ASE Technology Holding(ASX) - 2018 Q4 - Annual Report

Part I Key Information This section summarizes key financial data, emphasizing the 2018 SPIL acquisition's impact on comparability, and details various business, operational, and geopolitical risks Selected Financial Data The company's 2018 financial performance shows significant growth, with operating revenues increasing by 27.8% to NT$371.1 billion, primarily due to the SPIL acquisition, affecting comparability with prior years - ASEH was formed on April 30, 2018, through a share exchange with ASE Inc. and SPIL. The financial data for 2018 includes the results of ASE for the full year and SPIL from April 30, 2018, making it not directly comparable with prior periods which only reflect ASE's results[19][30] Selected Consolidated Financial Data (IFRS, in NT$ millions) | Indicator | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Operating revenues | 274,884.1 | 290,441.2 | 371,092.4 | | Gross profit | 53,187.2 | 52,732.3 | 61,163.0 | | Profit from operations | 25,860.1 | 25,327.2 | 27,019.3 | | Profit for the year | 22,577.9 | 24,497.1 | 27,424.3 | | Profit attributable to Owners of the Company | 21,324.4 | 22,819.1 | 26,220.7 | | Basic Earnings per common share (NT$) | 5.57 | 5.59 | 6.18 | | Total assets | 357,930.6 | 363,922.3 | 534,061.9 | | Total liabilities | 191,089.4 | 162,612.1 | 315,034.0 | Segment Operating Revenues (in NT$ millions) | Segment | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Packaging | 125,282.8 | 126,225.1 | 178,308.2 | | Testing | 27,031.8 | 26,157.3 | 35,903.2 | | Electronic manufacturing services | 115,395.1 | 133,948.0 | 151,890.4 | Risk Factors The company faces significant risks from the SPIL acquisition's financial non-comparability and antitrust issues, semiconductor industry cyclicality, intense competition, customer and supplier dependencies, high fixed costs, and geopolitical tensions - SPIL Acquisition Risks: The financial results for 2018 are not comparable to prior periods due to the SPIL acquisition. The company must also adhere to "Hold-Separate conditions" imposed by China's antitrust authority (SAMR) for 24 months, which could lead to unfavorable actions if not met[30][33][34] - Business & Market Risks: The company is highly dependent on the cyclical semiconductor industry. A slowdown in the outsourcing trend, intense competition (including from state-subsidized P.R.C. companies), and the need for continuous technological innovation pose significant risks to profitability[35][40][47] - Customer & Supplier Risks: A large portion of revenue comes from a small group of customers, with the top five accounting for 46.2% of operating revenues in 2018. The loss of a key customer could adversely affect revenues. The company also relies on a limited number of suppliers for key raw materials like IC substrates[77][83] - Operational & Financial Risks: Operations have high fixed costs, making profitability sensitive to capacity utilization rates. The company faces risks from managing its global expansion, potential environmental liabilities (such as those related to the K7 plant), and cybersecurity threats[53][55][96] - Geopolitical & Regional Risks: A substantial portion of operations are in Taiwan, making the company vulnerable to strained R.O.C.-P.R.C. relations, natural disasters, and power outages. Changes in U.S. trade policy, particularly regarding China, could also adversely affect business[130][133][147] Information on the Company This section details the company's history, business overview including semiconductor packaging, testing, and EMS, strategic focus on expanding offerings and capacity, organizational structure, and principal properties History and Development of the Company ASE Technology Holding Co., Ltd. was established on April 30, 2018, through a share exchange combining ASE and SPIL, with its ADSs listed on the NYSE, and capital expenditures in 2018 totaling NT$39.1 billion for capacity expansion - ASEH was formed on April 30, 2018, through a statutory share exchange, making ASE and SPIL its wholly-owned subsidiaries. ASEH's common shares are listed on the TWSE (3711) and its ADSs on the NYSE (ASX)[182][190][192] - The acquisition of SPIL was a multi-year