What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-18 compared with 2021-02-19 · 114 added, 118 removed, 192 unchanged (55% of the section changed)

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This section includes comparisons of certain 2021 financial information to the same information for 2020.

For discussion of 2019 results in comparison with 2018 results refer to “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 19, 2020.

For discussion of 2020 results in comparison with 2019 results refer to “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on February 19, 2021.

Amkor is one of the world’s leading providers of outsourced semiconductor packaging and test services.

Our financial goals are sales growth and improved profitability.

To achieve these goals, we are focused on generating increased value from our investments in advanced technologies, improving utilization of existing assets, executing our balanced growth strategy and selectively growing our scale and scope through strategic investments.

Our financial goal is profitable sales growth.

To achieve this goal, we are focused on leveraging our leadership position in services for advanced technologies, optimizing utilization of existing assets, broadening our customer base and selectively growing our scale and scope through strategic investments.

We are an industry leader in developing and commercializing advanced packaging and test technologies.

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We believe that our technology leadership and this technology transition create significant growth opportunities for us.

We typically look for opportunities in the advanced packaging and test area where we can generate reasonably quick returns on investments made for customers seeking leading edge technologies.

We typically look for opportunities in the advanced packaging and test areas where we can generate reasonably quick returns on investments made for customers seeking leading edge technologies.

We also focus on developing a second wave of customers to fill the capacity that becomes available when leading edge customers transition to newer packaging and test equipment and platforms.

In addition, we are seeking to add new customers and to deepen our engagement with existing customers.

This includes an expanded emphasis on the automotive end market where semiconductor content continues to grow and in the analog area for our mainstream wirebond technologies.

From time to time, we identify attractive opportunities to grow our customer base and expand the markets we serve through joint ventures, acquisitions and other strategic investments.

For example, in May 2017 we acquired Nanium, which has strengthened our position in the market for wafer-level fan-out packaging.

This includes an expanded emphasis on the automotive and industrial end market where semiconductor content continues to grow and in the analog area for our mainstream wirebond technologies.

From time to time, we identify attractive opportunities to grow our customer base and expand the markets we serve through expansion of our operations, joint ventures, acquisitions and other strategic investments.

For example, we have recently announced plans to expand our operations to Vietnam through the construction of a new factory.

We believe that taking advantage of these opportunities helps to diversify our revenue streams, improve our profits, broaden our portfolio of services and maintain our technological leadership.

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We cannot predict the timing, strength or duration of any correction, economic slowdown or subsequent economic recovery.

While customer demand for our services was, overall, quite strong throughout 2020, particularly in the communications and consumer end markets, demand in automotive and industrial was lower through most of the year due to the Covid-19 pandemic.

We made many adjustments to our operations during 2020 to navigate through the onset of the pandemic, and through these efforts we were able to continue serving customers and grow the business in a challenging environment.

The full potential effect of the Covid-19 pandemic is unknown, and there is significant uncertainty related to the ultimate impact that the Covid-19 pandemic will have on the global economy, our business, results of operations and financial condition.

See Part I, Item 1A, including, “The Covid-19 Outbreak Has Impacted and May Continue to Impact the Supply Chain and Consumer Demand for Our Customers’ Products and Services, Which May Adversely Affect Our Business, Results of Operations, and Financial Condition” and “Dependence on the Highly Cyclical Semiconductor Industry - Our Packaging and Test Services Are Used in Volatile Industries and Industry Downturns, and Declines in Global Economic and Financial Conditions Could Harm Our Performance.”

The full potential effect of the ongoing Covid-19 pandemic is unknown, and there remains uncertainty related to the ultimate impact that the Covid-19 pandemic will have on the global economy, the semiconductor industry and our business, results of operations and financial condition.

While our revenue increased significantly in the year ended December 31, 2021, and we were able to successfully ramp new products during the year, we are subject to industry-wide supply constraints, and these constraints had an effect of restraining growth in some of the end markets we serve.

We expect these constraints to persist throughout 2022.

For additional information regarding the potential impact of macroeconomic factors, the Covid-19 pandemic and other risks on our business, results of operations and financial condition, please refer to the “Risk Factors” section in Part I, Item 1A of this Form 10-K.

We operate in a capital-intensive industry.

Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures, which are generally made in advance of the related revenues and without firm customer commitments.

We fund our operations, including capital expenditures and debt service requirements, with cash flows from operations, existing cash and cash equivalents, short-term investments, borrowings under available credit facilities and proceeds from any additional financing.

We fund our operations, including capital expenditures and

debt service requirements, with cash flows from operations, existing cash and cash equivalents, short-term investments, borrowings under available credit facilities and proceeds from any additional financing.

Maintaining an appropriate level of liquidity is important to our business and depends on, among other considerations, the performance of our business, our capital expenditure levels, our ability to repay debt out of our operating cash flows or proceeds from debt or equity financings and our investment strategy.

As of December 31, 2021, we had cash and cash equivalents and short-term investments of $826.7 million and $251.5 million, respectively.

Our net sales, gross profit, operating income, cash flows, liquidity and capital resources have historically fluctuated significantly from quarter to quarter as a result of many factors, including the seasonality of our business, the cyclical nature of the semiconductor industry and other factors discussed in Part 1, Item 1A of this Annual Report on Form 10-K.

Our net sales, gross profit, operating income, cash flows, liquidity and capital resources have historically fluctuated significantly from quarter to quarter due to many factors, including the seasonality of our business, the cyclical nature of the semiconductor industry and other factors discussed in Part 1, Item 1A of this Form 10-K.

2021 Financial Summary

Our net sales increased $1,087.7 million or 21.5% to $6,138.3 million in 2021 from $5,050.6 million in 2020.

The increase was generally attributable to higher sales of advanced products in the communications, consumer and computing end markets, partially offset by a decline in the automotive and industrial end market.

Gross profit increased $251.4 million in 2020 compared to 2019, primarily due to the increase in net sales, partially offset by changes in the mix of products sold toward products with higher material content.

The increase was attributable to higher sales in all end markets led by the further adoption of 5G smartphones in the communications end market.

Gross margin increased to 20.0% in 2021 compared to 17.8% in 2020.

The increase in gross margin was primarily due to the increase in volume across all of our end markets.

Operating income margin expanded 330 basis points to 12.4% in 2021 from 9.1% in 2020.

The increase in our operating income margin was primarily due to our increase in net sales and expansion in gross margin discussed above along with disciplined cost control.

In 2021, our capital expenditures totaled $779.8 million, or 12.7% of net sales compared to $553.0 million, or 10.9% of net sales in 2020.

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Net cash provided by operating activities was $1,121.3 million for the year ended December 31, 2021, compared to $770.0 million for the year ended December 31, 2020.

This increase was primarily due to higher net sales, higher operating profit, and changes in working capital.

In October 2020, our Board of Directors approved the initiation of a regular quarterly cash dividend on our common stock.

The initial quarterly dividend was $0.04 per share.

This increase was primarily due to higher net sales, higher operating profit and an increase in contract liabilities due to customer advance payments.

This increase was offset by changes in working capital.

In November 2021, our Board of Directors approved a quarterly dividend of $0.05 per share, a 25% increase.

In 2021, we paid total quarterly cash dividends of $51.2 million.

In November 2021, we announced our plans for a new factory location in Bac Ninh, Vietnam.

Construction of the first phase is expected to commence in 2022, and high volume manufacturing is expected to begin in mid-2023.

Our initial investment is expected to be between $200 million and $250 million.

Results of Operations

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Net sales $ 6,138,329 $ 5,050,589 $ 4,052,650 $ 1,087,740 21.5 % $ 997,939 24.6 %

The increase in net sales in 2020 compared to 2019 was due to higher sales of advanced products in the communications, consumer and computing end markets, partially offset by a decline in the automotive and industrial end market.

The communications end market benefited from the recovery in the smartphone market from the prior year inventory correction.

Sales increased in the consumer end market due to the introduction of a new high-volume consumer product.

Increased demand, driven by work-from-home arrangements, drove higher sales in the computing end market.

The automotive and industrial market experienced decreased demand and supply chain disruptions due to the Covid-19 pandemic.

The $1.1 billion increase in net sales in 2021 compared to 2020 was due to higher sales across all end markets.

Sales in the communications end market represented 42% of the increase, driven primarily by the further adoption of 5G smartphones.

