UMC(US:UMC)2020-04-28 10:47Part I Key Information This section presents selected five-year financial data and a comprehensive overview of the company's business, financial, manufacturing, political, legal, and market-related risks Selected Financial Data The company's operating revenues slightly decreased from NT$151,253 million in 2018 to NT$148,202 million in 2019, while net income attributable to stockholders of the parent increased, with wafer fabrication remaining the dominant revenue source Consolidated Statement of Comprehensive Income Data (2017-2019) | Indicator | 2017 (NT$ million) | 2018 (NT$ million) | 2019 (NT$ million) | 2019 (US$ million) | | :--- | :--- | :--- | :--- | :--- | | Operating revenues | 149,285 | 151,253 | 148,202 | 4,955 | | Gross profit | 27,058 | 22,840 | 21,315 | 713 | | Operating income | 6,568 | 5,680 | 4,883 | 163 | | Net income | 6,679 | 3,248 | 4,576 | 153 | | Net income attributable to Stockholders of the parent | 9,676 | 7,678 | 8,155 | 273 | | Basic Earnings per share (NT$) | 0.81 | 0.65 | 0.71 | 0.02 | | Diluted Earnings per share (NT$) | 0.75 | 0.60 | 0.65 | 0.02 | Consolidated Balance Sheet Data (As of Dec 31) | Indicator | 2018 (NT$ million) | 2019 (NT$ million) | 2019 (US$ million) | | :--- | :--- | :--- | :--- | | Total assets | 362,597 | 366,262 | 12,245 | | Total liabilities | 158,200 | 163,348 | 5,461 | | Stockholders' equity | 204,397 | 202,914 | 6,784 | Segment Data - Operating Revenues (NT$ million) | Segment | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Wafer fabrication | 148,940 | 151,024 | 148,124 | | New business | 345 | 229 | 78 | Risk Factors The company identifies a wide range of risks, including industry cyclicality, intense competition, customer dependence, manufacturing complexities, geopolitical tensions, and ongoing legal disputes, alongside risks related to ADSs and potential disruptions from pandemics - The business is exposed to significant risks from the cyclical nature of the semiconductor industry, periodic overcapacity, and intense competition, which can lead to volatile revenues and reduced demand262741 - The top ten customers accounted for 51.3% of operating revenues in 2019, indicating significant revenue concentration risk4647 - Substantial political risks stemming from its location in Taiwan and the tense relationship with the PRC could adversely affect operations and market price8586 - Ongoing legal proceedings with the U.S. Department of Justice (DOJ) regarding alleged trade secret theft, and a related shareholder class action lawsuit, pose significant financial and reputational risks8788 - The outbreak of contagious diseases, such as COVID-19, presents a material risk that could disrupt operations, reduce customer orders, and negatively impact the global supply chain3839 Information on the Company This section details UMC's position as a leading global semiconductor foundry, covering its history, strategic focus, key acquisitions, manufacturing facilities, process technologies, capacity, customer base, quality management, intellectual property, R&D, and risk management policies History and Development of the Company UMC, founded in 1980, is a major independent semiconductor foundry, with recent developments including the acquisition of USJC in Japan and the establishment of USCXM in China, aligning with a growth strategy focused on differentiating process technologies and expanding global presence - In October 2019, UMC acquired the remaining 84.1% of Mie Fujitsu Semiconductor (renamed USJC), specializing in 90nm, 65nm, and 40nm products on 300mm wafers137 - UMC established United Semiconductor (Xiamen) Co., Ltd. (USCXM) in China, focusing on 12-inch wafer foundry services and manufacturing on 40nm and 28nm technology nodes138 - The company's strategy centers on a customer-driven, partnership-based business model to foster alliances and enhance synergy among IDMs, IP/design houses, and foundries143144 Business Overview UMC operates multiple fabs globally, offering process technologies from 0.5 micron to 14nm, with an estimated 8-inch equivalent capacity of 8,148 thousand wafers and 88.7% utilization in 2019, serving key customers primarily from fabless design companies Wafer Sales by Application | Application | 2017 (%) | 2018 (%) | 2019 (%) | | :--- | :--- | :--- | :--- | | Communication | 48.6 | 45.2 | 52.2 | | Consumer | 29.4 | 28.6 | 26.4 | | Computer | 13.1 | 16.3 | 13.6 | | Others | 8.9 | 9.9 | 7.8 | Capacity and Utilization (8-inch wafer equivalents) | Year | Total Estimated Capacity (thousand wafers) | Total Output (thousand wafers) | Average Utilization (%) | | :--- | :--- | :--- | :--- | | 2017 | 7,304 | 6,896 | 94.4% | | 2018 | 7,673 | 7,143 | 93.1% | | 2019 | 8,148 | 7,227 | 88.7% | - The top ten customers accounted for 51.3% of operating revenues in 2019, with fabless design companies constituting 91.3% of wafer sales190192 - R&D expenses were NT$11,860 million in 2019, representing 8.0% of operating revenues, and the company held 6,024 U.S. patents and 7,483 patents outside the U.S. as of December 31, 2019213216 Operating and Financial Review and Prospects This section analyzes UMC's financial performance and condition, detailing the impact of industry cyclicality and pricing pressures on operating results, supported by strong liquidity from operating cash flow, bank borrowings, and bond issuances, while outlining contractual obligations Operating Results In 2019, operating revenues decreased by 2.0% to NT$148,202 million, with gross margin falling to 14.4% due to a 2.9% decline in average selling price, partially offset by increased wafer shipments and lower R&D expenses - 2019 vs. 2018: Operating revenues decreased by 2.0% due to a 2.9% decline in average selling price, partially offset by a 1.1% increase in wafer shipments, with gross margin decreasing from 15.1% to 14.4%309311 - 2018 vs. 2017: Operating revenues increased by 1.3% due to a 4.0% increase in wafer shipments, partially offset by a 3.4% decline in average selling price, with gross margin decreasing from 18.1% to 15.1% due to higher operating costs321322 Wafer Sales by Process Technology (%) | Process Technology | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | 28 nanometers and below | 17.1 | 15.2 | 11.3 | | 40 nanometers | 28.4 | 25.3 | 23.1 | | 65 nanometers | 12.3 | 12.5 | 14.7 | | 90 nanometers | 4.9 | 8.3 | 13.6 | | 0.11/0.13 micron | 11.5 | 11.6 | 12.6 | | 0.15/0.18 micron | 12.4 | 13.7 | 13.1 | | 0.25 micron and above | 13.4 | 13.4 | 11.6 | Liquidity and Capital Resources UMC maintains liquidity through operating cash flow, bank borrowings, and bond issuances, with NT$95,492 million in cash and cash equivalents as of December 31, 2019, and NT$54,904 million in net cash from operating activities in 2019, funding significant capital expenditures Cash Flow Summary (NT$ million) | Activity | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 52,474 | 50,935 | 54,904 | | Net cash used in investing activities | (35,416) | (15,500) | (31,682) | | Net cash from (used in) financing activities | 9,162 | (33,485) | (9,867) | - Capital expenditures were approximately NT$44,236 million in 2017, NT$19,590 million in 2018, and NT$17,760 million (US$594 million) in 2019352 - As of December 31, 2019, the company held NT$95,492 million (US$3,193 million) in cash and cash equivalents, with total bonds payable of NT$38,781 million (US$1,297 million)333350 Tabular Disclosure of Contractual Obligations As of December 31, 2019, total contractual cash obligations amounted to NT$158,415 million, primarily comprising NT$90,998 million in long-term debt (unsecured bonds and loans) and NT$38,878 million in purchase obligations Contractual Obligations as of December 31, 2019 (NT$ million) | Obligation Type | Total | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Unsecured bonds | 39,940 | 20,660 | 10,590 | 8,690 | — | | Loans | 51,058 | 18,316 | 19,632 | 13,098 | 12 | | Lease obligations | 7,128 | 741 | 1,414 | 1,181 | 3,792 | | Purchase obligations | 38,878 | 29,832 | 2,845 | 1,810 | 4,391 | | Other long-term obligations | 21,411 | 101 | 12,765 | 8,446 | 99 | | Total | 158,415 | 69,650 | 47,246 | 33,225 | 8,294 | Directors, Senior Management and Employees This section details the company's leadership, including its board of directors and key executives, outlines the board committee structure, and provides information on its workforce size, compensation, and insider share ownership - The board comprises nine directors, including four independent directors, with key leadership including Chairman Stan Hung and Co-presidents SC Chien and Jason Wang364420 - As of December 31, 2019, the company employed 19,577 people, a slight decrease from 20,076 in 2017382388 - Aggregate compensation in 2019 was approximately NT$29.5 million for directors and NT$234.9 million for executive officers375 - The board has established an Audit Committee, a Remuneration Committee, and a Nominating Committee to enhance corporate governance377378381 Major Stockholders and Related Party Transactions This section identifies the company's major shareholders, including Hsun Chieh Investment Co., Ltd. and Silicon Integrated Systems Corp., and details related party transactions, which generated NT$1,563 million in operating revenues in 2019 Major Stockholders (as of April 12, 2020) | Name of Beneficial Owner | Common Shares Beneficially Owned | Percentage (%) | | :--- | :--- | :--- | | Hsun Chieh Investment Co., Ltd. | 441,371,000 | 3.75% | | Silicon Integrated Systems Corp. | 285,380,424 | 2.42% | - The company provides foundry services to related parties, including Faraday Technology Corp. and Silicon Integrated Systems Corp., generating NT$1,563 million (US$52 million) in operating revenues in 2019397398 Financial Information This section covers significant legal proceedings, including an indictment by the U.S. DOJ and a civil suit from Micron, and outlines the company's dividend policy, with a proposed dividend of approximately NT$0.75 per share for 2019 - UMC faces an indictment from the U.S. Department of Justice (DOJ) and a civil complaint from Micron regarding alleged trade secret theft related to DRAM technology cooperation with Fujian Jinhua, with development activities suspended403405 - A shareholder class action lawsuit was filed against the company in the U.S. in March 2019, alleging violations of the Securities Exchange Act of 1934, with the mediation process ongoing406 - The board proposed a cash dividend of NT$9,765 million (approximately NT$0.75 per share) for 2019, subject to shareholder approval, following a cash dividend of NT$0.58989396 per share for 2018408 Additional Information This section provides detailed information on the company's corporate structure, material contracts, exchange controls, and taxation, outlining shareholder rights, board structure, dividend policies, key agreements, and R.O.C. and U.S. federal tax considerations for shareholders - The company holds material cross-license agreements with IBM for semiconductor patents and technology license agreements with subsidiaries like USCXM for 28nm, 40/55nm, and 80nm process technologies463466468 - R.O.C. tax considerations for non-resident holders indicate that dividends are subject to a 21% withholding tax, while capital gains from securities transactions are generally exempt from income tax496498 - For U.S. holders, the company believes it was not a Passive Foreign Investment Company (PFIC) for 2019 and does not expect to become one, with dividends on ADSs expected to qualify for reduced tax rates512520 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks stem from interest rate and foreign currency exchange rate fluctuations, particularly the U.S. dollar, which are managed through natural hedging, with no outstanding foreign currency forward contracts as of December 31, 2019 - The company's main market risks arise from changes in interest rates on borrowings and foreign currency exchange rates, primarily the U.S. dollar, due to export sales and equipment purchases537540 - A sensitivity analysis indicates a 10 basis point change in interest rates would impact 2019 profit by approximately NT$46 million, while a 10% change in the NTD/USD exchange rate would impact profit by approximately NT$1,009 million861863 - The company employs a policy of natural hedging to reduce foreign exchange exposure and had no outstanding foreign currency forward contracts as of December 31, 2019544545 Part II Controls and Procedures Management concluded that disclosure controls and procedures, and internal control over financial reporting (ICFR), were effective as of December 31, 2019, though the ICFR assessment excluded the newly acquired USJC, with Ernst & Young issuing an unqualified opinion on ICFR effectiveness - Management concluded that both disclosure controls and procedures and internal control over financial reporting (ICFR) were effective as of December 31, 2019554558 - The ICFR assessment excluded the internal controls of United Semiconductor Japan Co., Ltd. (USJC), acquired on October 1, 2019, which constituted 6.27% of total assets and 2.89% of revenues for the year557561 - The independent registered public accounting firm, Ernst & Young, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2019560562 Other Information This section covers governance and compliance topics, including the identification of audit committee financial experts, adoption of a Code of Ethics, principal accountant fees, details of share repurchase programs, and significant differences in corporate governance practices compared to NYSE standards Principal Accountant Fees (NT$ thousands) | Fee Type | 2018 | 2019 | | :--- | :--- | :--- | | Audit Fees | 52,794 | 62,040 | | Audit-related Fees | 1,283 | 1,095 | | Tax Fees | 4,304 | 3,943 | | Total | 58,381 | 67,078 | Share Repurchases in 2019 | Period | Total Shares Purchased | Average Price (NT$) | | :--- | :--- | :--- | | Jan 2019 (till Jan 5) | 20,000,000 | 10.91 | | Apr 2019 (from Apr 26) | 19,000,000 | 13.37 | | May 2019 | 126,000,000 | 13.10 | | Jun 2019 (till Jun 13) | 55,000,000 | 13.39 | - The company discloses significant differences in its corporate governance practices compared to NYSE standards for U.S. companies, including the absence of a majority of independent directors on the board and variations in board committee composition and roles578581582 Part III Financial Statements This section presents the company's audited consolidated financial statements for 2017-2019, prepared under IFRS, including the independent auditor's report, balance sheets, statements of comprehensive income, changes in equity, cash flows, and detailed notes Report of Independent Registered Public Accounting Firm Ernst & Young issued an unqualified opinion on the consolidated financial statements for 2017-2019, highlighting the valuation of slow-moving inventories as a critical audit matter and noting the adoption of IFRS 15, IFRS 9, and IFRS 16 - The auditor, Ernst & Young, issued an unqualified opinion on the consolidated financial statements595 - A critical audit matter identified was the valuation for slow-moving inventories, requiring complex judgment regarding historical usage, write-offs, and inventory aging600601 - The company adopted new accounting standards: IFRS 15 (Revenue) and IFRS 9 (Financial Instruments) in 2018, and IFRS 16 (Leases) in 2019597 Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial figures, covering the adoption of new IFRS standards, financial instruments, inventory valuation, property, plant & equipment, business combinations like the USJC acquisition, significant contingencies, related party transactions, segment information, and capital management strategies - The company adopted IFRS 16 "Leases" on January 1, 2019, recognizing NT$8,578 million in right-of-use assets and NT$6,006 million in lease liabilities on the balance sheet620 - The acquisition of USJC on October 1, 2019, was accounted for as a business combination, involving a cash consideration of JPY 54.4 billion and resulting in a bargain purchase gain of NT$171.6 million822825 - The company details significant contingencies related to legal proceedings with Micron and the U.S. DOJ concerning alleged trade secret misappropriation, with the outcome and potential impact unassessable at the time of the report854857 - The company's capital management strategy aims to maintain a healthy debt-to-capital ratio, which was 25.06% as of December 31, 2019, down from 26.72% in 2018891892