process, starting with an initial tender offer in August 2015, followed by a second offer, open market purchases, and a final Joint Share Exchange Agreement in June 2016[185][186][189] Capital Expenditures (in NT$ millions) | Year | Machinery and Equipment | Building and Improvements | Total | | :--- | :--- | :--- | :--- | | 2016 | 21,978.3 | 5,702.6 | 27,680.9 | | 2017 | 19,432.9 | 4,244.8 | 23,677.7 | | 2018 | 32,575.3 | 6,516.9 | 39,092.2 | Business Overview ASEH is a leading semiconductor manufacturing services provider, focusing on expanding packaging offerings, increasing capacity, and leveraging global presence, while facing intense competition and environmental regulatory scrutiny - The company's strategy is to provide integrated solutions by expanding its range of packaging offerings (flip-chip, SiP, fan-out), strategically expanding production capacity, and leveraging its presence in key semiconductor manufacturing centers like Taiwan, P.R.C., and Korea[223][225][231] Revenue Breakdown by Service (2018) | Service | Revenue Percentage | | :--- | :--- | | Packaging | 48.1% | | Testing | 9.7% | | Electronic Manufacturing Services | 40.9% | Packaging Revenue by Technology Type | Packaging Type | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Bumping, Flip Chip, WLP and SiP | 28.6% | 29.9% | 36.1% | | IC Wirebonding | 61.4% | 59.2% | 54.0% | | Discrete and other | 10.0% | 10.9% | 9.9% | Packaging & Testing Revenue by End-Use Application (2018) | End-Use Application | Revenue Percentage | | :--- | :--- | | Communications | 49.9% | | Computing | 14.0% | | Consumer electronics/industrial/automotive/other | 36.1% | - The company faces significant competition from other independent providers and integrated device manufacturers. A key competitive threat is from TSMC's integrated fan-out (InFO) technology[327][329] - The company is subject to environmental regulations and has faced scrutiny over wastewater disposal at its K7 plant in Kaohsiung, though it was ultimately found not guilty in a criminal case and had a major fine overturned[333][334][335] Organizational Structure ASE Technology Holding Co., Ltd. serves as the parent holding company, overseeing principal manufacturing subsidiaries including ASE Inc., SPIL, and the USI Group, with a global network of other subsidiaries for packaging, testing, and materials production - The corporate structure is a holding company (ASEH) with three main operating groups: ASE Inc., SPIL, and USI Inc., each with its own set of global subsidiaries[349][350] - Key subsidiaries include ASE Test Taiwan (testing), ASE Electronics (interconnect materials), ASE Korea, ASE Japan, and multiple facilities in China (Shanghai, Suzhou, Weihai, Kunshan) for packaging and testing[351][354][356] - The USI Group, which focuses on electronic manufacturing services, underwent significant restructuring, culminating in USI Inc. becoming a direct, wholly-owned subsidiary of ASEH after a spin-off and merger process completed in January 2019[364][373] Property, Plants and Equipment The company operates numerous packaging, testing, and EMS facilities across Asia, the US, and Mexico, with key locations in Taiwan, China, Korea, and Malaysia, and has successfully overturned a major administrative fine related to its K7 plant - The company's primary packaging and testing facilities are located in Kaohsiung, R.O.C., with other significant integrated facilities in Chung Li (R.O.C.), Penang (Malaysia), Paju (Korea), and Shanghai (China)[378][379] - Following the acquisition, the company now operates SPIL's major facilities in Taichung, Changhua, and Hsinchu in Taiwan, as well as a facility in Suzhou, China[380] - The company leases land in Taiwan's export processing and science parks from government administrations, with leases expiring through 2035[381] Operating and Financial Review and Prospects This section analyzes the company's financial condition and results, highlighting the SPIL acquisition's impact on 2018 revenue growth and gross margin decline, discusses liquidity, debt structure, R&D efforts, and tabulates contractual obligations Operating Results and Trend Information Operating revenues for 2018 increased by 27.8% to NT$371.1 billion due to the SPIL