Elettronica
Okmetic Oyj Interim report 1 January - 31 March 2016: Strong cash flow in weak market situation
Unless otherwise stated, figures in parenthesis refer to the corresponding period of the previous year.
Demand for Okmetic's advanced sensor wafers is expected to remain on a growth track in 2016. Sensor wafers have more stable demand and prices than silicon wafers used in the manufacture of discrete semiconductors and analog circuits (Discrete & Analog, D&A), and they are also traditionally less sensitive to economic fluctuations. D&A wafers replaced semiconductor wafers as one of Okmetic's two customer segments at the beginning of 2016. For D&A wafers, growth is anticipated to be flat in 2016 due to sluggish demand in the early months of the year.
The market was quieter than usual in early 2016 as anticipated, particularly due to forecasts of lacklustre smartphone sales and the ensuing inventory adjustments across the entire value chain. Demand is expected to pick up again from the second quarter onwards.
The company revised its guidance for net sales in conjunction of the sale of the Allen plant published on 1 April 2016. In 2016, the net sales are estimated to decline from the level of 2015 and operating profit without non-recurring items to exceed the level of 2015. According to the earlier guidance, the net sales and operating profit without non-recurring items were estimated to exceed the level of 2015 in 2016.
" The slowing demand in the end of 2015 carried over into 2016, and it took until March for demand to pick up again. Demand for smartphones, a driver of market growth in recent years, is falling because they have now reached a point of saturation. This has led to a rise in inventory levels across the whole value chain. Adjustments in inventory levels will in 2016 affect the entire silicon wafer market, including both of Okmetic's customer segments despite the fact that demand in these is more stable than in the rest of the market.
Net sales (19.6 million euro) were down by 9.2 percent against the comparison period. The biggest drop by far was in the North American market (-1.8 million euro), but Europe (-0.5 million euro) did not escape the effects of the slowing demand either. Net sales growth brought Asia's share of Okmetic's net sales already to 24 percent. Asia has been identified as the fastest-growing market area for Okmetic in the next few years.
The lacklustre market in early 2016 was reflected in Okmetic's operating profit without non-recurring items, which lagged clearly behind the level achieved in the comparison period. The weakening of the US dollar against the euro had a negative impact of 0.2 million euro on the operating profit. A considerable non-recurring gain of 6.0 million euro was recorded for the review period as a result of the sale of the Allen epi plant. The operating profit also includes a non-recurring item of 0.6 million euro related to the voluntary public tender offer by National Silicon Industry Group (NSIG), announced after the review period on 1 April 2016 (described in more detail later in this report). The Allen plant ended its final quarter under Okmetic in the negative at -0.4 million euro.
The sale of the Allen plant was a better option than the wind-down plan announced in December 2015. The plant will remain operational and the delivery of products to customers will continue. Meanwhile, Okmetic will continue to supply wafers to the plant, now owned and operated by Epitek Silicon. The phase-out of the epi business is a logical step for Okmetic in light of its chosen strategy and focus on high value-added silicon wafers.
Net cash flow in early 2016 (4.4 million euro) was at a significantly better level than in the comparison period. The measures to release working capital are taking effect, and the high polysilicon inventory levels we have seen over the past few years have begun to come down in early 2016 as anticipated, and will continue to do so until the second half of 2017.
In the early months of the year, Okmetic continued its focused investments in line with the company strategy. March saw the launch of an enhanced SOI wafer, E-SOI, which is the result of sustained R&D efforts. Thanks to its advanced properties, E-SOI opens new markets for Okmetic such as HV devices, silicon photonics applications and high-precision sensors. "
Semiconduct or industry
Semiconductor industry sales in 2015 were down by two percent year-on-year (IHS) and are estimated at approximately 350 billion US dollars (IC Insights, IHS). Growth was weak in all quarters and especially in the first quarter (IHS). The slowing down of the semiconductor market in 2015 resulted from stagnant smartphone and tablet markets as well as developments in world economy, and China in particular, that are affecting the consumption in general.