The automotive and industrial end market recovered in the current year from weakened demand relating to the Covid-19 pandemic in the prior year, representing 25% of our growth in net sales.

Sales in the computing end market accounted for 20% of the increase in 2021 due to growth in all applications, primarily due to the shift in cloud computing needs and new product introductions within personal computing.

The consumer end market continues to see strong sales, primarily due to demand for both home and personal electronics, and made up the remaining 13% of the increase compared to 2020.

Gross Profit and Gross Margin

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Accordingly, relatively modest increases or decreases in revenue can have a significant effect on margin and on labor and other manufacturing costs as a percentage of revenue, depending upon product mix, utilization and seasonality.

Gross profit and gross margin for 2020 increased compared to 2019, primarily due to the increase in net sales, partially offset by changes in the mix of products sold toward products with higher material content.

Selling, General and Administrative Expenses

Recently, we have expanded our business in advanced SiP modules, which tend to have higher material costs when compared to our other products.

As we continue to increase production of these higher material cost modules, there could be an impact on our profitability, depending on overall utilization.

Gross profit and gross margin for 2021 increased compared to 2020, primarily due to the increase in net sales.

The increase was partially offset by an increase in fixed costs from our expanded capacity investments and an increase in the mix of products sold with higher material costs.

Selling, General and Administrative

2021 2020 2019 2021 over 2020 2020 over 2019

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$ 296,084 $ 302,842 $ 278,631 $ (6,758) (2.2) % $ 24,211 8.7 %

Selling, general and administrative expenses increased in 2020 compared to 2019 primarily due to costs incurred for our factory consolidation efforts in Japan and increased employee compensation costs.

These increases were partially offset by our efforts to control expenses, particularly travel and professional fees.

In addition, we had a gain from a sale of real estate in 2019 which lowered our expenses in that period.

Selling, general and administrative expenses decreased in 2021 compared to 2020.

The decrease was primarily due to a reduction of $15.1 million in costs incurred for factory consolidation efforts in Japan compared to the prior year.

These decreases were partially offset by increased professional fees.

Research and Development

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The costs related to our technology and product development projects are included in research and development expense until the project moves into production.

Once production begins, the costs related to production become part of the cost of sales, including ongoing depreciation for the equipment previously held for research and development activities.

Once production begins, the costs relating to production become part of the cost of sales, including ongoing depreciation for the equipment previously held for research and development activities.

Research and development expenses in 2021 increased compared to 2020 due to new development projects in advanced packaging technologies, primarily advanced SiP modules.

Other Income and Expense

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Total other expense, net $ 48,367 $ 70,563 $ 73,360 $ (22,196) (31.5) % $ (2,797) (3.8) %

Interest expense decreased in 2020 compared to 2019, primarily due to the repayment of higher interest rate debt with the proceeds from our ¥28.5 billion ($260.6 million) fixed rate term loan agreement in December 2019 and January 2020.

Interest expense has also decreased due to overall decreases in interest rates in 2020 for our variable interest rate loans.

Interest expense decreased in 2021 compared to 2020, primarily due to the decrease in our average outstanding debt throughout the year.

Interest income decreased in 2021 compared to 2020, primarily due to lower interest rates in the overall market.

The changes in foreign currency (gain) loss, net for 2021 compared to 2020 were due to foreign currency exchange rate movements, mainly the Korean won, and the associated impact on our net monetary exposure at our foreign subsidiaries.

Loss on debt retirement in 2019 is primarily due to the early redemption in April 2019 of the outstanding $525 million aggregate principal amount of our 6.375% Senior Notes due 2022.

Income Tax Expense

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Income tax expense, which includes foreign withholding taxes and minimum taxes, reflects the applicable tax rates in effect in the various countries where our income is earned and is subject to volatility depending on the relative mix of earnings in each location.

The effective tax rate is below the U.S.

statutory rate of 21% primarily due to lower tax rates applicable to our operations in some foreign jurisdictions where we earn income.

The effective tax rate in 2020 includes a $20.2 million income tax benefit from the recognition of deferred tax assets we expect to utilize in future years.

The effective tax rate in 2018 includes a $22.3 million income tax expense to complete the accounting for the impact of the Tax Act, reducing our estimated net tax benefit of $41.6 million from 2017.

During 2020, 2019 and 2018, our subsidiaries in Korea, Malaysia, the Philippines, and Singapore operated under various tax holidays.