acquisition, though gross margin decreased to 16.5% primarily from PPA effects and a higher mix of lower-margin EMS business Year-over-Year Financial Performance (2018 vs. 2017) | Metric | 2017 (NT$M) | 2018 (NT$M) | Change | Reason | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | 290,441.2 | 371,092.4 | +27.8% | SPIL Acquisition and growth in EMS. | | Gross Profit | 52,732.3 | 61,163.0 | +16.0% | - | | Gross Margin | 18.2% | 16.5% | -1.7pp | PPA effects and increased mix of lower-margin EMS business. | | Profit from Operations | 25,327.2 | 27,019.3 | +6.7% | - | | Net Profit (to owners) | 22,819.1 | 26,220.7 | +14.9% | Aided by lower effective tax rate. | - The decrease in gross margin for the packaging business (22.8% to 18.9%) and testing business (35.6% to 34.2%) in 2018 was primarily due to PPA effects from the SPIL acquisition, which added NT$3.2 billion to cost of goods sold[442] - The company adopted IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers) in 2018. The adoption did not have a material impact on the consolidated financial statements[398][406] Quarterly Gross Margin Trend (%) | Quarter | 2017 | 2018 | | :--- | :--- | :--- | | Q1 | 18.0% | 16.0% | | Q2 | 18.3% | 16.2% | | Q3 | 18.7% | 17.1% | | Q4 | 17.6% | 16.4% | Liquidity and Capital Resources The company maintains strong liquidity, with NT$51.1 billion in operating cash flow in 2018, utilizing significant cash for the SPIL acquisition and capital expenditures, and managing NT$198.4 billion in total debt with substantial unused credit lines Consolidated Cash Flow Summary (in NT$ millions) | Cash Flow Activity | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 52,107.9 | 47,430.8 | 51,074.7 | | Net cash from investing activities | (43,159.5) | (16,086.2) | (129,542.3) | | Net cash from financing activities | (21,087.0) | (19,323.4) | 83,111.4 | - In 2018, major uses of cash in investing activities included NT$95.2 billion for the acquisition of subsidiaries (primarily SPIL) and NT$41.4 billion for property, plant, and equipment[467] - As of December 31, 2018, the company had total debt of NT$198.4 billion, unused credit lines of NT$219.9 billion, and cash and cash equivalents of NT$51.5 billion[469][470] - In April 2018, the company entered into a NT$90.0 billion five-year syndicated credit facility to finance the SPIL Acquisition. As of year-end, NT$55.0 billion was outstanding under this facility[485] Research and Development The company's R&D efforts focus on optimizing technologies across packaging, testing, and EMS segments, with NT$15.0 billion in expenditures in 2018, representing 4.0% of operating revenues, supported by a team of 10,283 employees R&D Expenditures | Year | R&D Expense (NT$M) | % of Operating Revenues | | :--- | :--- | :--- | | 2016 | 11,391.1 | 4.1% | | 2017 | 11,746.6 | 4.0% | | 2018 | 14,962.8 | 4.0% | - R&D activities are centralized in Kaohsiung and Taichung, focusing on advanced packaging, IC substrate technology, and developing testing solutions for complex semiconductors like 3D ICs[496][497][498] - As of December 31, 2018, the company's research and development team comprised 10,283 employees[495] Tabular Disclosure of Contractual Obligations As of December 31, 2018, total contractual obligations amounted to NT$171.3 billion, predominantly long-term debt of NT$162.5 billion, with NT$20.4 billion due within one year Contractual Obligations as of December 31, 2018 (in NT$ millions) | Contractual Obligations | Total | Under 1 Year | 1 to 3 Years | 3 to 5 Years | After 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | 162,465.8 | 13,694.0 | 98,522.4 | 45,881.8 | 4,367.6 | | Capital lease obligations | 248.8 | 17.1 | 231.7 | - | - | | Operating leases | 2,386.1 | 510.0 | 519.5 | 309.0 | 1,047.6 | | Purchase obligations | 6,203.8 | 6,203.8 | - | - | - | | Total | 171,304.5 | 20,424.9 | 99,273.6 | 46,190.8 | 5,415.2 | Directors, Senior Management and Employees This section details the company's leadership, compensation structure, and workforce, noting a thirteen-member board, NT$1.05 billion in 2018 executive compensation, and a significant increase in employees to 93,891 due to the SPIL acquisition Directors and Senior Management The company is led by a thirteen-member