In 2016, the semiconductor market is projected to remain flat or fall slightly from the previous year's level (Gartner, WSTS). Growth for 2017 is projected at around three percents (WSTS).
Sensor industry
In 2015, the sensor industry is estimated to have grown by one percent from the previous year with the market value amounting to 6.4 billion US dollars (IC Insights). Growth for 2016 is projected at around two percents (Semi, SIA, WSTS).
Certain silicon-based microelectromechanical (MEMS) products within the sensor segment have higher sales growth than the others. As a result of the increasing amount of sensors in mobile devices, the demand for e.g. pressure sensors and microphones has surged despite the slowing growth rate of the markets. Silicon-On-Insulator (SOI) technology is increasingly used in the manufacture of these products, among others. Okmetic is a pioneering supplier of SOI wafers for the sensor industry.
Discrete semiconductor and analog circuits industries (Discrete & Analog)
The discrete semiconductor market is estimated to decline by around one percent (WSTS) analog circuits market around two percents in 2016 (Semi, SIA, WSTS).
Silicon wafer market
According to the estimate published by SMG, the group of silicon wafer suppliers in SEMI (a global umbrella organisation for semiconductor materials and equipment industry), the surface area of silicon wafer shipments grew by three percent in 2015 compared to the previous year and were at a record-high level. However at the same time the value of silicon wafer shipments decreased by six percent compared to the previous year. According to the company's own estimate, the surface area of silicon wafer shipments in January-March 2016 were around five percent lower than in the corresponding period in 2015 and around four percent lower than in 2015 on average.
Key customer areas for Okmetic in the silicon wafer market
In line with its strategy, Okmetic seeks niches in the silicon wafer market, where growth exceeds market average and in which the company has special expertise. The company supplies primarily 150 mm and 200 mm wafers.
The sensor/MEMS industry has been a key growth area for Okmetic for a long time. The use of sensors and their requirement level are expected to keep growing owing to proliferation of sensor applications in the automotive industry, industrial process control and in portable devices like smartphones, cameras, game consoles, and wearable electronics. In the future, a central growth driver for the sensor industry will be the Internet of Things, which will utilise sensor-produced data in communication between devices.
Another significant growth area is wafers used for the production of discrete and power semiconductors as well as analog circuits. In these wafer markets, areas for growth include, among others, components used in the production of renewable energy, increasing automotive electronics, electric cars, portable consumer products, as well as different solutions related to power supply and efficiency improvement. Okmetic has launched new products for these areas.
In January-March, Okmetic's net sales amounted to 19.6 (21.6) million euro. Net sales declined by 9.2 (grew by 24.2) percent compared to the corresponding period last year. The net sales of D&A wafers decreased by 13.1 percent and net sales of sensor wafers by 5.3 percent. The decline in net sales resulted mainly from overall weakness of demand. However, sales improved towards the end of the first quarter, and Okmetic's market share remained stable in the product groups important to the company.
As of financial year started on 1 January 2016, the company reports the net sales of its new customer segments, Sensor wafers and Discrete&Analog wafers (D&A wafers), as well as net sales of its market areas instead of value of deliveries.
Net sales per customer segment
Net sales per market area
The North American net sales decreased by 18.2 percent from the strong comparison period. Europe's net sales declined by 7.2 percent. In strategically important Asia the demand continued strong and net sales increased by 8.5 percent from the comparison period.
January-March
In January-March, operating profit was 6.7 (2.9) million euro corresponding to 34.2 (13.5) percent of net sales. Operating profit includes non-recurring gain of 6.0 million euro related to the sale of the US-based epi plant announced on 1 April 2016 as well as non-recurring cost of 0.6 million euro related to the Tender Offer of NSIG.
Operating profit without non-recurring items was 1.4 (2.9) million euro corresponding to 7.0 (13.5) percent of net sales. The weaker operating profit is resulting mainly from decline in sales, weaker sales mix as well as weak result of the Allen epi plant.
