GLOBALFOUNDRIES(GFS) - 2022 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION This section outlines the principal risks facing the company, categorized into business and industry, manufacturing operations, intellectual property, legal and regulatory, and risks related to its status as a controlled foreign private issuer Risk Factors The company faces significant risks from global economic and geopolitical conditions, particularly US-China trade tensions and the Russia-Ukraine conflict, which could disrupt supply chains and demand - The company's business is materially affected by geopolitical tensions, particularly between the United States and China, and the conflict in Ukraine, which have led to trade barriers, export controls, and supply chain uncertainties for materials like natural gas[29][30] - A significant portion of revenue comes from a small number of customers, with the ten largest customers accounting for approximately 70%, 67%, and 73% of wafer shipment volume in 2022, 2021, and 2020, respectively[38] - The company relies heavily on a limited number of suppliers for silicon-on-insulator (SOI) wafers, with its largest supplier, Soitec S.A., providing 54% of its SOI wafers in 2022[39] - The company has entered into multiple Long-Term Agreements (LTAs) that obligate it to meet specific production requirements, exposing it to potential liquidated damages and constraining its ability to reallocate production capacity[32][33] - As a controlled company, the majority shareholder, Mubadala, beneficially owns approximately 85.7% of outstanding ordinary shares, giving it substantial control over key transactions and corporate matters[152] ITEM 4. INFORMATION ON THE COMPANY This section details the company's history, business operations, organizational structure, and physical assets History and Development of the Company Established in 2009 from AMD's manufacturing operations, GlobalFoundries has grown through acquisitions and strategically pivoted to focus on specialized process technologies - The company was established in 2009 from an acquisition of AMD's manufacturing operations and has since grown through key acquisitions like Chartered Semiconductor (2010) and IBM's Microelectronics division (2015)[175] - In 2018, the company underwent a strategic pivot to focus on the pervasive foundry market and specialized process technologies, divesting non-aligned assets[176] - The company completed its IPO on November 1, 2021, with shares listed on Nasdaq under the symbol "GFS"[177] - On December 31, 2022, the company completed the sale of its East Fishkill (EFK) business to ON Semiconductor for a gain of $403 million[176] Business Overview GlobalFoundries is a leading semiconductor foundry manufacturing complex, feature-rich ICs for diverse markets, differentiating itself with a global manufacturing footprint outside of China and Taiwan - The company is one of the world's leading semiconductor foundries, focusing on feature-rich ICs for markets like Smart Mobile Devices, IoT, Communications Infrastructure, Automotive, and Personal Computing[183][191] - As of December 31, 2022, the company had long-term agreements with an aggregate remaining revenue commitment of over $22 billion[186] - Single-sourced products, which can only be manufactured with the company's technology without significant redesign, represented approximately 65% of wafer shipment volume in 2022[187][188] - The company operates seven primary differentiated technology platforms: RF SOI, FinFET, Feature-Rich CMOS, FDX™, SiGe, GaN, and SiPh[192] R&D Expenditures (2020-2022) | Year | R&D Expense (in millions) | % of Net Revenue | | :--- | :--- | :--- | | 2022 | $482 | 6% | | 2021 | $478 | 7% | | 2020 | $476 | 10% | Property, Plant and Equipment The company operates four primary manufacturing sites in Dresden (Germany), Singapore, Malta (New York), and Burlington (Vermont), with significant capacity expansions underway 2022 Wafer Shipments by Facility (300mm equivalent) | Facility Location | Wafer Size (mm) | 2022 Shipments (kwpa) | | :--- | :--- | :--- | | Malta, New York | 300 | ~390 | | Burlington, Vermont | 200 | ~231 | | Dresden, Germany | 300 | ~650 | | Singapore | 300, 200 | ~1060 | | East Fishkill, New York (Sold) | 300 | ~140 | - The company is expanding its Singapore facility with Module 7H, expected to begin production in 2023 and add 450,000 wafers of 300mm capacity when fully ramped[240] - Expansion plans in Malta, New York include a $1.0 billion investment to expand the existing fab's capacity by ~150,000 wafers per year, followed by construction of a new fab to double capacity[241] - A new jointly-operated 300mm facility is being built in Crolles, France with STMicroelectronics, targeted to ramp to 620,000 wafers per year at full build-out[242] ITEM 5. OPERATING AND FINANCIAL REVIEWS AND PROSPECTS This section provides a detailed analysis of the company's financial performance and condition, highlighting significant growth in revenue and profitability for fiscal year 2022 Operating Results For the year ended December 31, 2022, net revenue increased 23.1% to $8.11 billion, with gross profit more than doubling and a significant turnaround to net income Consolidated Statement of Operations Summary (FY 2022 vs. FY 2021) | Metric | 2022 (in millions) | 2021 (in millions) | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | $8,108 | $6,585 | 23.1% | | Gross Profit | $2,239 | $1,013 | 121.0% | | Gross Margin | 27.6% | 15.4% | +1,220 bps | | Income (Loss) from Operations | $1,167 | $(60) | N/M | | Net Income (Loss) | $1,446 | $(254) | N/M | - The 23.1% increase in net revenue was primarily driven by a 17% year-over-year increase in