Business context and reporting period
Advanced Semiconductor Engineering, Inc. (ASE), the operating company associated with ASE Technology Holding Co., Ltd., filed this Form 20-F for the fiscal year ended December 31, 2017. It reports under IFRS in New Taiwan dollars (NT$); U.S. dollar figures are convenience translations. ASE provides semiconductor packaging and testing, electronic manufacturing services (EMS), and other services. The filing is annual, but includes unaudited fourth-quarter revenue and gross-profit data.
Financial performance and position
Unless otherwise stated, amounts below are NT$ millions. 2016 comparative figures were retrospectively adjusted where indicated.
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | 290,441 | 274,884 | +5.7% |
| Gross profit / margin | 52,732 / 18.2% | 53,187 / 19.3% | -0.9% / -1.1 percentage points |
| Operating profit / margin | 25,327 / 8.7% | 25,860 / 9.4% | -2.1% / -0.7 percentage points |
| Profit attributable to owners | 22,819 | 21,324 | +7.0% |
| Diluted EPS per common share | NT$2.60 | NT$2.33 | — |
Revenue growth was led by EMS, up 16.1% to NT$133,948 million; packaging rose 0.8% to NT$126,225 million, while testing fell 3.2% to NT$26,157 million. EMS represented 46.1% of revenue. Its lower margin and higher raw-material intensity contributed to the decline in consolidated gross margin. EMS gross margin improved to 10.1% from 9.7%; packaging margin was 22.8% in both years, while testing margin declined to 35.6% from 36.9%.
Profit for the year, including non-controlling interests, was NT$24,497 million (US$826.5 million). Net non-operating income increased to NT$5,694 million, including a NT$5,589 million gain on disposal of a subsidiary, KSDY, a real-estate business. The disposal gain is an important non-recurring contributor to reported earnings.
| Fourth-quarter metric | Q4 2017 | Q3 2017 | Q4 2016 |
|---|---|---|---|
| Revenue | 83,986 | 73,878 | 77,129 |
| Gross profit | 14,794 | 13,848 | 15,375 |
| Gross margin | 17.6% | 18.7% | 19.9% |
Q4 revenue increased approximately 13.7% quarter over quarter and 8.9% year over year, driven notably by EMS, but gross margin contracted against both comparisons. The filing does not provide a clear quarterly operating-profit, net-profit, or cash-flow value.
- Operating cash flow was NT$47,431 million, down from NT$52,108 million in 2016. Investing cash outflow was NT$16,086 million; financing cash outflow was NT$19,323 million.
- Capital expenditures for property, plant and equipment were NT$23,678 million; cash payments for property, plant and equipment were NT$24,699 million. Year-end commitments for capital expenditures were NT$7,019 million.
- Cash and cash equivalents were NT$46,078 million; current financial assets were NT$5,312 million. Working capital was NT$36,562 million, based on current assets of NT$144,938 million and current liabilities of NT$108,377 million.
- Total debt was NT$76,905 million, comprising NT$17,963 million of short-term debt and NT$58,943 million of long-term debt, including its current portion. Debt was lower than the prior year. Total liabilities fell to NT$162,612 million from NT$191,089 million.
- Dividends paid in 2017 were NT$11,214 million; the dividend reported per common share for 2017 was NT$1.40. The company cautions that future dividends are not assured.
Material changes and management commentary
- Management attributed higher annual revenue chiefly to increased outsourced EMS orders for consumer and communications products. Testing revenue weakened with softer end-market demand.
- Raw materials rose to 49.2% of revenue from 45.5%, reflecting the larger EMS contribution. Depreciation, amortization and rental expense declined as a share of revenue to 9.5% from 10.3%.
- Operating cash flow declined, partly because of reduced trade payables. Investment cash outflow was lower than in 2016, including NT$7,021 million of proceeds from subsidiary disposals.
- ASE held a 33.29% equity-method interest in SPIL at year-end and did not control it. A proposed share exchange to place ASE and SPIL under ASE Holding received required shareholder approvals and conditional PRC approval; the filing said completion was expected on April 30, 2018, subject to remaining conditions. The transaction entails regulatory, integration, operating-separation and potential holding-company-discount risks.
- ASE entered a Qualcomm joint-venture agreement in February 2018 to expand SiP activity. In March 2018, its board approved acquiring the remaining 40% of ASEN for US$127.1 million.
- Management said cash, marketable securities, forecast operating cash flow and available credit lines were expected to cover capital expenditures, working capital, debt and lease obligations for at least 12 months. No specific total 2018 capital-expenditure forecast is provided; planned spending includes capacity equipment, and environmental capital expenditures were estimated at approximately US$13.3 million.
Guidance, risks, contingencies and unusual items
- The filing gives no specific revenue or earnings guidance. Management emphasizes semiconductor cyclicality, pricing pressure, capacity utilization, customer concentration, competition, technology investment needs, and raw-material availability and costs.
- Foreign-exchange exposure is significant because much revenue is in U.S. dollars while costs and debt span several currencies. ASE reported a 2017 net foreign-exchange gain of NT$3,503 million, versus a gain of NT$1,928 million in 2016; future results may differ.
- ASE reported no breach of debt covenants at December 31, 2017, but warns that restrictive covenants and cross-default provisions could limit liquidity if breached. It had NT$174,235 million of unused credit lines.
- Environmental proceedings related to K7 wastewater allegations included a Supreme Administrative Court order in June 2017 requiring refund of the NT$102 million fine. A separate NT$3 million criminal penalty had been overturned and the company found not guilty. The filing warns that future claims, penalties, or operational suspensions could still be costly.
- A criminal proceeding involving COO and director Tien Wu concerning alleged insider trading related to SPIL remained unresolved; a civil action seeking his removal from ASE’s board was filed in February 2018.
- ASE recognized NT$765 million of impairment charges in 2017, including NT$425 million of goodwill impairment associated with weaker-than-forecast revenue growth in the “other” segment. Total comprehensive income was also reduced by NT$4,638 million of other comprehensive loss, largely reflecting foreign-operation translation effects.
- New standards adopted in 2018 were expected to change presentation: IFRS 15 was expected to shift packaging and testing revenue recognition to over time, with an estimated NT$522 million increase in retained earnings at initial adoption; IFRS 9 was expected to increase retained earnings by NT$364 million. The filing says IFRS 16, effective in 2019, was not expected to have a material accounting impact.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of year-end. The auditor relied on SPIL’s other auditor for the equity-method investment and earnings amounts.
Most important facts for investors to verify
- Whether the proposed ASE–SPIL share exchange closed as expected, and the final terms, regulatory restrictions and resulting structure of ASE Technology Holding.
- How much of 2017 attributable-profit growth depended on the NT$5,589 million subsidiary-disposal gain, currency movements and other valuation items.
- Whether the Q4 margin decline continued, and whether EMS growth can sustain profitability given its high material costs and lower margins.
- Debt maturities, covenant headroom, available credit facilities and the repayment of the NTD-linked convertible bonds that matured in March 2018.
- Developments in the Tien Wu proceeding and environmental matters, including receipt of the ordered wastewater fine refund.
- The actual effects of IFRS 9 and IFRS 15 adoption on reported revenue, working capital and earnings comparability.