board including three independent directors, with Jason C.S. Chang as Chairman and CEO, and notes an ongoing insider trading proceeding against COO Dr. Tien Wu - The board of directors consists of 13 members, including 3 independent directors. Key leadership includes Jason C.S. Chang (Chairman & CEO) and Richard H.P. Chang (Vice Chairman & President)[511][512][517] - The Audit Committee is composed of three independent directors: Shen-Fu Yu, Ta-Lin Hsu, and Mei-Yueh Ho, who are financially literate and independent under SEC and R.O.C. rules[513] - Dr. Tien Wu, the company's Director and COO, is involved in a criminal proceeding for alleged insider trading related to the SPIL tender offers. The R.O.C. Securities and Futures Investors Protection Center has also filed a civil lawsuit to remove him from the board[71][72] Compensation In 2018, total remuneration for directors and executive officers was approximately NT$1.05 billion, with 188.7 million employee stock options outstanding across three plans as of year-end - Total remuneration for directors and executive officers in 2018 was approximately NT$1,054.2 million. The company also accrued NT$11.1 million for management retirement benefits[558] - ASEH maintains three employee stock option plans (2010, 2015, 2018). As of Dec 31, 2018, 188.7 million options were outstanding, with 56.9 million assumed from ASE and 131.9 million granted by ASEH[163][562] - Subsidiaries USI Enterprise Limited and Universal Scientific Industrial Shanghai also have active employee stock option plans[564][565] Employees The company's total workforce significantly increased to 93,891 as of December 31, 2018, primarily due to the SPIL acquisition, with the majority of employees in direct labor and located in Taiwan and the P.R.C. Employee Headcount by Year | Year-End | Total Employees | | :--- | :--- | | 2016 | 66,711 | | 2017 | 68,753 | | 2018 | 93,891 | Employee Breakdown (as of Dec 31, 2018) | Category | Number of Employees | | :--- | :--- | | By Function | | | Direct labor | 50,877 | | Indirect labor (manufacturing) | 25,002 | | Indirect labor (administration) | 7,729 | | Research and development | 10,283 | | By Location | | | Taiwan | 55,679 | | P.R.C. | 28,123 | | Korea | 2,429 | | Malaysia | 3,867 | | Others | 5,193 | Share Ownership As of January 31, 2019, Chairman and CEO Jason C.S. Chang was the largest beneficial owner, holding approximately 22% of the company's outstanding common shares, primarily through various holding companies and a family trust - As of January 31, 2019, Chairman and CEO Jason C.S. Chang beneficially owned 949,352,706 common shares, representing 21.96% of the total outstanding shares[573][574][578] - Vice Chairman Richard H. P. Chang beneficially owned 124,175,228 common shares[573] Major Shareholders and Related Party Transactions This section identifies Jason C.S. Chang as the only major shareholder with over 5% beneficial ownership and details key related party transactions, including contributions to the ASE Cultural and Educational Foundation and patent acquisitions - As of January 31, 2019, Jason C.S. Chang is the only major shareholder with beneficial ownership exceeding 5%, holding 21.96% of the company's common shares through a combination of direct ownership and various holding companies under a family trust[576][578] - Several of the company's own subsidiaries, including ASE Test and Hung Ching, hold a small percentage of ASEH's common shares[579][580] - Significant related party transactions include annual NT$100 million contributions to the ASE Cultural and Educational Foundation for environmental projects, and past transactions for factory construction and patent acquisitions[588][590][591] Financial Information This section covers consolidated financial statements, favorable conclusions in legal proceedings regarding the K7 plant, and the dividend policy aiming for at least 30% cash payout, with a NT$2.50 per share cash dividend proposed for 2018 - Legal proceedings regarding the K7 plant's wastewater discharge concluded with the Supreme Administrative Court overturning a NT$102.0 million fine and ordering a refund to the company in June 2017. A related criminal case was also overturned in 2015[593] - The