TAIWAN SEMICONDUCTOR MANUFACTURING CO LTD annual report, Q4 FY2018

Business context and reporting period

TSMC’s Form 20-F is an annual report for the fiscal year ended December 31, 2018, prepared under IFRS as issued by the IASB. Although the request specifies 2018 Q4, this filing reports full-year results and does not provide a clear standalone Q4 financial summary. TSMC operates a semiconductor foundry business; it estimated a 56% share of the worldwide foundry revenue market in 2018. The financial statements received an unqualified audit opinion.

Financial performance and position

Amounts below are in NT$ unless noted; U.S. dollar translations are for convenience.

At year-end, total assets were NT$2,090.0bn, current assets NT$951.7bn, current liabilities NT$356.8bn, and total liabilities NT$428.9bn. Interest-bearing debt comprised NT$88.8bn of short-term loans and NT$91.8bn of bonds, including NT$34.9bn of current maturities. Total equity was NT$1,661.1bn. Cash dividends paid for 2018 were NT$8 per common share, or NT$207.4bn in total.

Material changes versus the prior comparable period

• Revenue growth reflected higher wafer shipments (+2.9%) and a higher average selling price (+2.5%), partly offset by NT-dollar appreciation. Shipments reached 10.8 million 12-inch-equivalent wafers, versus 10.4 million in 2017.
• Profitability weakened at the gross and operating levels: management attributed the lower gross margin to lower utilization, product mix and exchange rates. Higher silicon-wafer prices also weighed on gross margin. Operating expenses rose 3.9%, including R&D spending up 6.4% to NT$85.9bn.
• Net income grew despite slightly lower operating income, supported in part by higher non-operating income and lower income tax expense. The 2018 tax expense fell to NT$34.4bn from NT$51.1bn, reflecting tax-law changes and tax benefits, partly offset by the higher corporate tax rate.
• Advanced nodes gained weight: 7nm contributed 9% of wafer revenue, 10nm 11%, and technologies at 28nm and below 63%, up from 58% in 2017. Computer-application revenue rose 61%, primarily due to cryptocurrency-mining demand; communication remained the largest application at 56.1% of revenue.
• China rose to 17.0% of revenue from 11.3%; North America remained the largest customer-headquarters region at 61.8%. The geographic and application breakdowns use a revised allocation method, with prior-year classifications restated for comparison.

Outlook, management commentary, risks and unusual items

• TSMC expected 2019 capital expenditures of US$10bn–US$11bn, primarily for 7nm and 5nm capacity, advanced packaging, mask operations, Fab 15 facilities, Fab 18 and R&D. Plans were preliminary and subject to market conditions; funding was expected primarily from operating cash flow.
• TSMC commenced 7nm volume production in 2018, was transferring 7nm Plus toward manufacturing, and expected 5nm risk production in 2019. It planned continued investment in advanced-node and mature-process R&D.
• Management expected cryptocurrency-mining demand to slow significantly in 2019 versus 2018. Semiconductor cyclicality, overcapacity, utilization, pricing pressure and fixed manufacturing costs could affect revenue and margins.
• A computer-virus outbreak in August 2018 disrupted certain Taiwan fab tools and shipments; TSMC recognized NT$2.596bn of cost-of-revenue losses. It reported remediation actions, with further cybersecurity enhancements ongoing.
• In January 2019, TSMC discovered contamination from unqualified photoresist materials. It recognized an estimated NT$3.4bn loss in Q1 2019; the filing said the issue was expected to negatively affect gross and operating margins.
• Key exposures include customer concentration (the largest customer represented 22% of 2018 revenue; the ten largest represented 68%), foreign exchange, supplier and equipment availability, trade tensions, competition, power and water constraints, and natural disasters. A 10% adverse currency move was estimated to reduce 2018 net income by NT$506mn after hedges.
• The European Commission’s preliminary inquiry into alleged anticompetitive practices remained unresolved. In February 2019, IFT filed U.S. patent-infringement complaints and the ITC instituted an investigation; TSMC could not reliably estimate potential liability. No material off-balance-sheet arrangements were reported.
• IFRS 9 and IFRS 15 were adopted in 2018; management reported no material effect of IFRS 15 on 2018 revenue. IFRS 16 was expected to add about NT$20.1bn of right-of-use assets and lease liabilities on January 1, 2019.

Important facts for investors to verify

• Review subsequent quarterly results for the full financial impact of the photoresist contamination and the pace of recovery in yields and margins.
• Track utilization, wafer shipments, pricing and advanced-node mix, especially 7nm/5nm ramp costs and the decline in cryptocurrency-mining demand.
• Assess whether the planned US$10bn–US$11bn 2019 capex is supported by demand and operating cash flow, and monitor capital-purchase commitments of NT$329.1bn.
• Monitor customer concentration, China exposure, currency sensitivity and key supplier dependencies, including silicon wafers.
• Follow the European Commission inquiry, IFT/ITC patent proceedings, and potential impacts from trade, power, water and Taiwan regional risks.