The tax holidays granted to our Malaysia operations and certain operations in the Philippines expired during 2018.

As these tax holidays expire, income earned in these jurisdictions will be subject to higher statutory income tax rates, which may cause our effective tax rate to increase.

See Note 4 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information about our income tax expense.

We assess our liquidity based on our current expectations regarding sales and operating expenses, capital spending, dividend payments and stock repurchases, debt service requirements and other funding needs.

Based on this assessment, we believe that our cash flow from operating activities, together with existing cash and cash equivalents, short-term investments and availability under our credit facilities, will be sufficient to fund our working capital, capital expenditure, dividend payments, debt service and other financial requirements for at least the next twelve months.

Our liquidity is affected by, among other factors, volatility in the global economy and credit markets, the performance of our business, our capital expenditure levels, other uses of our cash including any dividends and purchases of stock under any stock repurchase program, any acquisitions or investments in joint ventures and our ability to either repay debt out of operating cash flow or refinance it at or prior to maturity with the proceeds of debt or equity offerings.

There can be no assurance that we will generate the necessary net income or operating cash flows, or be able to borrow sufficient funds, to meet the funding needs of our business beyond the next twelve months due to a variety of factors, including the cyclical nature of the semiconductor industry and other factors discussed in Part I, Item 1A of this Annual Report on Form 10-K.

During 2021, 2020 and 2019, our subsidiaries in Korea, the Philippines and Singapore operated under various tax holidays.

The tax holidays granted to certain operations in the Philippines expired during 2020 and 2021.

holidays expire, income earned in these jurisdictions will be subject to higher statutory income tax rates, which may cause our effective tax rate to increase.

See Note 4 to our Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional information about our income tax expense.

We assess our liquidity based on our current expectations regarding sales and operating expenses, capital spending, dividend payments, stock repurchases, debt service requirements and other funding needs.

Based on this assessment, we believe that our cash flow from operating activities, together with existing cash and cash equivalents, short-term investments and availability under our credit facilities, will be sufficient to fund our working capital, capital expenditures, dividend payments, debt service and other financial requirements for at least the next twelve months.

Our liquidity is affected by, among other factors, volatility in the global economy and credit markets, the performance of our business, our capital expenditure levels, other uses of our cash including any dividends and purchases of stock under any stock repurchase program, any acquisitions, joint ventures or other investments and our ability to either repay debt out of operating cash flow or refinance it at or prior to maturity with the proceeds from debt or equity offerings.

Our primary source of cash and the source of funds for our operations are cash flows from operations, current cash and cash equivalents, short-term investments, borrowings under available credit facilities and proceeds from any additional debt or equity financings.

We refer you to Note 6 and Note 11 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on our investments and borrowings, respectively.

Please refer to Note 6 and Note 11 to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information on our investments and borrowings, respectively.

As of December 31, 2021, we had cash and cash equivalents and short-term investments of $1,078.3 million.

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We have the ability to access cash held offshore by our foreign subsidiaries primarily through the repayment of intercompany debt obligations.

Due to the changes in the U.S.

tax law under the Tax Act, distributions of cash to the U.S.

as dividends generally will not be subject to U.S.

If we were to distribute this offshore cash to the U.S.

as dividends from our foreign subsidiaries, the dividends generally would not be subject to U.S.

federal income tax.

We estimate that repatriation of this foreign cash and short-term investments would generate withholding taxes and state income taxes of approximately $40.8 million.

For the year ended December 31, 2021, we estimate that repatriation of this foreign cash and short-term investments would generate withholding taxes and state income taxes of approximately $35 million.

As of December 31, 2021, our net liability associated with unrecognized tax benefits is $38.3 million.

Due to the uncertainty regarding the amount and timing of any future cash outflows associated with our unrecognized tax benefits, we are unable to reasonably estimate the amount and period of ultimate settlement, if any, with the various taxing authorities.

For certain accounts receivable, we use non-recourse factoring arrangements with third party financial institutions to manage our working capital and cash flows.

Under this program, we sell receivables to a financial institution for cash at a discount to the face amount.

Available capacity under these programs is dependent on the level of our trade accounts receivable eligible to be sold, the financial institutions’ willingness to purchase such receivables and the limits provided by the financial institutions.

