ASE Technology Holding(ASX) - 2019 Q4 - Annual Report

PART I Key Information This section presents selected five-year financial data and details significant business, acquisition, and operational risk factors Selected Financial Data This chapter details key financial performance metrics from 2018 to 2019, showing revenue growth alongside decreased profitability Selected Financial Performance (2018 vs. 2019) | Financial Metric | 2018 (NT$ millions) | 2019 (NT$ millions) | 2019 (US$ millions) | | :--- | :--- | :--- | :--- | | Operating Revenues | 371,092.4 | 413,182.2 | 13,814.2 | | Gross Profit | 61,163.0 | 64,310.8 | 2,150.2 | | Profit from Operations | 27,019.3 | 23,257.8 | 777.6 | | Profit for the year (Attributable to Owners) | 26,220.7 | 17,060.6 | 570.4 | | Diluted Earnings per Common Share (NT$) | 6.07 | 3.91 | 0.13 | Selected Financial Position and Cash Flow (2018 vs. 2019) | Financial Metric | 2018 (NT$ millions) | 2019 (NT$ millions) | 2019 (US$ millions) | | :--- | :--- | :--- | :--- | | Total Assets | 534,061.9 | 557,223.7 | 18,630.0 | | Total Liabilities | 315,034.0 | 344,421.4 | 11,515.3 | | Capital Expenditures | (41,386.4) | (56,810.2) | (1,899.4) | | Net Cash Inflow from Operating Activities | 51,074.7 | 72,303.3 | 2,417.4 | Segment Operating Revenues (2018 vs. 2019) | Segment | 2018 (NT$ millions) | 2019 (NT$ millions) | 2019 (US$ millions) | | :--- | :--- | :--- | :--- | | Packaging | 178,308.2 | 198,916.8 | 6,650.5 | | Testing | 35,903.2 | 42,658.7 | 1,426.2 | | EMS | 151,890.4 | 165,789.5 | 5,543.0 | Risk Factors The company faces significant risks from its SPIL acquisition, industry cyclicality, customer concentration, and geopolitical tensions - Financial and operational results may not be comparable across periods due to the SPIL Acquisition on April 30, 2018, which combined operations[16] - The business is highly dependent on the cyclical semiconductor and electronics industries, with significant revenue concentration in communications (52.5% of packaging/testing) and EMS (37.4%) end-markets[18] - The company faces intense competition from other independent packaging/testing companies and integrated device manufacturers, with government subsidies to competitors in the P.R.C. noted as a specific pressure[21] - Customer concentration is a significant risk, with the five largest customers accounting for 51.1% of operating revenues in 2019[34] - Strained relations between the R.O.C. and the P.R.C. could negatively affect the business, as a substantial majority of operations and revenues are derived from Taiwan and the P.R.C.[58] Information on the Company This section details the company's history, business overview, organizational structure, and global operational footprint History and Development of the Company The company was formed in 2018 through the combination of ASE and SPIL, with capital expenditures increasing significantly since - ASEH was formed on April 30, 2018, through a statutory share exchange that made ASE Inc. and SPIL wholly-owned subsidiaries[75][77] - The Anti-Monopoly Bureau of China, which had imposed a 24-month period of independent operation on ASE and SPIL, officially lifted all restrictive conditions on March 25, 2020[77][78] Capital Expenditures (2017-2019) | Year | Machinery & Equipment (NT$ millions) | Building & Improvements (NT$ millions) | Total (NT$ millions) | | :--- | :--- | :--- | :--- | | 2017 | 19,432.9 | 4,244.8 | 23,677.7 | | 2018 | 32,575.3 | 6,516.9 | 39,092.2 | | 2019 | 14,365.1 | 48,708.8 | 63,073.9 | Business Overview The company is a leading provider of semiconductor packaging, testing, and EMS solutions across diverse end-markets - The company's strategy is to provide integrated solutions by growing packaging services, strategically expanding production capacity, leveraging its presence in key manufacturing centers, and strengthening strategic relationships[92][93][94] - The company is subject to various environmental regulations and has been involved in administrative and judicial proceedings related to wastewater discharge at its K7 facility in Kaohsiung[40][135] 2019 Revenue Breakdown by Service | Service | Percentage of Operating Revenues | | :--- | :--- | | Packaging | 48.2% | | Testing | 10.3% | | EMS | 40.1% | 2019 Packaging Revenue by Technology | Package Type | Percentage of Packaging Revenue | | :--- | :--- | | Bumping, Flip Chip, WLP and SiP | 41.7% | | IC Wirebonding | 