ChipMOS(IMOS) - 2018 Q4 - Annual Report

Key Information Selected Financial Data Revenue slightly increased in 2018, but profit attributable to equity holders significantly decreased due to a prior year's one-time gain, with cash also declining Consolidated Income Statement Data (2016-2018) | Indicator | 2016 (NT$ million) | 2017 (NT$ million) | 2018 (NT$ million) | 2018 (US$ million) | | :--- | :--- | :--- | :--- | :--- | | Revenue | 18,387.6 | 17,940.9 | 18,480.0 | 603.7 | | Gross Profit | 3,642.1 | 3,237.2 | 3,430.0 | 112.1 | | Operating Profit | 1,998.5 | 2,239.9 | 2,099.7 | 68.6 | | Profit from Continuing Operations | 1,523.3 | 981.9 | 1,325.8 | 43.3 | | Profit (Loss) from Discontinued Operations | (122.1) | 1,815.0 | — | — | | Profit for the Year | 1,401.2 | 2,796.9 | 1,325.8 | 43.3 | | Basic EPS (Equity Holders - Continuing) | NT$2.13 | NT$1.16 | NT$1.65 | US$0.05 | Consolidated Statement of Financial Position Data (As of Dec 31, 2017-2018) | Indicator | 2017 (NT$ million) | 2018 (NT$ million) | 2018 (US$ million) | | :--- | :--- | :--- | :--- | | Total Assets | 33,259.9 | 33,133.7 | 1,082.4 | | Total Liabilities | 15,139.0 | 15,112.5 | 493.7 | | Total Equity | 18,120.9 | 18,021.2 | 588.7 | | Cash and Cash Equivalents | 8,035.7 | 4,642.5 | 151.7 | | Long-term Bank Loans | 7,498.9 | 9,042.1 | 295.4 | Consolidated Statement of Cash Flows Data (2016-2018) | Indicator | 2016 (NT$ million) | 2017 (NT$ million) | 2018 (NT$ million) | 2018 (US$ million) | | :--- | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | 3,688.0 | 4,157.3 | 4,129.2 | 134.9 | | Net Cash used in Investing Activities | (4,556.7) | (3,493.4) | (5,129.3) | (167.6) | | Net Cash used in Financing Activities | (3,223.9) | (550.8) | (2,400.4) | (78.4) | | Net (Decrease) in Cash | (4,166.1) | 74.5 | (3,393.2) | (110.9) | Risk Factors The company faces diverse risks including semiconductor industry cyclicality, customer concentration, high fixed costs, geopolitical tensions, and securities volatility Risks Relating to Our Industry The company's performance is heavily tied to the highly cyclical semiconductor industry, making it vulnerable to market downturns and declining average selling prices - The company's business is dependent on the highly cyclical semiconductor industry. Revenue for 2017 decreased by 2.4% from 2016, while 2018 revenue increased by 3.0% from 2017[18] - A significant portion of revenue comes from testing and assembling memory semiconductors, accounting for 48%, 46%, and 43% of revenue in 2016, 2017, and 2018, respectively. Downturns in DRAM prices could significantly reduce revenue and profit[23] - The company has significant investment in equipment for LCD and other display panel driver semiconductors. A decrease in market demand for these products could negatively affect capacity utilization and profitability[24] Risks Relating to Our Business Key business risks include intense competition, high customer concentration, significant fixed costs impacting profitability, substantial indebtedness, and production yield issues - The company is highly dependent on a small group of customers. In 2018, the top five customers accounted for 61% of revenue[30] - Operations are characterized by high fixed costs. For example, in 2018, fixed costs represented 49% of the total cost of revenue for memory and logic/mixed-signal testing services, making profitability highly sensitive to capacity utilization rates[32] - As of December 31, 2018, the company had approximately NT$9,790 million (US$320 million) in outstanding long-term indebtedness, which poses risks to its business operations and cash flow[25] - The company's joint venture with Tsinghua Unigroup, which involved selling 54.98% of its subsidiary Unimos Shanghai, carries risks associated with acquisitions, investments, and joint ventures that could impact the business strategy[53] Risks Relating to Countries in Which We Conduct Operations Operations in Taiwan expose the company to political risks from ROC-PRC relations, natural disasters, and uncertainties from the US-Mainland China trade war - The company's principal executive offices and facilities are in Taiwan, exposing it to political risks associated with the relationship between the ROC and the PRC, which could adversely affect business and stock price[62] - Operations are vulnerable to disruptions from natural disasters, as facilities are located in regions susceptible to earthquakes[65][66] - Uncertainties about the 'trade war' between the United States and Mainland China may materially and adversely affect results of operations due to potential disruptions in the complex semiconductor supply chain[68] Risks Relating to Our Common Shares or ADSs Securities