ASP per wafer and a 4.1% increase in wafer shipments[268][269] - A gain of $403 million was recognized from the sale of the EFK business, significantly contributing to the net income for 2022[277] - The company implemented a restructuring plan in Q4 2022, resulting in $94 million of charges related to workforce reduction and other strategic support[274] - Selling, general and administrative (SG&A) expenses decreased by 16.6% to $496 million, mainly due to a $59 million reduction in share-based compensation[273] Liquidity and Capital Resources As of December 31, 2022, the company maintained a strong liquidity position with $3.35 billion in cash, cash equivalents, and marketable securities, alongside access to a $1 billion revolving credit facility Liquidity and Debt Position (as of Dec 31) | Metric (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $2,352 | $2,939 | | Marketable securities | $994 | $0 | | Total Liquidity | $3,346 | $2,939 | | Total Debt Outstanding | $2,511 | $2,013 | Summary of Cash Flows (Year Ended Dec 31) | Cash Flow (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Cash from Operating Activities | $2,624 | $2,839 | | Cash used in Investing Activities | $(4,058) | $(1,450) | | Cash from Financing Activities | $842 | $650 | - The significant increase in cash used for investing activities was driven by a $1.29 billion rise in purchases of property, plant, and equipment for capacity expansion and $996 million in net purchases of marketable securities[289] - As of December 31, 2022, the company had $6.36 billion in unconditional purchase commitments, with $2.77 billion for capital expenditures and $3.59 billion for operating expenditures[292] Trend Information The company's performance is influenced by macroeconomic headwinds and a semiconductor industry inventory correction, but benefits from improved visibility through its long-term partnership model - The company is cautious about macroeconomic headwinds facing the semiconductor industry in the first half of 2023[295] - The mix of single-sourced business, a key measure of customer partnership, increased to approximately 65% of wafer shipment volume in 2022, up from 62% in 2021[297] - Long-Term Agreements (LTAs) provide significant revenue visibility, with an aggregate lifetime revenue commitment of approximately $22 billion as of December 31, 2022[301] - Shipment utilization is a key driver of financial performance, with the average utilization rate across 300mm fabs at 103% in 2022, down slightly from 106% in 2021[304] Critical Accounting Policies and Estimates This section details the accounting policies requiring the most significant judgments and estimates, including revenue recognition, inventory valuation, and deferred income tax assets - Revenue is generally recognized when control transfers to the customer, which is typically at the point of shipment from the company's facilities[307] - In Q1 2021, the company revised the estimated useful life of certain production equipment to 10 years, which benefited loss before income taxes by approximately $628 million for the year ended December 31, 2021[317][669] - The realization of deferred tax assets is a critical estimate, dependent on the generation of future taxable income, with $292 million in deferred tax assets as of December 31, 2022, primarily in Singapore[314][315] - Share-based compensation is valued using the Black-Scholes and Monte Carlo simulation models, which require subjective assumptions about volatility, expected term, and risk-free rates[318] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section provides information on the company's leadership, compensation practices, and employee base, including executive officers, board members, and global workforce distribution - The aggregate compensation for directors and executive officers for the year ended December 31, 2022, was $46.4 million, including salary, benefits, and equity awards[348] - Executive compensation in 2022 consisted of base salary, an Annual Incentive Program (AIP) based on financial and strategic goals, and long-term incentives in the form of Performance Stock Units (PSUs) and Restricted Stock Units (RSUs)[347][351][353] - The board of directors is divided into three staggered classes, with terms expiring in 2023, 2024, and 2025, and several directors are designated by the majority shareholder, Mubadala, under a Shareholder's Agreement[370][371][373] - As of December 31, 2022, the company employed approximately 14,000 people, with 42% in North America, 25% in EMEA, and 33% in APAC, and approximately 70% of employees were engineers or technicians[386] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details the company's ownership structure and transactions with related parties, highlighting Mubadala's dominant shareholder position and its significant control through various agreements - As of December 31, 2022, Mubadala beneficially owned 469,501,994 ordinary shares, representing an 85.72% stake in the company[390] - A Shareholder's Agreement grants Mubadala the right to nominate a majority of the board of directors and provides consent rights over significant corporate actions as long as it maintains certain ownership thresholds[392][395] - A Registration Rights Agreement provides Mubadala with demand and "piggyback" rights to have its shares registered for sale in public offerings[398][399] - The company holds a 49% interest in Silicon Manufacturing Partners Pte Ltd. ("SMP"), a joint venture from which it purchased $60 million in products (primarily wafers) in 2022[401] ITEM 8. FINANCIAL INFORMATION This section references the full consolidated financial statements and discusses significant