Under these arrangements, we sell receivables to a financial institution for cash at a discount to the face amount.

Available capacity under these arrangements is dependent on the level of our trade accounts receivable eligible to be sold, the financial institutions’ willingness to purchase such receivables and the limits provided by the financial institutions.

These factoring arrangements can be reduced or eliminated at any time due to market conditions and changes in the credit worthiness of customers.

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Servicing our current and future customers may require that we incur significant operating expenses and make significant investments in equipment and facilities, which are generally made in advance of the related revenues and without firm customer commitments.

The borrowing base under our $250.0 million first lien senior secured revolving credit facility entered into by our subsidiary, Amkor Technology Singapore Holding Pte, Ltd.

(“the Singapore Revolver”), is limited to the amount of eligible accounts receivable.

As of December 31, 2020, we had availability of $250.0 million and no outstanding standby letters of credit.

We refer you to Note 11 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

As of December 31, 2020, our foreign subsidiaries had $316.0 million available to be drawn under revolving credit facilities, including the Singapore Revolver, and $60.1 million available to be borrowed under term loan credit facilities for working capital purposes and capital expenditures.

As of December 31, 2020, we had $1,154.3 million of debt.

Our scheduled principal repayments on debt include $149.0 million due in 2021, $182.4 million due in 2022, $170.8 million due in 2023, $81.5 million due in 2024, $27.4 million due in 2025 and $553.3 million due thereafter.

The borrowing base under our $250.0 million first lien senior secured revolving credit facility (the “Singapore Revolver”) entered into by our subsidiary, Amkor Technology Singapore Holding Pte, Ltd.

(“ATSH”), is limited to the amount of eligible accounts receivable.

As of December 31, 2021, we had availability of $250.0 million and no

outstanding standby letters of credit.

As of December 31, 2021, our foreign subsidiaries had $316.0 million available for future borrowings under revolving credit facilities, including the Singapore Revolver, and $222.4 million available to be borrowed under term loan credit facilities for working capital purposes and capital expenditures.

For additional information regarding the Singapore Revolver, please refer to Note 11 to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

As of December 31, 2021, we had debt of $1,138.0 million, with $153.0 million payable within 12 months.

As of December 31, 2021, the interest payment obligations, based on stated coupon rates for fixed rate debt and interest rates applicable at December 31, 2021 for variable rate debt, were $235.6 million during the remaining term of the debt.

Interest payment obligations payable within 12 months is $44.4 million.

We were in compliance with all debt covenants as of December 31, 2021, and we expect to remain in compliance with these covenants for at least the next twelve months.

In December 2020, we borrowed ¥10.9 billion (US$105 million) under a new term loan agreement due December 2025.

We refer you to Note 11 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

For additional information regarding our debt arrangements, please refer to Note 11 to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

Certain of our debt agreements have restrictions on dividend payments and the repurchase of stock and subordinated securities.

These restrictions are determined in part by our covenant compliance and on calculations based upon cumulative net income or, in the case of our Singapore Revolver, borrowing availability.

Dividend payments and stock repurchases are not currently restricted under our debt agreements.

These restrictions are determined in part by our covenant compliance and on calculations based upon cumulative net income or, in the case of our Singapore Revolver, borrowing availability, and do not currently have a material impact on our ability to make dividend payments or stock repurchases.

The debt of Amkor Technology, Inc.

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From time to time, Amkor Technology, Inc.

and Amkor Technology Singapore Holding Pte, Ltd.

also guarantee certain debt of our subsidiaries.

and certain of our subsidiaries also guarantee certain debt of our other subsidiaries.

In order to reduce our debt and future cash interest payments, we may from time to time repurchase or redeem our outstanding notes for cash or exchange shares of our common stock for our outstanding notes.

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Our subsidiary in Korea maintains an unfunded severance plan that covers certain employees that were employed prior to August 1, 2015.

As of December 31, 2020, the severance liability was $98.0 million.

As of December 31, 2021, the severance liability was $73.2 million, with $8.2 million payable within 12 months.

Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date.

For service periods subsequent to August 1, 2015, employees participate in either a defined benefit pension plan or a defined contribution pension plan.

From time to time, we may offer employees the option to convert from the severance plan to the defined contribution plan which would require the company to fund the converted portion of the liability.