risks include price volatility, differing ADS voting rights, restrictions on ADR deposits, and limited participation in rights offerings for ADS holders - Holders of ADSs have different voting rights than holders of common shares. If the depositary does not receive timely instructions, ADS holders are deemed to have given a discretionary proxy to a person designated by the Company[80] - The ability to deposit shares into the ADR facility is restricted by ROC law, which may adversely affect the liquidity and price of the ADSs[83] - The rights of ADS holders to participate in rights offerings are limited, which could cause dilution to their holdings if they are unable to exercise such rights[86] Information on the Company Overview of the Company ChipMOS is a leading independent semiconductor assembly and test provider, specializing in display drivers and memory, which underwent a 2016 merger and 2017 joint venture - The company is a leading independent provider of testing and assembly services for LCD and other display panel driver semiconductors, as well as advanced memory and logic/mixed-signal products[92] - In October 2016, ChipMOS Bermuda merged into the company, with the company as the surviving entity. This resulted in the issuance of ADSs listed on NASDAQ, each representing 20 common shares[95] - In March 2017, the company completed the sale of a 54.98% equity interest in its subsidiary Unimos Shanghai to strategic investors led by a subsidiary of Tsinghua Unigroup, making Unimos Shanghai an affiliate rather than a subsidiary[102][105] Industry Background The company provides back-end semiconductor services within a cyclical industry, benefiting from the trend of outsourcing by IDMs and fabless companies, with Taiwan as a key global hub - The semiconductor manufacturing process is broadly divided into circuit design, wafer fabrication, wafer probe, assembly, and final test. ChipMOS provides back-end services including wafer probe, assembly, and final test[114] - There is a significant trend of outsourcing in the semiconductor industry, driven by high capital expenditure requirements, a focus on core competencies, and time-to-market pressures. This has benefited independent service providers like ChipMOS[115][116][117] - Taiwan is one of the world's leading locations for outsourced semiconductor manufacturing, featuring a specialized and disaggregated supply chain that allows for economies of scale and efficiency[119] Our Strategy The company's strategy focuses on reinforcing its leadership in semiconductor assembly and test services by targeting high-growth segments, investing in R&D, leveraging Taiwan's presence, and expanding integrated offerings - Focus on providing services to potential growth segments of the semiconductor industry, such as memory, logic/mixed-signal, MEMS, and LCD/display panel driver semiconductors[122] - Continue to invest in R&D of advanced assembly and test technologies, with a 2018 R&D expenditure of 5.1% of revenue[123][126] - Build on its strong presence in Taiwan to leverage proximity to suppliers, customers, and a skilled labor pool, while also exploring opportunities in Mainland China through its joint venture[127][128] - Expand offerings of vertically integrated services (testing, assembly, direct shipment) to shorten lead times for customers[129] Principal Products and Services Revenue is derived from Testing, Assembly, LCD/display panel driver, and Bumping services, with LCD driver services being the largest segment in 2018, offering comprehensive solutions for memory, logic/mixed-signal, and display drivers Revenue by Service Segment (% of Total Revenue) | Service Segment | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Testing | 25.0% | 26.9% | 25.9% | | Assembly | 31.9% | 29.4% | 25.3% | | LCD and other display panel driver semiconductor testing and assembly | 26.8% | 26.7% | 30.8% | | Bumping | 16.3% | 17.0% | 18.0% | | Total | 100.0% | 100.0% | 100.0% | - The company provides a wide range of testing services, including engineering testing, wafer probing, burn-in testing, and final testing for memory (SRAM, DRAM, Flash) and logic/mixed-signal semiconductors[136][137][138][139] - Assembly services include various package formats such as leadframe-based (e.g., TSOP, QFP) and organic substrate-based (e.g., BGA, FCCSP), as well as Wafer-Level Chip Scale Packages (WLCSP)[146][153][157] - For display driver semiconductors, the company offers assembly and test services using Tape Carrier Package (TCP), Chip-on-Film (COF), and Chip-on-Glass (COG) technologies, along with gold and copper bumping services[163][175] Customers The company exhibits significant customer concentration, with Taiwan being the most