48.2% | | Discrete and other | 10.1% | 2019 Revenue Breakdown by End-Use Application | End-Use Application | Packaging & Testing Revenue % | EMS Revenue % | | :--- | :--- | :--- | | Communications | 52.5% | 37.4% | | Computing / Computers & Storage | 14.6% | 11.3% | | Consumer/Industrial/Automotive | 32.9% | 46.7% (sum of Consumer, Industrial, Automotive) | Organizational Structure The company operates under a holding structure with three principal groups for packaging, testing, and EMS services - The corporate structure consists of three main operating groups under the ASEH holding company: ASE Group (packaging & testing), SPIL Group (packaging & testing), and USI Group (EMS)[142][144][157][158] Property, Plants and Equipment The company operates numerous manufacturing facilities with a primary concentration in Taiwan and a significant international presence - The company's primary packaging and testing facilities are located in Taiwan (Kaohsiung, Chung Li, Taichung, Hsinchu)[161][165] - Significant international manufacturing presence includes facilities in China, South Korea, Malaysia, Singapore, Japan, Mexico, and Poland[162][163][164][165][166] Operating and Financial Review and Prospects This section analyzes financial results, showing revenue growth in 2019 offset by margin decline due to acquisition effects and higher costs Operating Results and Trend Information Revenues increased 11.3% in 2019 due to the SPIL acquisition, but margins declined from higher costs and PPA amortization - The increase in 2019 revenue was primarily due to the SPIL Acquisition and an 11.6% increase in packaging revenues and a 9.2% increase in EMS revenues[192] - The decrease in operating margin was primarily due to an 18.2% increase in operating expenses, driven by higher R&D and general & administrative costs, as well as PPA effects from the SPIL acquisition[192] Comparison of Operating Results (2018 vs. 2019) | Metric | 2018 (NT$ millions) | 2019 (NT$ millions) | Change | | :--- | :--- | :--- | :--- | | Operating Revenues | 371,092.4 | 413,182.2 | +11.3% | | Gross Profit | 61,163.0 | 64,310.8 | +5.1% | | Profit from Operations | 27,019.3 | 23,257.8 | -13.9% | | Gross Margin | 16.5% | 15.6% | -0.9 ppt | | Operating Margin | 7.3% | 5.6% | -1.7 ppt | Liquidity and Capital Resources Operating cash flow increased significantly in 2019, and the company maintains sufficient liquidity to meet near-term obligations - As of December 31, 2019, the company had NT$60.1 billion in cash and cash equivalents and NT$225.4 billion in total unused credit lines[204] - Total debt as of December 31, 2019, was NT$220.7 billion, consisting of NT$43.3 billion in short-term debt and NT$177.4 billion in long-term debt[204] Cash Flow Summary (2018 vs. 2019) | Cash Flow Activity | 2018 (NT$ millions) | 2019 (NT$ millions) | | :--- | :--- | :--- | | Net Cash from Operating Activities | 51,074.7 | 72,303.3 | | Net Cash used in Investing Activities | (129,542.3) | (54,579.1) | | Net Cash from (used in) Financing Activities | 83,111.4 | (6,498.8) | Research and Development R&D spending increased in 2019, focusing on advanced packaging, testing solutions, and innovative EMS products - R&D activities are focused on packaging technology, developing testing solutions for advanced ICs, and creating diversified products for the EMS segment[214][217][218] R&D Expenditures | Year | R&D Expenditure (NT$ millions) | % of Operating Revenues | | :--- | :--- | :--- | | 2018 | 14,962.8 | 4.0% | | 2019 | 18,395.3 | 4.5% | Tabular Disclosure of Contractual Obligations As of year-end 2019, total contractual obligations were NT$203.4 billion, primarily composed of long-term debt Contractual Obligations as of December 31, 2019 (NT$ millions) | Obligation Type | Total | Under 1 Year | 1 to 3 Years | 3 to 5 Years | After 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | 186,574.8 | 8,185.4 | 137,999.7 | 29,626.7 | 10,763.0 | | Lease liabilities | 6,672.9 | 723.4 | 892.0 | 644.6 | 4,412.9 | | Purchase obligations | 10,130.6 | 10,130.6 | - | - | - | | Total | 203,378.3 | 19,039.4 | 138,891.7 | 30,271.3 | 15,175.9 | Directors, Senior Management and Employees This section details the company's leadership structure, compensation policies, and global workforce composition Directors and Senior Management The company is led by a 13-member board with established audit, compensation, and risk management committees - The board consists of 