company's dividend policy targets a cash payout of at least 30% of the total dividend. For 2018, the board proposed a cash dividend of NT$2.50 per share, to be distributed from capital surplus[597][600][601] Historical Cash Dividends Per Common Share (NT$) | Year Paid | Cash Dividend per Share | | :--- | :--- | | 2014 | 1.29 | | 2015 | 2.00 | | 2016 | 1.60 | | 2017 | 1.40 | | 2018 | 2.50 | The Offer and Listing The company's common shares are listed on the TWSE (symbol "3711") and its ADSs on the NYSE (symbol "ASX") since April 30, 2018, with 4.32 billion common shares and 142.5 million ADSs outstanding as of January 31, 2019 - ASEH common shares trade on the Taiwan Stock Exchange (TWSE) under symbol "3711"[606] - ASEH American Depositary Shares (ADSs) trade on the New York Stock Exchange (NYSE) under symbol "ASX"[608] - As of January 31, 2019, there were 4,322,321,982 common shares and 142,511,705 ADSs outstanding[606][608] Additional Information This section outlines the company's corporate governance framework, including its Articles of Incorporation and key material contracts like the NT$90 billion syndicated loan for the SPIL acquisition, and discusses R.O.C. foreign investment regulations and tax implications for non-R.O.C. holders Articles of Incorporation The company's Articles of Incorporation establish it as a company limited by shares with NT$50 billion authorized capital, stipulate a thirteen-member board, and define a dividend policy requiring a 10% legal reserve and at least 30% cash distribution - The company has an authorized share capital of NT$50 billion, divided into 5 billion common shares[614] - The dividend policy requires setting aside 10% of annual net income as a legal reserve and distributing at least 30% of total dividends in cash[620][622] - Major corporate actions, such as amending the Articles of Incorporation or dissolution, require approval by at least two-thirds of shares represented at a meeting where a majority of all outstanding shares are present[629][631] Material Contract The company highlights two key material contracts: a NT$90 billion five-year syndicated credit facility for the SPIL acquisition and the Joint Share Exchange Agreement, where each ASE share was exchanged for 0.5 ASEH common shares and each SPIL share for NT$51.2 in cash - On April 30, 2018, the company entered into a NT$90 billion five-year syndicated credit facility to finance the SPIL Acquisition[655] - The Joint Share Exchange Agreement stipulated that each ASE common share would be exchanged for 0.5 ASEH common shares, and each SPIL common share would be acquired for NT$51.2 in cash[656][657][659] Taxation This subsection details R.O.C. tax implications for non-R.O.C. holders, including a 21% dividend withholding tax, capital gains exemption on common shares, and a 0.3% securities transaction tax, while noting the company believes it was not a PFIC for 2018 - R.O.C. Taxation: Dividends paid to non-R.O.C. holders are subject to a 21% withholding tax. Capital gains on common shares are exempt from income tax, but a 0.3% securities transaction tax applies to sales. ADSs are not subject to these taxes[679][682][683] - U.S. Federal Income Taxation: For U.S. Holders, distributions are generally taxed as foreign-source dividend income. Gains from the sale of common shares or ADSs are typically treated as U.S.-source capital gains[687][696][700] - The company believes it was not a Passive Foreign Investment Company (PFIC) for the 2018 taxable year, but notes that this status is determined annually and cannot be guaranteed for future years[702] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are interest rate and foreign currency fluctuations, managed with derivatives, resulting in a NT$1.02 billion net foreign exchange loss in 2018, reversing prior years' gains - The company is exposed to interest rate risk primarily through its long-term floating-rate debt. As of Dec 31, 2018, the company had significant variable rate long-term borrowings in NT$ (NT$100.0 billion) and US$ (US$993.6 million)[708][712] - Foreign currency risk is managed through derivative instruments. The company recorded a net foreign exchange loss of NT$1,015.6 million in 2018, compared to gains