Profit for the period was 6.5 (2.2) million euro. The low income tax expense (0.3 million euro) in the financial period are explained by the Allen plant's tax losses (approximately 5.7 million euro), which are deductible in full against gain from the sale of Allen plant. Basic earnings per share was 0.39 (0.13) euro. Diluted earnings per share was 0.38 (0.13) euro.
The company's financial position was solid at the end of the period. In January-March, net cash flow from operations amounted to 4.4 (0.9) million euro.
The company's interest-bearing liabilities amounted to 10.6 (13.2) million euro on 31 March 2016. At the end of the period, cash and cash equivalents amounted to 6.5 (9.2) million euro. The company's net interest-bearing liabilities amounted to 4.1 (4.0) million euro on 31 March 2016. The company has ensured liquidity with credit facilities of 6.0 million euro. On 31 March 2016, the credit facilities were fully unused. To ensure liquidity, Okmetic has rearranged its credit facilities after the end of the review period. The company has negotiated new committed credit facilities of 6.0 million euro to replace the 6.0 million euro uncommitted credit facilities. A total of 3.0 million euro has been drawn from these new committed credit facilities after the review period.
Return on equity was 16.5 (13.8) percent. Return on investment was 15.7 (15.0) percent. The company's equity ratio was 69.5 (68.6) percent. Equity per share amounted to 3.78 (3.66) euro.
In January-March, capital expenditure amounted to 2.6 (1.6) million euro. The investments focused mainly on increasing capacity and capability for SOI and 200 mm wafers.
In January-March, the company expensed 0.7 (0.7) million euro in product development projects, corresponding to 3.4 (3.3) percent of net sales. Product development costs have not been capitalised.
In the first quarter of 2016, Okmetic's product development projects focused on the development of new crystal technology and new SOI applications, deployment of new processes to improve productivity, as well as process development for sophisticated C-SOI wafers. As a result of sustained R&D efforts, the company launched an enhanced SOI wafer, E-SOI in March.
Okmetic employed on average 387 (372) people in January-March. At the end of the period, Okmetic employed 389 (375) people, of which 340 worked in Finland, 43 in the US, five in Japan, and one in Hong Kong. As a result of the sale of the Allen epi plant, t he majority of the employees of Okmetic Inc., the US-based subsidiary of Okmetic, transfered to the service of the new owner on 1 April 2016.
There have been no significant changes in the company's near future risks and uncertainties. However, changes in macro economy may indirectly have an influence also on Okmetic's business.
Business is confronted by risks, which may arise from the company's operations or changes in its operating environment. Risks that, if materialised, can have an adverse effect on the company's operations and valuation are described below.
Silicon wafer sales are targeted at the sensor, discrete semiconductor and analog circuit producers in the electronics industry. The demand of discrete semiconductor and analog circuit industries is sensitive to economic fluctuations, and changes in the market situation can be sudden and dramatic. The demand for sensor wafers is more stable. The proliferation of sensors in consumer electronics applications has, however, increased the susceptibility of this market too to economic fluctuations. In addition, the consolidation of customer companies might be a risk for the company's wafer sales.
Okmetic's share of the global silicon wafer market is around one percent, and market prices have a notable effect on the price development of the company's products. The company has considerable pricing power only with its own special products. The pricing of other wafers is largely based on global market price.
Okmetic operates globally, and therefore the company's business is affected by risks due to exchange rate fluctuations, consisting of cash flows from purchases and sales. A significant part of sales is conducted in US dollars. Despite hedging of the forecasted open currency position, the company remains exposed to exchange rate fluctuations.
Substantial volumes of electricity are used in Okmetic's production. Despite hedging, the company is exposed to fluctuations in the price of electricity.
On 31 March 2016, Okmetic Oyj's paid-up share capital, as entered in the Finnish Trade Register, was 11,821,250.00 euro. The number of shares was 17,287,500. The shares have no nominal value attached. Each share entitles to one vote at general meetings. The company has one class of shares. The company's shares are included in the Finnish book-entry system.