legal proceedings and the company's dividend policy - The company is involved in a significant legal proceeding with IBM, which alleges breach of contract and fraudulent misrepresentation concerning the 2015 acquisition of IBM's Microelectronics division, with IBM seeking $2.5 billion in damages[404][758] - The company does not expect to declare or pay any cash dividends in the foreseeable future, intending to retain all available funds to support business development and growth[406] ITEM 10. ADDITIONAL INFORMATION This section provides details on the company's corporate structure and governance, outlining significant differences between Cayman Islands and U.S. (Delaware) corporate law, and discussing taxation - The company is an exempted company incorporated in the Cayman Islands with limited liability[180] - Significant differences exist between Cayman Islands and Delaware corporate law regarding mergers, shareholder suits, directors' fiduciary duties, and shareholder proposals, for example, Cayman law provides for a right of dissenting shareholders to be paid fair value in a merger, but these rights are not available in all circumstances[418][421][428][433] - The company has received a tax concession undertaking from the Cayman Islands government, effective for 20 years from October 21, 2008, stating that no law imposing tax on profits, income, or gains will apply to the company or its operations[465][466] - For U.S. federal income tax purposes, the company believes it was not a Passive Foreign Investment Company (PFIC) for 2021 or 2022 and does not anticipate becoming one[474][480] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The company's primary market risk exposures are to foreign currency fluctuations and interest rate changes, which it mitigates using derivative instruments - The company's main market risks are foreign currency risk (primarily Euro, Singapore dollar, Japanese yen) and interest rate risk on its floating-rate debt[490][491][492] - The company utilizes derivative financial instruments, including foreign currency forward contracts, interest rate swaps, and cross-currency swaps, to hedge its exposure to market fluctuations[491][492] - As of December 31, 2022, management believes that a hypothetical 10% change in existing interest rates or in the relative value of the U.S. dollar to key foreign currencies would not materially impact the company's financial statements[491][493] PART II ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS This section details the use of proceeds from the company's October 2021 Initial Public Offering (IPO) and a concurrent private placement, which have been partially used for capacity expansion projects - The company raised approximately $1.4 billion in net proceeds from its IPO and a concurrent private placement in October/November 2021[498] - From the IPO closing through December 31, 2022, a portion of the proceeds was used for construction at the Singapore facility and other capacity expansion projects[500] ITEM 15. CONTROLS AND PROCEDURES This section addresses the company's internal controls, with management concluding that both disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[502][503] - Management assessed its internal control over financial reporting as effective as of December 31, 2022, based on the COSO framework[505] - The independent registered public accounting firm, KPMG LLP, audited and issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[506][507] Corporate Governance and Other Disclosures This section covers various governance topics, including the audit committee financial expert, fees paid to the principal accountant, and the company's adherence to Nasdaq listing standards as a foreign private issuer - The board of directors has identified Jack Lazar as an "audit committee financial expert"[509] Principal Accountant Fees (KPMG LLP) | Fee Category (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Audit fees | $4,744 | $4,900 | | Audit-related fees | $61 | $0 | | Tax fees | $0 | $152 | | All other fees | $0 | $29 | | Total | $4,805 | $5,081 | - As a foreign private issuer, the company follows home country (Cayman Islands) practices for certain Nasdaq listing standards, including those related to director nominations and shareholder approval for certain equity issuances[521] PART III ITEM 18. FINANCIAL STATEMENTS This section contains the company's audited consolidated financial statements and the reports from its independent registered public accounting firms for the years ended December 31, 2022, 2021, and 2020 Consolidated Financial Position (as of Dec 31) | Metric (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Total Assets | $17,841 | $15,028 | | Total Current Assets | $5,800 | $5,291 | | Property, plant and equipment, net | $10,596 | $8,713 | | Total Liabilities | $7,881 | $6,995 | | Total Current Liabilities | $3,359 | $3,163 | | Total Equity | $9,960 | $8,033 | Consolidated Statement of Operations (Year Ended Dec 31) | Metric (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Revenue | $8,108 | $6,585 | $4,851 | | Gross Profit (Loss) | $2,239 | $1,013 | $(712) | | Income (Loss) from Operations | $1,167 | $(60) | $(1,656) | | Net Income (Loss) | $1,446 | $(254) | $(1,353) | | Diluted EPS | $2.62 | $(0.49) | $(2.70) | - The company's revenue is primarily from wafer fabrication, which accounted for $7.63 billion of the $8.11 billion total revenue in 2022[671] - In 2020, a change in contract cancellation terms led to a shift from recognizing revenue over time to recognizing it at a point in time (shipment), resulting in a one-time cumulative decrease in revenue of $315 million for that year[672][673]