We refer you to Note 12 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

In October 2020, our Board of Directors approved the initiation of a regular quarterly cash dividend on our common stock.

The first quarterly dividend of $0.04 per share, representing an initial dividend payment of $9.7 million in the aggregate, was paid on January 7, 2021 to stockholders of record as of December 18, 2020.

From time to time, we may offer employees the option to convert from the severance plan to the defined contribution plan which would require us to fund the converted portion of the liability.

In addition, as of December 31, 2021, we had foreign pension plan obligations of $55.2 million, for which the timing and actual amount of impact on our future cash flow is uncertain.

For additional information regarding our pension and severance plans, please refer to Note 12 to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

We lease certain machinery and equipment, office space, and manufacturing facilities.

As of December 31, 2021, our total remaining operating lease obligations and finance lease obligations were $158.7 million and $89.6 million, respectively, with $68.7 million and $33.2 million payable within 12 months, respectively.

The lease obligations represent our future minimum lease payments including interest payments.

For additional information regarding our leases, please refer to Note 9 to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

We had off-balance sheet purchase obligations for capital expenditures, long-term supply contracts and other contractual commitments.

As of December 31, 2021, the purchase obligations were $460.1 million, with $432.8 million payable within 12 months.

In 2021, we paid total quarterly cash dividends of $51.2 million.

We currently anticipate that we will continue to pay quarterly cash dividends in the future.

However, the payment, amount and timing of future dividends remain within the discretion of our Board of Directors and will depend upon our results of operations, financial condition, cash requirements, debt restrictions and other factors.

Our Board of Directors previously authorized the repurchase of up to $300.0 million of our common stock, exclusive of any fees, commissions or other expenses.

At December 31, 2020, approximately $91.6 million was available to repurchase common stock pursuant to the stock repurchase program.

The purchase of stock may be made in the open market or through privately negotiated transactions.

Our Board of Directors previously adopted a stock repurchase program (the “Stock Repurchase Program”) authorizing the repurchase of up to $300.0 million of our common stock, exclusive of any fees, commissions or other expenses.

Under the Stock Repurchase Program, the purchase of stock may be made in the open market or through privately

negotiated transactions.

The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, the cash needs and investment opportunities for the business, the current market price of our stock, applicable legal requirements and other factors.

We have not purchased any stock under the program since 2012.

We have not purchased any stock under the Stock Repurchase Program since 2012.

At December 31, 2021, approximately $91.6 million was available to repurchase common stock pursuant to the Stock Repurchase Program.

Capital Resources

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In 2021, our capital expenditures totaled $779.8 million or approximately 12.7% of net sales.

We expect that our 2021 capital expenditures will be approximately $700 million.

Ultimately, the amount of our 2021 capital expenditures will depend on several factors including, among others, the timing and implementation of any capital projects under review, the performance of our business, economic and market conditions, the cash needs and investment opportunities for the business, the need for additional capacity to service anticipated customer demand and the availability of cash flows from operations or financing.

In addition, we are subject to risks associated with our capital expenditures, including those discussed in Part I, Item 1A of this Annual Report on Form 10-K under the caption “Capital Expenditures - We Make Substantial Investments in Equipment and Facilities to Support the Demand of Our Customers, Which May Adversely Affect Our Business if the Demand of Our Customers Does Not Develop as We Expect or Is Adversely Affected.”

We expect that our 2022 capital expenditures will be approximately $950 million, approximately $100 million of which we expect to spend on the construction of our new Vietnam factory.

Ultimately, the amount of our 2022 capital expenditures will depend on several factors including, among others, the timing and implementation of any capital projects under review, the performance of our business, economic and market conditions, the cash needs and investment opportunities for the business, the need for additional capacity to service anticipated customer demand, equipment lead times and the availability of cash flows from operations or financing.

In addition, we are subject to risks associated with our capital expenditures, including those discussed in Part I, Item 1A of this Form 10-K under the caption “We make substantial investments in equipment and facilities to support the demand of our customers, which may materially and adversely affect our business if the demand of our customers does not develop as we expect or is adversely affected.”

