What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-16 compared with 2023-02-22 · 59 added, 64 removed, 240 unchanged (34% 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, 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.

To achieve this goal, we are focused on leveraging our leadership position in services for advanced technologies, providing our customers with a geographically diverse manufacturing footprint, growing within the industry secular growth markets of 5G, automotive, HPC and IoT, 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.

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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.

With the continuing trend towards cloud-based computing and the expanding use of artificial intelligence, innovative advanced packaging solutions are needed to achieve the increased performance and power consumption requirements for this market.

In consumer devices, further miniaturization and increasing functionality within IoT devices also require advanced packaging.

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.

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

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 continue to support global supply chains and to participate in initiatives to regionalize supply chains.

We are preparing to deliver advanced SiP modules and other advanced packages from our Vietnam Facility beginning in the second half of 2024, which we believe will provide customers with a cost-competitive high-volume manufacturing location that offers additional supply chain diversification.

Another key factor in our success is the optimization of asset utilization.

We build and utilize manufacturing lines which support multiple customers, and we 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.

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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.

We operate in a capital-intensive industry.

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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.

or equity financings and our investment strategy.

As of December 31, 2023, we had cash and cash equivalents and short-term investments of $1,119.8 million and $474.9 million, respectively.

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.

We expect macroeconomic conditions to be challenging in the first half of 2024.

To prepare for future growth, we will continue to make prudent investments, and we will closely manage capacity expansion and control costs in response to changes in market conditions.

2023 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 primarily due to higher sales of advanced products across all end markets, partially offset by unfavorable foreign currency exchange rate movements.

Our net sales decreased $588.5 million or 8.3% to $6,503.1 million in 2023 from $7,091.6 million in 2022.

The decrease was primarily due to lower sales in our consumer and computing end markets, partially offset by growth in our communications end market.

Gross margin decreased to 14.5% in 2023 compared to 18.8% in 2022.

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 favorable foreign currency exchange rate movements in operating expenses, partially offset by a decrease in our gross margin discussed above.

The decrease in gross margin was primarily due to an increase in the mix of products sold with higher material content, the decrease in net sales and resulting lower factory utilization.

Operating income margin decreased 550 basis points to 7.2% in 2023 from 12.7% in 2022.

The decrease in our operating income margin was due to the decrease in our gross margin discussed above along with an increase in research and development expenses, primarily due to additional equipment and overhead costs to support development projects in advanced packaging technologies, partially offset by projects that moved into production.

Operating income margin was also impacted by an increase in selling, general and administrative expenses, primarily due to costs associated with the opening of the Vietnam Facility and increased bad debt expense, partially offset by a reduction in employee compensation costs.

In 2023, our capital expenditures totaled $749.5 million, or 11.5% of net sales, compared to $908.3 million, or 12.8% of net sales in 2022.

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

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

Net cash provided by operating activities was $1,270.0 million for the year ended December 31, 2023, compared to $1,098.8 million for the year ended December 31, 2022.

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.

This increase was primarily due to changes in working capital, offset by lower net sales and operating profits.

In November 2023, our Board of Directors approved a quarterly dividend of $0.07875 per share, a 5% increase from the rate set in November 2022.

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Gross margin 14.5 % 18.8 % 20.0 %

Selling, general and administrative 4.5 % 4.0 % 4.8 %

Research and development 2.7 % 2.1 % 2.7 %

Operating income 7.2 % 12.7 % 12.4 %

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Net sales $ 6,503,065 $ 7,091,585 $ 6,138,329 $ (588,520) (8.3) % $ 953,256 15.5 %

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.

The $588.5 million decrease in net sales in 2023 compared to 2022 was primarily due to lower sales in our consumer and computing end markets, partially offset by growth in our communications end market.

The consumer and computing end markets decreased 38% and 11%, respectively, in 2023 compared to 2022.

These end markets were impacted by the cyclical correction of the semiconductor market, product lifecycle changeovers and weaker demand.

Despite this cyclical correction, communications, our largest end market, grew 4% in 2023 compared to 2022, due to market share gains and the increase in silicon content within premium tier smartphones.

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 on product mix, utilization, foreign currency exchange rate movements and seasonality.

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.

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.

We have expanded our business in advanced packaging which tends to have higher material costs than our other products.