A total of 0.7 (2.4) million shares were traded between 1 January and 31 March 2016, representing 4.2 (13.6) percent of the weighted average of share total of 17.3 (17.3) million during the period. The lowest quotation of the reporting period was 6.66 (4.80) euro, and the highest 7.60 (7.25) euro, with the average being 7.07 (5.74) euro. The closing quotation for the period was 7.60 (6.59) euro. At the end of the period, market capitalisation amounted to 131.4 (113.9) million euro.
At the end of the period, the company held a total of 406,129 (416,763) own shares, which is approximately 2.3 (2.4) percent of Okmetic's all shares and votes.
The sale of the Allen epi plant
With its stock exchange release published on 1 April 2016, Okmetic announced that it has sold its production plant focusing on epitaxial deposition of silicon wafers, located in Allen in the United States, to American company Epitek Silicon instead of the wind-down announced earlier. In line with the agreement, Okmetic Inc. has transferred the plant to the buyer on 31 March 2016.
The purchase price was 9.5 million US dollars (around 8.5 million euros). The f inancing conditions are as follows: 0.25 million US dollars were paid at the signing of the agreement on 31 March 2016 and the rest of the purchase price is financed by a vendor note. According to the agreement, 1.5 million US dollars of the vendor note is paid back in parts on a monthly basis by the use of inventories mostly or totally during 2016, 5.75 million US dollars in July 2016, 1.0 million US dollars will be paid 12 months after the signing of the agreement and 1.0 million US dollars 24 months after the signing of the agreement. Okmetic recorded a non-recurring gain of six million euro based on the transaction.
As a result of the sale the business, production facility, equipment, inventories as well as majority of the personnel of Okmetic's US-based subsidiary Okmetic Inc. transferred to the buyer. Okmetic Inc. continues as a North American sales office as announced earlier. Okmetic has agreed with Epitek Silicon that Okmetic will deliver wafers for epitaxial deposition at least for five years time after the transaction.
Tender offer
Okmetic Oyj ("Okmetic") and National Silicon Industry Group ("NSIG") have on 1 April 2016 entered into a Combination Agreement pursuant to which NSIG, either directly or through its subsidiary (jointly, the "Offeror"), will make a voluntary public tender offer to purchase all of the issued and outstanding shares and option rights in Okmetic that are not owned by Okmetic or any of its subsidiaries (the "Tender Offer").
The consideration offered for each share validly tendered in the Tender Offer is EUR 9.20 in cash. In addition, in accordance with the Combination Agreement, the dividend of EUR 0.65 per share declared by Okmetic's Annual General Meeting held on 7 April 2016 and paid to Okmetic shareholders on 18 April 2016 does not reduce the price offered for the shares. The price offered for Option Rights validly tendered in the Tender Offer is EUR 4.87 in cash for each 2013 A Option Right and EUR 4.62 in cash for each 2013 B Option Right.
The Share Offer Price of EUR 9.20 per Okmetic share represents a premium of approximately 21.1 percent compared to the closing price of the Okmetic shares on Nasdaq Helsinki Ltd. ("Nasdaq Helsinki") on 31 March 2016, the last trading day before the announcement of the Tender Offer. The Share Offer Price of EUR 9.20 together with the Dividend of EUR 0.65 per Okmetic share already paid to Okmetic's shareholders, EUR 9.85 in the aggregate, represents a premium of approximately 29.6 percent compared to the closing price of the shares on Nasdaq Helsinki on the last trading day before the announcement of the Tender Offer.
Certain of the largest shareholders of Okmetic, Accendo Capital SICAV SIF, Ilmarinen Mutual Pension Insurance Company, Oy Ingman Finance Ab, Mandatum Life Insurance Company Limited and Kaleva Mutual Insurance Company, as well as the members of the Board of Directors and the Executive Management Group of Okmetic, representing jointly approximately 29.9 percent of the outstanding shares and votes in Okmetic as well as 92.9 percent of the outstanding option rights, have, subject to certain customary conditions, irrevocably undertaken to accept the Tender Offer.