Net cash provided by (used in) operating, investing and financing activities for each of the three years ended December 31, 2021 was as follows:

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Operating activities:

Our cash flow provided by operating activities for the year ended December 31, 2020 increased by $206.2 million compared to the year ended December 31, 2019, primarily due to higher net sales, higher operating profit, and changes in working capital.

Our cash flow provided by operating activities for the year ended December 31, 2021 increased by $351.3 million compared to the year ended December 31, 2020, primarily due to higher net sales, higher operating profit and an increase in contract liabilities due to customer advance payments.

This increase was offset by changes in working capital.

Investing activities:

Our cash flow used in investing activities for the year ended December 31, 2020 increased by $176.2 million compared to the year ended December 31, 2019, primarily due to purchases of short-term investments and an increase in payments related to property, plant and equipment.

This increase was partially offset by proceeds from sales and maturities of short-term investments and an increase in proceeds received from foreign exchange forward contracts.

Our cash flow used in investing activities for the year ended December 31, 2021 increased by $305.2 million compared to the year ended December 31, 2020, primarily due to increased payments related to property, plant and equipment and increased net payments for foreign currency forward contracts.

Payments for property, plant and equipment can fluctuate based on the timing of purchase, receipt and acceptance of equipment.

Financing activities:

The net cash used in financing activities for the year ended December 31, 2021 was primarily due to dividend payments, partially offset by net debt borrowing in Korea.

The net cash used in financing activities for the year ended December 31, 2020 was primarily due to the net debt repayments in Korea and Taiwan.

The net cash provided by financing activities for the year ended December 31, 2019 was primarily due to the issuance of the 2027 Notes and net borrowings in Japan, partially offset by the redemption of the 2022 Notes and net repayments in Korea.

We provide the following supplemental data to assist our investors and analysts in understanding our liquidity and capital resources.

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Free cash flow is not defined by U.S.

We believe free cash flow to be relevant and useful information to our investors because it provides them with additional information in assessing our liquidity, capital resources and financial operating results.

Our management uses free cash flow in evaluating our liquidity, our ability to service debt and our ability to fund capital expenditures.

We believe free cash flow to be relevant and useful information to our investors

because it provides them with additional information in assessing our liquidity, capital resources and financial operating results.

Our management uses free cash flow in evaluating our liquidity, our ability to service debt, our ability to fund capital expenditures and our ability to pay dividends and the amount of dividends to be paid.

However, free cash flow has certain limitations, including that it does not represent the residual cash flow available for discretionary expenditures since other, non-discretionary expenditures, such as mandatory debt service, are not deducted from the measure.

The amount of mandatory versus discretionary expenditures

can vary significantly between periods.

The amount of mandatory versus discretionary expenditures can vary significantly between periods.

This measure should be considered in addition to, and not as a substitute for, or superior to, other measures of liquidity or financial performance prepared in accordance with U.S.

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Free cash flow $ 344,777 $ 220,831 $ 103,072

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2020, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

Payments Due for Year Ending December 31,

Total 2021 2022 2023 2024 2025 Thereafter

(In thousands)

Total debt $ 1,164,302 $ 149,007 $ 182,373 $ 170,776 $ 81,461 $ 27,400 $ 553,285

Scheduled interest payment obligations (1) 269,994 44,293 41,855 38,981 37,150 36,231 71,484

Purchase obligations (2) 234,662 224,644 5,145 1,333 1,333 655 1,552

Operating lease obligations (3) 147,413 55,196 36,850 19,974 10,213 7,925 17,255

Finance lease obligations (3) 27,687 13,409 6,395 3,777 1,063 997 2,046

Severance obligations (4) 98,004 10,837 9,647 8,575 7,622 6,788 54,535

Total contractual obligations $ 1,942,062 $ 497,386 $ 282,265 $ 243,416 $ 138,842 $ 79,996 $ 700,157

(1) Represents interest payment obligations calculated using stated coupon rates for fixed rate debt and interest rates applicable at December 31, 2020, for variable rate debt.

(2) Represents off-balance sheet purchase obligations for capital expenditures, long-term supply contracts and other contractual commitments outstanding at December 31, 2020.

(3) Represents future minimum lease payments including interest payments.

(4) Represents estimated benefit payments for our Korean subsidiary severance plan.

In addition to the obligations identified in the table above, other non-current liabilities recorded in our Consolidated Balance Sheet at December 31, 2020, include:

• $72.2 million of foreign pension plan obligations, for which the timing and actual amount of impact on our future cash flow is uncertain.

