreased 4.9% to NT$7.6 billion, impacted by an 83.8% increase in income tax expense due to higher pre-tax income, capital gains tax from internal restructuring, and undistributed earnings tax.

Outlook, Risks, and Contingencies

• Capital Structure: In June 2011, the Board resolved to issue NT$8 billion in 5-year secured bonds to improve financial structure. Registration was approved in August 2011.
• Dividends: The Board resolved to distribute cash dividends of NT$0.65 per share and stock dividends of NT$1.15 per share on 2010 earnings, payable in September 2011.
• Legal Contingency: ASE is involved in patent infringement litigation filed by Tessera Inc. in the U.S. (California Litigation). Proceedings are currently stayed pending a final resolution of an investigation by the U.S. International Trade Commission (ITC). The financial impact cannot be estimated at this time.
• Commitments: As of June 30, 2011, the company had commitments to purchase machinery and equipment of approximately NT$6.76 billion and construction commitments of NT$3.62 billion.

Investor Verification Checklist

• Margin Sustainability: Verify if the decline in gross margin (19.1%) is a temporary result of the EMS business mix or a structural shift due to rising raw material costs.
• Debt Servicing: Confirm the company's ability to service its total debt load of ~NT$63 billion, particularly given the significant refinancing activity and new bond issuance.
• Legal Exposure: Monitor the status of the Tessera Inc. patent litigation and the ITC investigation for potential future liabilities.
• USI Integration: Assess the full-year contribution of the USI acquisition to the EMS segment, as the 2010 comparison period was incomplete.
• Tax Efficiency: Review the impact of the increased income tax expense (83.8% rise) on future profitability, specifically regarding undistributed earnings tax and restructuring costs.