significant geographic region for revenue, primarily operating through purchase orders with rolling forecasts - Customer concentration is high, with the top three customers accounting for approximately 21%, 14%, and 11% of revenue in 2018[183] Revenue by Geographic Region (% of Total Revenue) | Region | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Taiwan | 69% | 73% | 80% | | Japan | 10% | 13% | 10% | | Singapore | 17% | 10% | 6% | | Others | 4% | 4% | 4% | | Total | 100% | 100% | 100% | Research and Development The company maintains a strong R&D focus, with NT$939 million spent in 2018, concentrating on advanced packaging and testing technologies with a team of 659 employees R&D Expenses (2016-2018) | Year | R&D Expense (NT$ million) | % of Revenue | | :--- | :--- | :--- | | 2016 | 839 | 4.5% | | 2017 | 986 | 5.5% | | 2018 | 939 | 5.1% | - Key R&D efforts in 2019 are expected to focus on advanced assembly for WLCSP and MEMS, fine-pitch Au and Cu bumping for 300mm wafers, and advanced test capabilities for OLED & TDDI products[124] Operating and Financial Review and Prospects Results of Operations In 2018, revenue increased by 3% driven by LCD driver and bumping services, gross margin improved, but profit attributable to equity holders decreased significantly due to a prior year's one-time gain Revenue by Segment (2017 vs 2018) | Segment | 2017 (NT$ million) | 2018 (NT$ million) | Change (%) | | :--- | :--- | :--- | :--- | | Testing | 4,838 | 4,790 | -1% | | Assembly | 5,259 | 4,679 | -11% | | LCD and other display panel driver | 4,790 | 5,695 | +19% | | Bumping | 3,054 | 3,316 | +9% | | Total Revenue | 17,941 | 18,480 | +3% | - Gross profit increased to NT$3,430 million in 2018 from NT$3,237 million in 2017, with gross margin improving to 18.6% from 18.0%. The margin improvement was driven by stronger performance in the LCD driver and bumping segments[285][287] - Profit for the year attributable to the Company decreased to NT$1,326 million in 2018 from NT$2,797 million in 2017. The 2017 figure was significantly boosted by a NT$1,815 million profit from discontinued operations (the sale of Unimos Shanghai)[296] Average Capacity Utilization Rates (2016-2018) | Segment | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Testing (Memory & Logic/Mixed-Signal) | 70% | 79% | 77% | | Assembly (Memory & Logic/Mixed-Signal) | 64% | 66% | 64% | | LCD and other display panel driver | 77% | 85% | 80% | | Bumping | 68% | 69% | 72% | Liquidity and Capital Resources As of December 31, 2018, liquidity was supported by cash and undrawn loan facilities, with significant cash used in investing and financing activities, and NT$9,790 million in long-term debt outstanding - As of Dec 31, 2018, primary liquidity sources included NT$4,643 million in cash, NT$6,007 million in undrawn short-term facilities, and NT$1,800 million in undrawn long-term facilities[333] - In May 2018, the company obtained a new syndicated loan facility of NT$12,000 million for a term of five years to repay existing debt and for working capital[334] - In 2018, the company executed a capital reduction plan, reducing share capital by approximately 15% and returning NT$1.5 per common share (NT$30 per ADS) to shareholders[335] Maturities of Long-Term Bank Loans (as of Dec 31, 2018) | Period | Amount (NT$ million) | Amount (US$ million) | | :--- | :--- | :--- | | During 2019 | 748 | 24 | | During 2020 | 754 | 25 | | During 2021 | 754 | 25 | | During 2022 | 754 | 25 | | During 2023 and onwards | 6,780 | 221 | | Total | 9,790 | 320 | Directors, Senior Management and Employees Directors and Senior Management As of March 31, 2019, the board comprised eight directors, five independent, with established Audit and Compensation Committees, and Shih-Jye Cheng serving as Chairman and President - The board of directors consists of nine authorized positions, with eight currently filled as of March 31, 2019. Of the eight directors, five are independent[361] - The company has established an Audit Committee composed of all five independent directors and a Compensation Committee composed of three independent directors[362][378][379] Employees As of March 31, 2019, the company had 5,889 employees, primarily in general operations and engineering, with most based in Taiwan and no collective bargaining agreements Employees by Function (as of March 31, 2019) | Function | Number of Employees | | :--- | :--- | | General operations | 3,067 | | Quality control | 334 | | Engineering | 1,440 | | Research and development | 659 | | Sales, administration and finance | 137 | | Others | 252 | | Total | 5,889 | Major Shareholders and Related Party Transactions Major Shareholders As of April 12, 2019, Siliconware Precision Industries