TSMC 2017 Form 20-F Summary
Business context and reporting period
Taiwan Semiconductor Manufacturing Company Limited (TSMC) is a dedicated semiconductor foundry. This is its annual report for the fiscal year ended December 31, 2017, not a standalone fourth-quarter filing. Financial statements are prepared under IFRS as issued by the IASB; amounts are primarily in New Taiwan dollars (NT$). U.S. dollar figures are convenience translations.
Financial and operating metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net revenue | NT$977,447 million (US$32,977 million) | NT$947,938 million |
| Gross profit / margin | NT$494,826 million / 50.6% | NT$474,832 million / 50.1% |
| Operating income / margin | NT$385,559 million / 39.4% | NT$377,958 million / 39.9% |
| Net income | NT$345,039 million; parent-attributable NT$344,998 million | NT$331,797 million; parent-attributable NT$331,714 million |
| Basic and diluted EPS | NT$13.30 per share; NT$66.52 per ADS | NT$12.79 per share; NT$63.96 per ADS |
| Operating cash flow | NT$585,318 million | NT$539,835 million |
| Capital expenditures | NT$330,588 million | NT$328,045 million |
| Cash and cash equivalents at year-end | NT$553,392 million | NT$541,254 million |
| Current assets / current liabilities | NT$857,203 million / NT$386,890 million | NT$817,729 million / NT$348,286 million |
| Debt at year-end | NT$63,767 million short-term loans; NT$150,201 million bonds | NT$57,958 million short-term loans; NT$191,229 million bonds |
Cash, cash equivalents and short-term marketable securities totaled NT$649,358 million at year-end 2017. The current ratio was approximately 2.2. Operating, investing and financing cash flows were NT$585,318 million, negative NT$336,165 million and negative NT$215,698 million, respectively. Cash increased NT$12,138 million. The company reported NT$7.00 cash dividends per share paid for 2017 and proposed a further NT$8.00 per share, subject to shareholder approval.
Material changes versus the prior comparable period
- Revenue increased 3.1%, while wafer shipments rose 8.8% to about 10.4 million 12-inch-equivalent wafers. Management attributed the slower revenue growth partly to NT-dollar appreciation against the U.S. dollar.
- Net income increased 4.0%; operating income increased 2.0%. Gross margin improved 0.5 percentage point, but operating margin declined 0.5 point as operating expenses rose 11.3% and R&D expense rose 13.4%.
- Advanced technologies at 28-nanometers and below accounted for 58% of wafer revenue, versus 54% in 2016. 10-nanometer products contributed 10% of wafer revenue.
- Operating cash flow increased NT$45,483 million. Investing cash outflow fell from 2016, while financing cash outflow increased, chiefly reflecting dividends and bond repayments.
- Total liabilities declined to NT$497,285 million from NT$526,451 million; property, plant and equipment increased to NT$1,062,543 million.
Outlook, management commentary, risks and unusual items
- TSMC expected 2018 capital expenditures of US$10.5–11 billion, primarily for capacity and facilities supporting 7-nanometer and more advanced processes, Fab 15 and Fab 18, R&D, backend and mask operations. The plan was preliminary and subject to market conditions; funding was expected mainly from operating cash flow. No specific revenue or earnings guidance is provided in the filing text.
- Management said silicon-wafer price increases reduced 2017 gross margin and were expected to continue in 2018. New 10-nanometer products diluted 2017 gross margin by about 2 percentage points.
- Key exposures include semiconductor cyclicality and overcapacity, pricing and utilization, competition and technology execution, customer concentration, raw-material and equipment availability, foreign exchange, and Taiwan water, electricity and natural-disaster risks. The largest customer generated 22% of 2017 revenue; the ten largest generated 67%. The ten largest represented 70% of accounts receivable at year-end.
- The NT-dollar appreciation contributed to a net foreign-exchange loss of NT$1,510 million. TSMC stated that a 1% U.S.-dollar depreciation against the NT dollar would reduce operating margin by approximately 0.4 percentage point based on 2017 results.
- Unusual items included a NT$1,098 million disposal loss on obsolete equipment, a NT$14 million goodwill impairment, and NT$28,822 million of other comprehensive loss, mainly reflecting foreign-operation translation differences. In 2016, an earthquake caused NT$2,492 million of losses net of insurance; a further NT$105 million reduction was recognized in 2017 after the claim was finalized.
- The European Commission requested information in September 2017 concerning alleged anti-competitive practices in semiconductor sales; the matter was preliminary and its outcome and impact could not be predicted. A U.S. patent case brought by Uri Cohen was pending, with liability not reliably estimable. TSMC reported no other material litigation and no material off-balance-sheet arrangements.
- Chairman Morris Chang planned to retire after the June 2018 shareholders’ meeting. The disclosed succession plan called for Mark Liu to become Chairman and C.C. Wei Chief Executive Officer. Management described the leadership transition as supported by experienced executives.
- Deloitte issued an unqualified opinion on the IFRS financial statements and reported effective internal control over financial reporting as of December 31, 2017.
Important facts for investors to verify
- Confirm the annual-period scope and compare the audited 20-F figures with the company’s quarterly releases and Taiwan-IFRS filings.
- Track 2018 capex execution, 7-nanometer and 5-nanometer production ramps, utilization, and returns on expanded capacity.
- Assess whether customer concentration and demand from mobile, computing, cryptocurrency-related products and other end markets have changed.
- Monitor wafer prices, exchange-rate sensitivity, margins, and the effect of technology transitions on profitability.
- Check the status and potential financial consequences of the European Commission inquiry and the pending patent litigation.
- Verify shareholder approval and payment of the proposed NT$8.00-per-share dividend and the planned leadership transition.