The detailed terms and conditions of the Tender Offer and information on how to accept the Tender Offer will be included, in accordance with the Combination Agreement, in the tender offer document to be published by the Offeror by 22 April 2016.
Annual general meeting on 7 April 2016
Okmetic Oyj's annual general meeting on 7 April 2016 adopted the annual accounts and the consolidated annual accounts for 2015 and discharged the company's management from liability. The annual general meeting decided, in accordance with the proposal of the board of directors, to distribute a dividend of 0.65 euro per share (in total 11.0 million euro). The dividend was paid on 18 April 2016.
The annual general meeting confirmed that the company's board of directors consists of five members. Mr. Jan Lång, Mr. Hannu Martola, Ms. Riitta Mynttinen, Mr. Mikko Puolakka and Mr. Henri Österlund were re-elected as members of the board of directors until the end of the next annual general meeting. The board of directors elected Jan Lång as chairman and Henri Österlund as vice chairman in its organising meeting held immediately after the annual general meeting.
Authorised Public Accountant PricewaterhouseCoopers Oy was re-elected as auditor, with APA Mr. Mikko Nieminen as principal auditor.
A separate stock exchange release on the decisions of the annual general meeting was published on 7 April 2016.
Financing
To ensure liquidity, Okmetic has rearranged its credit facilities after the end of the review period. The company has negotiated new committed credit facilities of 6.0 million euro to replace the 6.0 million euro uncommitted credit facilities. A total of 3.0 million euro has been drawn from these new committed credit facilities after the review period.
These interim financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting.
In preparing these interim financial statements, Okmetic has followed the same accounting policies as in the financial statements for 2015 except for the effect of changes required by the adoption of certain new or revised standards and interpretations as of 1 January 2016, which have been described in financial statements 2015. The adoption of the new and revised standards and interpretations has not had an effect on the figures presented from the reporting period.
1)"Other reserves" contains hedge reserve and translation differences.
On 31 March 2016, Okmetic sold its production plant focusing on epitaxial deposition of silicon wafers, located in Allen in the United States, to American company Epitek Silicon instead of the wind-down announced earlier. The purchase price was 9.5 million US dollars (around 8.5 million euros). Okmetic recorded a gain of 6.0 million euro based on the transaction.
The contract price of the derivatives has been used as the nominal value of the underlying asset.
Fair value estimation
The group's financial instruments that are measured at fair value comprise derivatives used for hedging and held for trading.
Fair values of level 1 instruments are based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Fair values of level 2 instruments are based on other data than quoted prices in active markets, but on the data from which the asset or liability is observable, either directly (i.e. price) or indirectly (i.e. derived from the prices).
Electricity derivatives are classified as level 1, currency derivatives as level 2.
Fair value determination
The fair values of electricity derivatives are based on quoted market prices. The fair values of currency forwards and options are determined on the basis of market and contract prices of the agreements at the reporting date by applying commonly used valuation techniques.
1) non-recurring items adjusted in 2016
When calculating earnings per share and equity per share, Okmetic's own shares are deducted from the total number of shares.
All figures of the financial tables are rounded, and consequently the sum of individual figures can deviate from the presented sum figure.
The future estimates and forecasts in this interim report release are based on the company management's current knowledge. Actual events and results may differ from the estimates presented here.
A briefing for analysts, investors and media takes place today, Thursday 21 April 2016, at 8.30 a.m. in Helsinki Stock Exchange building, Fabianinkatu 14a, Helsinki (2nd floor, entrance via Nasdaq's reception). The result will be presented by President Kai Seikku.
Board of directors
For further information, please contact:
President Kai Seikku
tel. +358 9 5028 0232, email: kai.seikku@okmetic.com
Senior Vice President, Finance, IT and Communications Juha Jaatinen
tel. +358 9 5028 0286, email: juha.jaatinen@okmetic.com
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