and the ADS Depositary were the largest shareholders, with the Depositary's stake significantly decreasing due to ADS surrenders Major Shareholders' Ownership | Name of Beneficial Owner | March 28, 2017 (%) | June 19, 2018 (%) | April 12, 2019 (%) | | :--- | :--- | :--- | :--- | | Siliconware Precision Industries Co., Ltd | 14.97% | 18.22% | 20.12% | | Depositary (for ADSs) | 42.95% | 35.36% | 13.45% | - The total number of issued and outstanding ADSs has decreased by approximately 81% since their initial issuance in November 2016 due to holders surrendering ADSs and the 2018 Capital Reduction Plan[337] Related Party Transactions The primary related party is Unimos Shanghai, a 45.02%-owned affiliate, with whom the company had technology transfer and license agreements, one of which was terminated in April 2018 - The company conducts PRC operations through Unimos Shanghai, a 45.02%-owned affiliate, which was previously a wholly-owned subsidiary before a majority stake was sold in March 2017[392] - A Technology Transfer and License Agreement with Unimos Shanghai, which included a US$1 million license fee and a 0.5% running royalty, was terminated in April 2018[394] Financial Information Dividends and Dividend Policy The company paid cash distributions of NT$2.09, NT$1.00, and NT$0.30 per share from 2016-2018, with a policy requiring cash dividends to be at least 10% of distributed profit Cash Distributions per Share (2016-2018) | Year | Cash Distributions per Share (NT$) | | :--- | :--- | | 2016 | 2.09 | | 2017 | 1.00 | | 2018 | 0.30 | - The company's dividend policy requires that cash dividends be at least 10% of the total profit distributed as dividends[398] Quantitative and Qualitative Disclosure about Market Risk Market Risks The company is primarily exposed to interest rate and foreign currency exchange rate risks, with all NT$9,790 million debt at variable rates and exposure to RMB, USD, and JPY - As of December 31, 2018, 100% of the company's NT$9,790 million in debt was at variable rates. A 1% increase in interest rates would increase the annual interest charge by NT$98 million (US$3 million)[484] - The company has foreign currency exposure to the NT dollar, RMB, Japanese yen, and US dollar. As of December 31, 2018, a 5% average appreciation of the NT dollar against other relevant currencies would decrease the exchange gain by NT$204 million (US$7 million)[486] Controls and Procedures Management's Annual Report on Internal Control Over Financial Reporting Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, an assessment concurred with by PricewaterhouseCoopers, Taiwan - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[497] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2018. This assessment was audited by PricewaterhouseCoopers, Taiwan[501][502] Corporate Governance Principal Accountant Fees and Services The company paid PricewaterhouseCoopers, Taiwan, NT$19.78 million in 2018 for audit, audit-related, and tax services, with all non-audit services pre-approved by the Audit Committee Accountant Fees (2017-2018) | Fee Category | 2017 (NT$ thousand) | 2018 (NT$ thousand) | | :--- | :--- | :--- | | Audit Fees | 16,350 | 15,950 | | Audit Related Fees | 200 | 200 | | Tax Fees | 3,140 | 3,630 | | Total | 19,690 | 19,780 | Purchases of Equity Securities by the Issuer and Affiliated Purchasers The company completed three share repurchase programs between 2015 and 2016, buying back 50 million shares for approximately NT$1,639 million, with some shares retired and others for employee transfer - Between August 2015 and July 2016, the company completed three share repurchase programs, buying back a total of 50 million shares[510][514][515] Financial Statements Notes to the Consolidated Financial Statements The notes detail the impact of IFRS 9 and 15 adoption, segment information, 2018 capital reduction, retirement benefits, financial risk management, and the 2017 disposal of Unimos Shanghai - The company adopted IFRS 9 and IFRS 15 starting January 1, 2018. The adoption of IFRS 15 changed revenue recognition for customized services from completion-based to a progress-based model[537][566][805] - The sale of a 54.98% stake in the Unimos Shanghai subsidiary was completed in March 2017. This resulted in the reclassification of the remaining 45.02% stake as an 'Investment in associate' and the recognition of a NT$1,843 million gain on disposal of discontinued operations in 2017[677] - In 2018, the company executed a capital reduction of approximately 15%, cancelling 132.9 million ordinary shares and returning cash to shareholders[688] - As of December 31, 2018, the net defined benefit liability for the company's pension plan was NT$520.8 million[702]