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

Gross profit and gross margin decreased for 2023 compared to 2022 primarily due to an increase in the mix of products sold with higher material content, the decrease in net sales and resulting lower factory utilization.

Selling, General and Administrative

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$ 295,393 $ 283,372 $ 296,084 $ 12,021 4.2 % $ (12,712) (4.3) %

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

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.

Selling, general and administrative expenses increased in 2023 compared to 2022.

The increase was primarily due to costs associated with the opening of the Vietnam Facility and increased bad debt expense, partially offset by a reduction in employee compensation costs.

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 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 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.

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 increased in 2023 compared to 2022 primarily due to additional equipment and overhead costs to support development projects in advanced packaging technologies, partially offset by projects that moved into production.

Other Income and Expense

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Total other expense, net $ 26,446 $ 40,254 $ 48,367 $ (13,808) (34.3) % $ (8,113) (16.8) %

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.

Interest income increased in 2023 compared to 2022, primarily due to higher interest rates on our cash and cash equivalents and available-for-sale debt investment balances.

The changes in foreign currency (gain) loss, net for the 2023 compared to the 2022 were primarily due to the higher costs associated with our derivative instruments, which are used to reduce our exposure to foreign currency gains and losses.

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 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.

The effective tax rate in 2022 includes a $17.8 million tax benefit from the recognition of deferred tax assets we expect to utilize in future years.

During 2023, 2022 and 2021, 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.

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

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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.

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.

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As of December 31, 2023, our net liability associated with unrecognized tax benefits is $27.5 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.

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 timing 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 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.

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

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

For the year ended December 31, 2023 and 2022, we sold accounts receivable totaling $253.9 million and $386.5 million, net of discounts and fees of $1.3 million and $1.1 million, respectively.

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As of December 31, 2023, our total remaining operating lease obligations and finance lease obligations were $105.2 million and $118.0 million, respectively, with $36.9 million and $62.3 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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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.

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 Stock Repurchase Program since 2012.

At December 31, 2022, approximately $91.6 million was available to repurchase common stock pursuant to the Stock Repurchase Program.

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 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 make significant capital expenditures in order to service the demand of our customers.

In 2023, our capital expenditures totaled $749.5 million or approximately 11.5% of net sales, which are primarily focused on investments in advanced packaging and test equipment and the Vietnam Facility.

We expect that our 2024 capital expenditures will be approximately $750 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.

Ultimately, the amount of our 2024 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.

We expect that our 2024 capital expenditures related to our planned advanced packaging and test facility in Arizona will be primarily for the design and construction planning.

The primary sources of funds for our capital expenditures 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.

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.

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.”

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Operating activities:

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.

Our cash flow provided by operating activities for the year ended December 31, 2023 increased by $171.3 million compared to the year ended December 31, 2022, primarily due to changes in working capital, offset by lower net sales and operating profits.

Investing activities:

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.

Our cash flow used in investing activities for the year ended December 31, 2023 decreased by $55.3 million compared to the year ended December 31, 2022, primarily due to decreased payments related to property, plant and equipment and decreased net payments for foreign exchange forward contracts, offset by higher net payments for 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, 2023 was primarily due to the payments of our quarterly dividends and finance lease obligations.

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

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

We define “free cash flow” as net cash provided by operating activities less payments for property, plant and equipment, plus proceeds from the sale of and insurance recovery for property, plant and equipment, if applicable.

We define “free cash flow” as net cash provided by operating activities less payments for property, plant and equipment, plus proceeds from the sale of, insurance recovery for and grants for property, plant and equipment, if applicable.

Free cash flow is not defined by U.S.

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Payments for property, plant and equipment (749,467) (908,294) (779,779)

Proceeds from sale of and insurance recovery for property, plant and equipment 3,148 3,261 3,819

Proceeds from sale of, insurance recovery for and grants for property, plant and equipment 13,032 3,148 3,261

Free cash flow $ 533,585 $ 193,610 $ 344,777

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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.

There can be no assurance that actual results will not differ from those estimates, including the impact of 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.

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Impairment losses are recorded when the carrying amount of the reporting unit exceeds its fair value.

Recently Issued Standards

For information regarding recently adopted and recently issued accounting standards, see Note 1 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

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