• $33.0 million net liability associated with unrecognized tax benefits.

Due to the uncertainty regarding the amount and the timing of any future cash outflows associated with our unrecognized tax benefits, we are unable to reasonably estimate the amount and period of ultimate settlement, if any, with the various taxing authorities.

Off-Balance Sheet Arrangements

As of December 31, 2020, we had no off-balance sheet guarantees or other off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Contingencies, Indemnifications and Guarantees

We refer you to Note 17 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for a discussion of our contingencies related to litigation and other legal matters.

Please refer to Note 17 to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for a discussion of contingencies related to litigation and other legal matters.

Critical Accounting Policies and Use of Estimates

We have identified the policies below as critical to our business operations and the understanding of our results of operations.

A summary of our significant accounting policies used in the preparation of our Consolidated Financial Statements appears in Note 1 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Our preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period.

Our preparation of this Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period.

There can be no assurance that actual results will not differ from those estimates, including the impact of Covid-19 and any deterioration in the global business and economic environment.

We believe the following critical accounting estimates and policies, which have been reviewed with the Audit Committee of our Board of Directors, affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

Acquisitions.

We account for businesses we acquire using the acquisition method of accounting and record the underlying net assets at their respective acquisition-date fair values.

The accounting for acquisitions requires us to make significant estimates and assumptions, including those with respect to future cash flows, discount rates and asset lives, and therefore requires considerable judgment.

These determinations affect the amount of depreciation and amortization expense recognized in future periods.

Our estimates of fair value are based upon assumptions believed to be reasonable;

however, they are inherently uncertain and unpredictable.

Revenue Recognition.

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The consideration, including variable consideration, is allocated between the distinct services in a combined offering based upon the stand-alone selling prices of the individual services.

Our services involve a high degree of specialization which are unique based on the design and purpose of the customer’s wafers.

Our services involve a high degree of specialization

which are unique based on the design and purpose of the customer’s wafers.

Accordingly, our negotiated pricing reflects the customized nature of our services and represents a customer-specific stand-alone selling price.

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In evaluating our ability to recover our deferred tax assets in the jurisdictions from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and results of recent operations.

For most of our deferred tax assets, we consider it more likely than not that we will have sufficient taxable income to allow us to realize these deferred tax assets.

With the exception of a certain foreign jurisdiction and select U.S.

and foreign carryforwards, we consider it more likely than not that we will have sufficient taxable income to allow us to realize these deferred tax assets.

However, in the event taxable income falls short of current expectations, we may need to establish a valuation allowance against such deferred tax assets.

We have valuation allowances on certain U.S.

federal net operating loss and U.S.

foreign tax credit carryforwards expected to expire unused and select deferred tax assets in certain foreign jurisdictions.

federal net operating losses and U.S.

foreign tax credit carryforwards expected to expire unused and on select deferred tax assets in certain foreign jurisdictions.

Such valuation allowances are released as the related tax benefits are realized or when sufficient evidence exists to conclude that it is more likely than not that the deferred tax assets will be realized.

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However, we may not be successful in recovering the cost from our customers or be able to use the inventory in production and, accordingly, if we believe that it is probable that we will not be able to recover such costs, we reduce the carrying value of our inventory.

Additionally, we reduce the carrying value of our inventories for the cost of inventory we estimate is excess and obsolete based on the age of our inventories.

Additionally, we reduce the carrying value of our inventories by the cost of inventory we estimate is excess and obsolete based on the age of our inventories.

When a determination is made that the inventory will not be utilized in production or is not saleable, it is written off.

The forecast of demand and the evaluation of inventory recoverability require estimates and judgment.

Although we make an effort to ensure forecasted demand and estimates of inventory are accurate, any unanticipated changes could have a material effect on our financial condition and result of operations.

Inventories consist of raw materials and purchased components and are stated at the lower of cost and net realizable value.

Cost is principally determined by standard cost or the weighted moving average method, both of which approximate actual cost.

Cost is principally determined by standard cost or the weighted moving average method, both of which

approximate actual cost.

For inventory valued using the standard cost method, we review and set our standard costs as needed, but at a minimum on an annual basis.

12 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis