What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-18 · 81 added, 83 removed, 223 unchanged (42% of the section changed)

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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.

We believe these advanced technology solutions provide substantial value to our customers, particularly in the mobile communications market, where growth generally outpaces the overall semiconductor industry.

Advanced packages are now the preferred choice in both the high-end and the mid-range segments of the smartphone market, which together account for a high portion of mobile phone semiconductor value.

The demand for advanced packages is also being driven by second-wave mobile device customers, who are transitioning out of wirebond into wafer-level and flip-chip packages.

Interest in advanced packages for automotive applications is growing as well, largely due to new, data-intensive applications, which require increased pin count and performance.

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 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 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.

To achieve this goal, we are focused on leveraging our leadership position in services for advanced technologies, growing within the industry megatrend markets of 5G, automotive, IoT and HPC, optimizing utilization of existing assets, and selectively growing our scale and scope through strategic investments.

We are an industry leader in developing and commercializing advanced packaging and test technologies, which we believe provide substantial value to our customers.

Advanced packages, which account for a significant portion of mobile phone semiconductor value, are the preferred choice in the high-end smartphone market.

The use of advanced packages in automotive applications is also growing, largely due to new, data-intensive applications which require increased pin count and performance.

In consumer devices, further miniaturization and the integration of new functionality within IoT devices also require advanced packaging.

With the continuing trend towards cloud-based computing, innovative advanced packaging solutions are needed to achieve the increased speed, performance and power requirements for this market.

We believe that demand for advanced packaging services will continue to grow as our customers and leading electronics OEMs strive for smaller device geometries, higher levels of integration and performance and lower power consumption.

We intend to continue to leverage our investment in advanced technology to meet the demand for these services in high growth markets.

Another key to our success is to optimize the utilization of our assets.

We build and utilize manufacturing lines which support multiple customers and increase factory utilization through sophisticated planning processes and intensive efficiency improvement activities.

From time to time, we identify attractive opportunities to strengthen our leadership position and market share through expansion of our operations, joint ventures, acquisitions and other strategic investments.

For example, we are making preparations to deliver advanced SiP modules and other packaging solutions from a new factory in Bac Ninh, Vietnam.

We believe that the Bac Ninh facility, the first phase of which is expected to begin production in the fourth quarter of 2023, will provide customers with a cost-competitive high-volume manufacturing location that offers supply chain diversification.

In addition, our broad geographic footprint, including our manufacturing presence in Portugal, and our headquarters in the United States are key differentiators for us and position us to participate in initiatives to regionalize supply chains.

We believe that selective growth through these strategic actions can further strengthen customer relationships, help to maintain and enhance our technological leadership, diversify our revenue streams and improve our profits.

As a supplier in the semiconductor industry, our business is cyclical and impacted by broad economic factors.

Historical trends indicate there has been a strong correlation between worldwide gross domestic product levels, consumer spending and semiconductor industry cycles.

We believe that the general semiconductor market is currently going through a cyclical correction.

The semiconductor industry has experienced significant and sometimes prolonged cyclical upturns and downturns in the past.

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

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.

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

In March 2022, as part of a broad effort to mitigate a rising number of Covid-19 cases in Shanghai, the Chinese government mandated a temporary lockdown of our Shanghai factory.

The Shanghai facility reopened during the second quarter and returned to normal operating levels in late June 2022, which resulted in higher than seasonal growth in net sales for the third quarter compared to the second quarter.

Additionally, other national, regional and local governments have implemented, and may implement in the future, restrictions to mitigate the spread of Covid-19, the emergence of new variants or the re-emergence of Covid-19 in jurisdictions in which we, our customers and our suppliers operate, and

such restrictions may materially and adversely impact our operations and the operations of our customers and suppliers.

We also remain subject to industry-wide supply constraints and inflationary price pressures, which have resulted in long lead times, rising prices and supply chain disruptions.

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.

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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.

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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.

We expect macroeconomic conditions to be weak in 2023.

To prepare for future growth, we will continue to make prudent investments, including construction in Vietnam, but we will limit capacity expansion generally and control costs in response to changing market conditions.

2022 Financial Summary

Our net sales increased $953.3 million or 15.5% to $7,091.6 million in 2022 from $6,138.3 million in 2021.

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.

The increase was primarily due to higher sales of advanced products across all end markets, partially offset by unfavorable foreign currency exchange rate movements.

Gross margin decreased to 18.8% in 2022 compared to 20.0% in 2021.

The decrease in gross margin was primarily due to an increase in the mix of products sold with higher material content and the government-mandated lockdown and related underutilization of our Shanghai factory during the second quarter of 2022.

The decrease was partially offset by an increase in net sales and net favorable foreign currency exchange rate movements.

Operating income margin expanded 30 basis points to 12.7% in 2022 from 12.4% in 2021.

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.

The increase in our operating income margin was primarily due to favorable foreign currency exchange rate movements in operating expenses, partially offset by a decrease in our gross margin discussed above.

In 2022, our capital expenditures totaled $908.3 million, or 12.8% of net sales, compared to $779.8 million, or 12.7% of net sales in 2021.

Our spending was primarily focused on investments in advanced packaging and test equipment.

Our spending was primarily focused on investments in advanced packaging and test equipment and a new manufacturing facility in Bac Ninh, Vietnam.

Net cash provided by operating activities was $1,098.8 million for the year ended December 31, 2022, compared to $1,121.3 million for the year ended December 31, 2021.

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.

This decrease was primarily due to changes in working capital and changes in advanced payments to our vendors and from our customers, partially offset by higher net sales and operating profits.

In November 2022, our Board of Directors approved a quarterly dividend of $0.075 per share, a 50% increase from the rate set in November 2021.

In 2022, we paid total quarterly cash dividends of $55.1 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 $ 7,091,585 $ 6,138,329 $ 5,050,589 $ 953,256 15.5 % $ 1,087,740 21.5 %

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.

The $953.3 million increase in net sales in 2022 compared to 2021 was primarily due to higher sales of advanced products across all end markets, partially offset by unfavorable foreign currency exchange rate movements.

Sales in the communications end market represented 61% of the increase, driven primarily by content and market share gains within premium tier 5G smartphones.

The automotive and industrial end market represented 18% of the increase, driven by the increase of silicon content within vehicles for advanced features, including ADAS, infotainment and telematics.

Sales in the computing end market accounted for 16% of the increase, driven primarily by a shift to cloud-based services.

Gross Profit and Gross Margin

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Since a substantial portion of the costs at our factories is fixed, there tends to be a strong relationship between our revenue levels and gross margin.

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.

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

We have expanded our business in advanced SiP modules, which tend to have higher material costs than 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.

While gross profit increased for 2022 compared to 2021, gross margin decreased primarily due to an increase in the mix of products sold with higher material content and the government-mandated lockdown and related underutilization of our Shanghai factory during the second quarter of 2022.

The decrease was partially offset by an increase in net sales and net favorable foreign currency exchange rate movements.

Selling, General and Administrative

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Selling, general and administrative expenses decreased in 2022 compared to 2021.

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.

The decrease was primarily due to favorable foreign currency exchange rate movements and costs incurred for factory consolidation efforts in Japan in the prior year.

Research and Development

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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.

Research and development expenses in 2022 decreased compared to 2021 due to favorable foreign currency exchange rate movements and projects that moved into production, partially offset by new development projects in advanced packaging technologies.

Other Income and Expense

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Total other expense, net $ 40,254 $ 48,367 $ 70,563 $ (8,113) (16.8) % $ (22,196) (31.5) %

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.

Interest expense increased in 2022 compared to 2021, primarily due to an increase in our finance lease obligation balance, an increase in our average outstanding debt and an increase in interest rates throughout the year.

Interest income increased in 2022 compared to 2021, primarily due to higher interest rates on our available-for-sale debt investments.

Income Tax Expense

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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.

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.

The effective tax rates in 2022 and 2020 include a $17.8 million and $20.2 million income tax benefit, respectively, from the recognition of deferred tax assets we expect to utilize in future years.

During 2022, 2021 and 2020, our subsidiaries in Korea and Singapore operated under various conditional reduced tax rates.

The conditional reduced tax rates granted to certain operations in the Philippines expired during 2020 and 2021.

As these conditional reduced tax rates 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.

We assess our liquidity based on our current expectations regarding sales and operating expenses, capital spending, dividend payments, stock and debt 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, debt repurchases 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 or debt under any 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.

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 Form 10-K.

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

federal income tax.

federal income tax, but the distributions may be subject to foreign withholding and state income taxes.

For the year ended December 31, 2022, we estimate that repatriation of this foreign cash and short-term investments would generate withholding taxes and state income taxes of approximately $36 million.

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

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

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.

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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 (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.

The maximum borrowing capacity under our $600.0 million senior secured revolving credit facility (“2022 Singapore Revolver”) is limited to a base amount equal to the lesser of:

(1) $600.0 million;

or (2) $250 million plus a variable amount equal to 37.5% of our consolidated accounts receivable balance.

As of December 31, 2022, we had availability of $600.0 million.

As of December 31, 2022, our foreign subsidiaries had $615.0 million available for future borrowings under revolving credit facilities, including the 2022 Singapore Revolver, and $70.3 million available to be borrowed under term loan credit facilities for working capital purposes and capital expenditures.

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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, and do not currently have a material impact on our ability to make dividend payments or stock repurchases.

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

The debt of Amkor Technology, Inc.

is structurally subordinated in right of payment to all existing and future debt and other liabilities of our subsidiaries.

From time to time, Amkor Technology, Inc.

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.

From time to time, Amkor Technology, Inc., Amkor Technology Taiwan Ltd.

(“ATT”), Amkor Advanced Technology Taiwan, Inc.

(“AATT”) and Amkor Technology Singapore Holding Pte.

(“ATSH”) guarantee certain debt of our subsidiaries.

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

Any such transaction may be made in the open market, through privately negotiated transactions or otherwise, and would be subject to the terms of our indentures and other debt agreements, market conditions and other factors.

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

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

As of December 31, 2022, the severance liability was $56.2 million, with $7.4 million payable within 12 months.

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As of December 31, 2022, our total remaining operating lease obligations and finance lease obligations were $161.4 million and $117.6 million, respectively, with $75.8 million and $60.1 million payable within 12 months, respectively.

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

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.

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As of December 31, 2022, the purchase obligations were $582.8 million, with $564.8 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.

Capital Returns

In 2022, we paid total quarterly cash dividends of $55.1 million, and 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 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.

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.

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Capital Resources

We make significant capital expenditures in order to service the demand of our customers, which are primarily focused on investments in advanced packaging and test equipment.

We make significant capital expenditures in order to service the demand of our customers, which are primarily focused on investments in advanced packaging and test equipment and a new manufacturing facility in Bac Ninh, Vietnam.

In 2022, our capital expenditures totaled $908.3 million or approximately 12.8% of net sales.

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.

We expect that our 2023 capital expenditures will be approximately $800 million.

Ultimately, the amount of our 2023 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.

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Operating activities:

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.

Our cash flow provided by operating activities for the year ended December 31, 2022 decreased by $22.5 million compared to the year ended December 31, 2021, primarily due to changes in working capital and changes in advanced payments to our vendors and from our customers, partially offset by higher net sales and operating profits.

Investing activities:

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.

Our cash flow used in investing activities for the year ended December 31, 2022 increased by $63.3 million compared to the year ended December 31, 2021, primarily due to increased payments related to property, plant and equipment and increased net payments for foreign exchange forward contracts, partially offset by higher net proceeds from short-term investments.

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

Financing activities:

The net cash provided by financing activities for the year ended December 31, 2022 was primarily due to net debt borrowings in China and Korea, offset by the payments of our quarterly dividends and finance lease obligations.

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.

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.

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.

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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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However, resolution of these matters involves uncertainties, and there can be no assurance that the outcomes will be favorable.

In addition, changes in the mix of income from our foreign subsidiaries, expiration of tax holidays or changes in tax laws or regulations could result in increased tax expense and effective tax rates in the future.

In addition, changes in the mix of income from our foreign subsidiaries, expiration of conditional reduced tax rates or changes in tax laws or regulations could result in increased tax expense and effective tax rates in the future.

Additionally, we monitor on an ongoing basis our ability to utilize our deferred tax assets and whether there is a need for a related valuation allowance.

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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.

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.

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 a quarterly basis.

Valuation of Long-lived Assets.

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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