of NT$3,502.6 million in 2017 and NT$1,928.4 million in 2016[714][715] Outstanding Forward Exchange and Swap Contracts (as of Dec 31, 2018) | Contract Type | Notional Amount (Buy US$ vs NT$) | Notional Amount (Sell US$ vs NT$) | Notional Amount (Sell US$ vs JPY) | | :--- | :--- | :--- | :--- | | Forward Exchange | US$80.0 million | - | US$37.7 million | | Swap Contracts | US$1,687.4 million | US$208.8 million | US$54.2 million | Part II Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with the independent auditor issuing an unqualified opinion, excluding the SPIL subsidiary's internal controls - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[732] - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[735] - The independent auditor, Deloitte & Touche, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting. Their audit did not include the internal controls of the SPIL subsidiary, which were audited by other auditors (PricewaterhouseCoopers)[736][738][740] Other Information This section covers various governance and compliance, including the identification of three audit committee financial experts, adoption of a Code of Business Conduct and Ethics, NT$217.7 million in fees paid to Deloitte & Touche in 2018, and differences in corporate governance practices from NYSE standards Audit Committee Financial Expert The board has determined that all three members of its audit committee, Shen-Fu Yu, Ta-Lin Hsu, and Mei-Yueh Ho, qualify as independent audit committee financial experts under SEC rules - The board has identified Shen-Fu Yu, Ta-Lin Hsu, and Mei-Yueh Ho as audit committee financial experts[757] Code of Ethics The company has adopted a Code of Business Conduct and Ethics applicable to all personnel, covering anti-corruption, fair competition, anti-money laundering, and including a whistleblowing policy - A Code of Business Conduct and Ethics has been adopted, satisfying Item 16B requirements and applying to all company personnel[758] Principal Accountant Fees and Services For fiscal year 2018, fees paid to Deloitte & Touche totaled NT$217.7 million, with the majority for audit services, and all services pre-approved by the audit committee Principal Accountant Fees (in NT$ thousands) | Fee Category | 2017 | 2018 | | :--- | :--- | :--- | | Audit fees | 158,872.5 | 157,244.5 | | Audit-related fees | 1,032.6 | 9,319.9 | | Tax fees | 16,087.7 | 31,394.8 | | All other fees | 19,024.7 | 19,776.7 | | Total | 195,017.5 | 217,735.9 | Purchases of Equity Securities by the Issuer and Affiliated Purchasers The company has conducted past share repurchase programs, including the repurchase and cancellation of 1.85 million shares from dissenting shareholders in March 2018 related to the Share Exchange - In March 2018, ASE repurchased 1,852,000 common shares from shareholders who dissented to the Share Exchange. These shares were subsequently canceled[763] Corporate Governance As a foreign private issuer, the company's corporate governance practices differ from NYSE standards, notably regarding the absence of a majority of independent directors and dedicated nominating/corporate governance committee - The company follows R.O.C. corporate governance standards, which differ from NYSE rules for U.S. companies[767] - Key differences include: not having a majority of independent directors on the board, not having a dedicated nominating/corporate governance committee, and using R.O.C. independence standards for its compensation committee[769][772][778] Part III Financial Statements This section presents the audited consolidated financial statements for 2016-2018, prepared under IFRS, including audit reports from Deloitte & Touche and PricewaterhouseCoopers for the SPIL subsidiary, detailing balance sheets, income, equity, and cash flows - The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB)[814][895] - The audit report from Deloitte & Touche is based on their audit and the report of other auditors (PricewaterhouseCoopers) for the SPIL subsidiary, which was consolidated from April 30, 2018[815] - The financial statements for periods prior to the April 30, 2018 incorporation of ASEH are prepared under the assumption that ASEH was the continuation of ASE Inc., its predecessor entity[896]