13 directors, including three independent directors who form the audit committee[223] - Key leadership includes Jason C.S. Chang (Chairman & CEO), Richard H.P. Chang (Vice Chairman & President), Tien Wu (COO), and Joseph Tung (CFO)[224][226] Compensation Director and executive remuneration totaled NT$1.2 billion in 2019, supplemented by several employee stock option plans - Total remuneration to directors and executive officers in 2019 was approximately NT$1,163.9 million (US$38.9 million)[232] - ASEH maintains three active employee stock option plans (2010, 2015, 2018), with 170.8 million options outstanding as of December 31, 2019[234] Employees As of year-end 2019, the company employed over 96,000 people, with the majority in direct labor and located in Taiwan and the P.R.C Employee Breakdown as of Dec 31, 2019 | Category | Number of Employees | | :--- | :--- | | Total Employees | 96,528 | | By Function: | | | Direct labor | 51,389 | | Indirect labor (manufacturing) | 26,335 | | R&D | 10,768 | | Indirect labor (administration) | 8,036 | | By Location: | | | Taiwan | 57,543 | | P.R.C. | 28,920 | | Other | 10,065 | Major Shareholders and Related Party Transactions The Chairman is the largest beneficial owner, and key related party transactions include foundation contributions and asset purchases - As of January 31, 2020, Chairman and CEO Jason C.S. Chang beneficially owned 949.4 million common shares, representing 21.92% of the total outstanding shares[241][243] - In 2019, the company contributed NT$100.0 million to the ASE Cultural and Educational Foundation and purchased a production facility from its associate Hung Ching for NT$2.3 billion[248] Financial Information This section covers legal proceedings related to environmental and patent issues, and outlines the company's dividend policy - The company is involved in legal proceedings concerning a wastewater discharge incident at its K7 plant, a settled patent dispute with Broadcom for US$5.0 million, and an environmental pollution case in China[249][250][251] - The board proposed a cash dividend of NT$2.00 per share for 2019, following a dividend of NT$2.50 per share for 2018[252][254] Additional Information This section details material contracts, including a major EMS acquisition, and outlines the regulatory and tax environment for investors - In December 2019, a subsidiary entered into an agreement to acquire Financiere AFG S.A.S. (Asteelflash) for a base equity value of US$450.0 million to expand its EMS business[81][276] - For non-R.O.C. holders, dividends are subject to a 21% withholding tax, while capital gains from the sale of common shares are exempt from R.O.C. income tax as of January 1, 2016[285][286][287] Quantitative and Qualitative Disclosures about Market Risk The company is primarily exposed to interest rate and foreign currency risks, which it manages using derivative instruments - The company is exposed to interest rate risk primarily from its long-term floating-rate loans[300] - Foreign currency risk arises as most revenues are in USD, while costs are primarily in NTD, USD, and RMB; the company uses derivative instruments to hedge this risk[302][303] PART II Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end 2019 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[312] - Management's assessment concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework, excluding certain recent acquisitions[313] Corporate Governance As a foreign private issuer, the company follows R.O.C. corporate governance practices, which differ from NYSE standards - The company follows R.O.C. corporate governance practices, which differ from NYSE standards for U.S. companies[326] - Significant differences include not having a majority of independent directors on the board and not having a dedicated nominating/corporate governance committee[329][330][332] - The company has an audit committee with three independent members that satisfies SEC Rule 10A-3[223][336] PART III Financial Statements This section contains the company's audited consolidated financial statements for fiscal year 2019, prepared under IFRS - The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB[396] - The report includes the audited consolidated financial statements of ASE Technology Holding Co., Ltd. and its subsidiaries, as well as the report of the independent registered public accounting firm for its subsidiary, SPIL[347][357]