UMC(UMC) - 2021 Q4 - Annual Report

PART I ITEM 3 KEY INFORMATION Risk Factors The company faces risks from industry cyclicality, customer concentration, manufacturing complexity, and geopolitical tensions - The company identifies the cyclical nature of the semiconductor industry, periodic overcapacity, and vulnerability to economic downturns as significant risks to its business[21] - A significant portion of revenue comes from a small number of customers; in 2021, the top ten customers accounted for 54.5% of operating revenues, making the company vulnerable to the loss of any key customer[41] - Substantial political risks are associated with operations in Taiwan, particularly due to the tense relationship with the People's Republic of China (PRC), which could negatively affect business and investment value[73][74] - The ability to deposit common shares into the ADS program is restricted by R.O.C. law, which may adversely affect the liquidity and price of the ADSs and cause a divergence from the common share price on the Taiwan Stock Exchange[90][91][92] ITEM 4 INFORMATION ON THE COMPANY History and Development of the Company UMC operates a customer-driven foundry model, expanding its global footprint through strategic acquisitions and partnerships Wafer Sales by Application (2019-2021) | Application | 2019 % | 2020 % | 2021 % | | :--- | :--- | :--- | :--- | | Communication | 52.2 | 52.1 | 46.2 | | Consumer | 26.4 | 24.3 | 26.6 | | Computer | 13.6 | 13.9 | 16.7 | | Others | 7.8 | 9.7 | 10.5 | | Total | 100.0 | 100.0 | 100.0 | - The company's strategy focuses on a customer-driven, partnership-based business model to create a network of alliances among IDMs, IP/design houses, and foundries, aiming for synergistic growth[118][120] - Strategic expansion includes the 2019 acquisition of the remaining 84.1% of Mie Fujitsu Semiconductor (now USJC) in Japan and the establishment of USCXM in Xiamen, China, to bolster 12-inch wafer capacity for advanced nodes[111][112] - In September 2021, UMC entered into a strategic share exchange with Chipbond Technology Corporation, resulting in UMC and its subsidiary FORTUNE jointly holding approximately 9.09% of Chipbond's equity[117] Business Overview The company operates global manufacturing facilities, achieving high capacity utilization while facing intense industry competition Capacity and Utilization (in thousands of 8-inch wafer equivalents) | Metric | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Total Estimated Capacity | 8,148 | 9,188 | 9,453 | | Total Output (Actual) | 7,227 | 8,902 | 9,871 | | Average Capacity Utilization | 88.7% | 96.9% | 104.4% | Geographic Breakdown of Operating Revenues (by Customer Location) | Region | 2019 % | 2020 % | 2021 % | | :--- | :--- | :--- | :--- | | Taiwan | 36.4 | 36.8 | 37.9 | | Singapore | 16.2 | 14.7 | 13.7 | | China (incl. Hong Kong) | 12.9 | 12.8 | 14.6 | | USA | 13.5 | 13.9 | 11.4 | | Japan | 6.6 | 8.7 | 6.4 | | Europe | 4.7 | 3.6 | 2.6 | | Others | 9.7 | 9.5 | 13.4 | | Total | 100.0 | 100.0 | 100.0 | - The company's primary competitors include TSMC, SMIC, and Globalfoundries, as well as the foundry operations of IDMs like Samsung and Intel[182] - UMC has pledged to reach net-zero carbon emissions by 2050 and joined the RE100 initiative, committing to use 100% renewable energy by 2050[201] Organizational Structure UMC operates through a global network of subsidiaries in key regions to support its international manufacturing and sales footprint - The company's organizational structure includes key wholly-owned subsidiaries such as UMC Group (USA), United Microelectronics (Europe) B.V., and United Semiconductor Japan Co., Ltd., which support its global sales and manufacturing operations[213] - UMC holds significant majority or full ownership in its manufacturing subsidiaries in China, including Hejian Technology (Suzhou) Co., Ltd. (99.9985%) and United Semiconductor (Xiamen) Co., Ltd. (69.95%)[213] ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS Operating Results The company achieved significant growth in 2021, with a 20.5% revenue increase and a substantial expansion in gross margin to 33.8% Key Financial Performance (2020 vs. 2021) | Metric | 2020 (NT$ million) | 2021 (NT$ million) | Change (%) | | :--- | :--- | :--- | :--- | | Operating Revenues | 176,821 | 213,011 | +20.5% | | Gross Profit | 38,997 | 72,050 | +84.8% | | Operating Income | 21,931 | 51,686 | +135.7% | | Net Income (Parent) | 22,861 | 51,246 | +124.2% | Wafer Sales by Process Technology (2019-2021) | Process Technology | 2019 % | 2020 % | 2021 % | | :--- | :--- | :--- | :--- | | 14nm and under | 0.0 | 0.0 | 0.1 | | 28nm | 11.3 | 13.6 | 19.8 | | 40nm | 23.1 | 23.3 | 18.8 | | 65nm | 14.7 | 17.4 | 18.8 | | 90nm | 13.6 | 11.5 | 8.2 | | 0.11/0.13 micron | 12.6 | 11.1 | 11.5 | | 0.15/0.18 micron | 13.1 | 12.8 | 12.5 | | 0.25/0.35 micron | 8.7 | 7.8 | 7.8 | | 0.50 micron or higher | 2.9 | 2.5 | 2.5 | - The average capacity utilization rate increased significantly, from 96.9% in 2020 to 104.4% in 2021, reflecting strong demand and contributing to improved margins[218][222] Liquidity and Capital Resources UMC maintains a strong liquidity position, funding significant capital expenditures through operating cash flow and debt financing Cash Flow Summary (in NT$ millions) | Cash Flow from | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Operating Activities | 54,904 | 65,745 | 90,352 | | Investing Activities | (31,682) | (40,112) | (62,163) | | Financing Activities | (9,867) | (25,601) | 12,490 | - Capital expenditures have been increasing, reaching NT$50,120 million in 2021, up from NT$28,104 million in 2020, primarily for equipment purchases[271] - The company is pursuing major expansion projects in Taiwan and Singapore to meet strong wafer demand, supported by multi-year supply agreements with customers[272] - In 2021, the company issued new domestic unsecured corporate bonds totaling NT$14,600 million and zero-coupon exchangeable bonds of US$400 million to fund capital expenditures[263][264] Research, Development, Patents and Licenses, Etc. The company maintains a strong focus on R&D, investing 6.1% of operating revenues in 2021 to develop cost-effective technologies R&D Expenditures (2019-2021) | Year | R&D Expense (NT$ million) | % of Operating Revenues | | :--- | :--- | :--- | | 2019 | 11,860 | 8.0% | | 2020 | 12,896 | 7.3% | | 2021 | 12,935 | 6.1% | ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES Directors and Senior Management UMC's leadership includes an experienced executive team and a board composed of nine directors, including five independents - The board of directors is composed of nine members, with five being independent directors, indicating a majority-independent board structure[280] - Key leadership includes Stan Hung as Chairman & Chief Strategic Officer, SC Chien and Jason Wang as Co-presidents, and Chitung Liu as Chief Financial Officer[280][281][282][283][289] Compensation In 2021, aggregate compensation for directors was NT$31.3 million, while executive officers received NT$1,366.6 million 2021 Compensation Summary (in NT$ millions) | Group | Total Compensation | Bonus Component | | :--- | :--- | :--- | | Directors | 31.3 | - | | Executive Officers | 1,366.6 | 197.1 | | Directors & Senior Management | 473.0 | 46.1 | Board Practices The company's board operates with three-year terms and has established Audit, Remuneration, and Nominating committees - The board has established an Audit Committee, a Remuneration Committee, and a Nominating Committee, each composed entirely of the company's five independent directors[292][293][295] - Directors are elected for a three-year term at the annual general meeting of shareholders[291] Employees As of year-end 2021, the company had 19,741 employees, primarily engineers and technicians, who participate in a profit-sharing plan Employee Headcount by Role (2019-2021) | Role | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Engineers | 11,328 | 11,377 | 11,606 | | Technicians | 7,416 | 7,211 | 7,318 | | Administrative Staff | 833 | 798 | 817 | | Total | 19,577 | 19,386 | 19,741 | - The board proposed an employee cash bonus of NT$4,771 million (US$172 million) related to 2020 retained earnings[297] ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS Major Shareholders As of March 2022, major shareholders include Hsun Chieh Investment (3.54%) and Silicon Integrated Systems (2.29%) Beneficial Ownership of Major Shareholders (as of March 29, 2022) | Name of Beneficial Owner | Number of Common Shares | Percentage (%) | | :--- | :--- | :--- | | Hsun Chieh Investment Co., Ltd. | 441,371,000 | 3.54% | | Silicon Integrated Systems Corp. | 285,380,424 | 2.29% | | Directors and executive officers as a group | 853,071,669 | 6.83% | Related Party Transactions The company engages in arm's-length transactions with affiliated companies, primarily providing foundry services - The company generated NT$2,816 million (US$102 million) in operating revenues in 2021 from providing foundry services to two major related fabless design companies[303] ITEM 8 FINANCIAL INFORMATION Consolidated Statements and Other Financial Information The company settled legal proceedings with Micron Technology in 2021 with no material financial or operational effect - In November 2021, UMC and Micron Technology announced a global settlement agreement for all legal proceedings worldwide related to trade secret allegations, with no material financial or operational effect on UMC[308][310] Dividend Policy The company's dividend policy balances shareholder returns and financial planning, with a proposed NT$3 per share distribution for 2022 Cash Dividend Per Share (2019-2021) | Year | Cash Dividend per Share (NT$) | | :--- | :--- | | 2019 | 0.58989396 | | 2020 | 0.80395653 | | 2021 | 1.59988820 | - On February 24, 2022, the board proposed a cash distribution from capital surplus of approximately NT$3 per common share, to be approved at the May 27, 2022 annual general meeting[312] ITEM 10 ADDITIONAL INFORMATION Memorandum and Articles of Association The company's articles outline its governance structure, including a nine-member board and shareholder rights - The board of directors consists of nine members, five of whom are independent directors, and has established an Audit Committee composed of all independent directors[324][326] - The company's dividend policy targets a cash portion between 20% and 100% of the total dividend payout for shareholders[344][345] - The company is authorized to repurchase up to 10% of its issued common shares for purposes such as employee compensation or maintaining credit[349] Material Contracts UMC maintains material contracts for global sales, technology licensing with firms like IBM, and major facility construction - The company has ongoing sales and marketing support service contracts with its subsidiaries in key global markets, including the USA, Europe, Korea, China, and Japan[363] - UMC holds long-term patent cross-license agreements with major technology companies such as IBM (until 2029 and 2035) and Avago Technologies (until 2023)[365] - Significant construction contracts are active for building facilities at Fab 12A in Taiwan, with a total contracted amount exceeding NTD 12.6 billion[366] Exchange Controls Taiwan's liberalized exchange controls permit foreign investment in the securities market with annual remittance limits for residents - Foreign ownership limits in Taiwan Stock Exchange-listed companies have been lifted, allowing foreign investors to hold investments without percentage limitations unless specific laws impose restrictions[370] - R.O.C. companies may remit up to US$50 million per calendar year, and residents up to US$5 million, for transactions involving currency conversion[377] - Deposits of common shares into a depositary receipt facility are restricted and require specific R.O.C. FSC approval[382] Taxation This section outlines R.O.C. and U.S. tax implications for security holders, including withholding taxes and capital gains treatment - For non-R.O.C. resident holders, dividends distributed by the company are subject to a 21% withholding tax in Taiwan[386] - Gains from the sale of R.O.C. securities are generally exempt from R.O.C. income tax, though a 0.3% securities transaction tax applies to common share sales[387][388] - The company does not believe it was a Passive Foreign Investment Company (PFIC) for the 2021 tax year, which would have adverse U.S. tax consequences for investors[408] ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risks from interest rate and foreign currency fluctuations, which it manages via hedging strategies - The company's primary market risk exposures are from interest rate movements on borrowings and foreign exchange rate movements, particularly involving the U.S. dollar[420][421] - A 10 basis point change in interest rates would cause the profit for 2021 to decrease/increase by NT$39 million[805] - A 10% strengthening/weakening of the NTD against the USD would decrease/increase the 2021 profit by NT$1,104 million[804] PART II ITEM 15 CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2021 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[436] - Based on the COSO criteria, management assessed the internal control over financial reporting as effective as of December 31, 2021[438] - The independent registered public accounting firm, Ernst & Young, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[438][442] ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT The board has identified three independent directors who qualify as audit committee financial experts under SEC rules - The board has determined that independent directors Wenyi Chu, Wen-Hsin Hsu, and Kuang Si Shiu are audit committee financial experts[449] ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES In 2021, the company paid its principal auditor, Ernst & Young, a total of NT$67.5 million in fees for various services Principal Accountant Fees (in thousands NT$) | Fee Category | 2020 | 2021 | | :--- | :--- | :--- | | Audit Fees | 61,508 | 56,226 | | Audit-related Fees | 11,538 | 7,577 | | Tax Fees | 3,977 | 3,719 | | Total | 77,023 | 67,522 | ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS The company periodically conducts share buy-back plans, with the most recent plan announced in June 2020 - The company has conducted several share buy-back plans, with the 21st plan announced on June 5, 2020, to purchase up to 200 million shares[457] Share Repurchases (June 2020) | Month | Total Shares Purchased | Average Price (NT$) | Shares Purchased as Part of Plan | Max Shares Remaining Under Plan | | :--- | :--- | :--- | :--- | :--- | | June 2020 | 76,000,000 | 15.80 | 76,000,000 | 124,000,000 | ITEM 16G. CORPORATE GOVERNANCE The company's governance practices are governed by R.O.C. law but are largely aligned with NYSE standards - UMC's board has a majority of independent directors (five out of nine), aligning with NYSE standards[461] - The company has established nominating and remuneration committees composed entirely of independent directors, similar to NYSE requirements[462][463] - A key difference from NYSE standards is that shareholder approval for equity compensation plans follows R.O.C. requirements, which grant more authority to the board[464] PART III ITEM 18 FINANCIAL STATEMENTS The company's audited financial statements received an unqualified opinion, with slow-moving inventory valuation as a critical audit matter - The independent auditor, Ernst & Young, issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2021[477] - The critical audit matter identified by the auditor was the 'Valuation for Slow-Moving Inventories' due to the significant management judgment involved in estimating the reserve[481][483] Consolidated Balance Sheet Highlights (in NT$ thousands) | Account | Dec 31, 2020 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | 366,454,101 | 450,955,341 | | Total Current Assets | 164,305,911 | 233,273,433 | | Total Non-Current Assets | 202,148,190 | 217,681,908 | | Total Liabilities | 143,314,539 | 186,580,294 | | Total Current Liabilities | 79,481,143 | 108,249,378 | | Total Non-Current Liabilities | 63,833,396 | 78,330,916 | | Total Equity | 223,139,562 | 264,375,047 | Consolidated Income Statement Highlights (in NT$ thousands) | Account | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Operating Revenues | 148,201,641 | 176,820,914 | 213,011,018 | | Gross Profit | 21,314,972 | 38,997,101 | 72,049,629 | | Operating Income | 4,883,545 | 21,931,227 | 51,686,286 | | Net Income | 4,576,250 | 20,851,667 | 50,578,180 | | Basic EPS (NTD) | 0.71 | 1.93 | 4.27 |