|TEV||40,489||TEV/EBIT||16||TTM 2018-12-31, in MM, except price, ratios|
|Item 1.Identity of Directors, Senior Management and Advisers|
|Item 2.Offer Statistics and Expected Timetable|
|Item 3.Key Information|
|Item 4.Information on The Company|
|Item 4A.Unresolved Staff Comments|
|Item 5.Operating and Financial Review and Prospects|
|Item 6.Directors, Senior Management and Employees|
|Note 2:On September 10, 2019, The Corporate Director Representative of The Auo Foundation Was Reassigned From Kuo-Hsin (Michael) Tsai To Frank Ko.|
|Note 3:Refers To Compensation for Directors in 2019 (Including Salaries, Job Allowance, Severance Pay, Bonuses, and Performance Fees).|
|Note 4:Refers To Pension Either Allocated or Paid Out per Legal Requirements in 2019.|
|Note 5:Refers To Directors' Remunerations in 2019.|
|Note 9:Total Compensation in Various Items Paid Out To Au Optronics Corp.'s Directors.|
|Note 10:Profit Refers To The Profit (Loss) for The Year in The 2019 Parent Company Only Financial Statements of Au Optronics Corp. Under Taiwan Ifrs.|
|Note 12:Total Compensation Paid To Au Optronics Corp.'s Directors.|
|Note 1:The Information in The Table Refers To 2019 Compensation for Current Managers Such As Vice Presidents or Above As of The End of 2019.|
|Note 2:Refers To Compensation for Managers Such As Vice Presidents or Above in 2019, Including Salaries, Job Allowance and Severance Pay.|
|Note 3:Refers To Pension Either Allocated or Paid Out per Legal Requirements in 2019.|
|Note 5:Refers To Remunerations for Employee in 2019.|
|Note 6:Total Compensation in Various Items Paid Out To Au Optronics Corp.'s Managers Such As Vice Presidents or Above.|
|Note 7:Profit (Loss) Refers To The Profit (Loss) for The Year in The 2019 Parent Company Only Financial Statements of Au Optronics Corp. Under Taiwan Ifrs.|
|Note 9:Total Compensation Paid To Managers Such As Vice Presidents or Above.|
|Note 1:The Information in The Table Refers To 2019 Compensation for Current Managers Such As Vice Presidents or Above As of The End of 2019.|
|Note 2:Appointed on September 10, 2019.|
|Note 3:Refers To Compensation for Managers Such As Vice Presidents or Above in 2019, Including Salaries, Job Allowance and Severance Pay.|
|Note 4:Refers To Pension Either Allocated or Paid Out per Legal Requirements in 2019.|
|Note 6:Refers To Remunerations for Employee in 2019.|
|Note 7:Total Compensation in Various Items Paid Out To Au Optronics Corp.'s Managers Such As Vice Presidents or Above.|
|Note 8:Profit (Loss) Refers To The Profit (Loss) for The Year in The 2019 Parent Company Only Financial Statements of Au Optronics Corp. Under Taiwan Ifrs.|
|Item 7.Major Shareholders and Related Party Transactions|
|Item 8.Financial Information|
|Item 9.The Offer and Listing|
|Item 10.Additional Information|
|Item 11.Quantitative and Qualitative Disclosures About Market Risk|
|Item 12.Description of Securities Other Than Equity Securities|
|Item 13.Item Defaults, Dividend Arrearages and Delinquencies|
|Item 14.Material Modifications To The Rights of Security Holders and Use of Proceeds|
|Item 15.Controls and Procedures|
|Item 17.Financial Statements|
|Item 18.Financial Statements|
|Balance Sheet||Income Statement||Cash Flow|
Rev, G Profit, Net Income
Ops, Inv, Fin
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☐||REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934|
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2019
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|☐||SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
Commission file number: 001-31335
(Exact name of Registrant as specified in its charter)
|AU OPTRONICS CORP.||TAIWAN, REPUBLIC OF CHINA|
|(Translation of Registrant’s name into English)||(Jurisdiction of incorporation or organization)|
1 LI-HSIN ROAD 2
HSINCHU SCIENCE PARK
REPUBLIC OF CHINA
(Address of principal executive offices)
Chief Financial Officer
1 Li-Hsin Road 2
Hsinchu Science Park
Republic of China
Telephone No.: +886-3-500-8800
Facsimile No.: +886-3-564-3370
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
|Common Shares of par value NT$10.00 each||AUOTY||The New York Stock Exchange, Inc. (until September 30, 2019)*|
|OTC Markets Group (since October 1, 2019)|
* Not for trading but only in connection with the listing on the New York Stock Exchange, Inc. of American Depositary Shares representing such Common Shares
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 9,499,245,115 Common Shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one):
|Large Accelerated Filer ☒||Accelerated Filer ☐||Non-accelerated Filer ☐||Emerging Growth Company ☐|
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|U.S. GAAP ☐||International Financial Reporting Standards as issued by the International Accounting Standards Board ☒||Other ☐|
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
|SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS||1|
|ITEM 1.||IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS||5|
|ITEM 2.||OFFER STATISTICS AND EXPECTED TIMETABLE||5|
|ITEM 3.||KEY INFORMATION||5|
|3.A.||Selected Financial Data||5|
|3.B.||Capitalization and Indebtedness||7|
|3.C.||Reason for the Offer and Use of Proceeds||7|
|ITEM 4.||INFORMATION ON THE COMPANY||33|
|4.A.||History and Development of the Company||33|
|4.D.||Property, Plants and Equipment||45|
|ITEM 4A.||UNRESOLVED STAFF COMMENTS||48|
|ITEM 5.||OPERATING AND FINANCIAL REVIEW AND PROSPECTS||49|
|5.B.||Liquidity and Capital Resources||61|
|5.C.||Research and Development||64|
|5.E.||Off-Balance Sheet Arrangements||66|
|5.F.||Tabular Disclosure of Contractual Obligations||66|
|5.G.||Recent Accounting Pronouncement||67|
|ITEM 6.||DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES||67|
|6.A.||Directors and Senior Management||67|
|ITEM 7.||MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS||80|
|7.B.||Related Party Transactions||80|
|7.C.||Interests of Experts and Counsel||81|
|ITEM 8.||FINANCIAL INFORMATION||82|
|8.A.||Consolidated Statements and Other Financial Information||82|
|ITEM 9.||THE OFFER AND LISTING||84|
|9.A.||Offering and Listing Details||84|
|9.B.||Plan of Distribution||84|
|9.F.||Expenses of the Issue||85|
|ITEM 10.||ADDITIONAL INFORMATION||85|
|10.B.||Memorandum and Articles of Incorporation||85|
|10.F.||Dividends and Paying Agents||96|
|10.G.||Statement by Experts||96|
|10.H.||Documents on Display||96|
|ITEM 11.||QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK||97|
|ITEM 12.||DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES||101|
|12.B.||Warrants and Rights||101|
|12.D.||American Depositary Shares||101|
|ITEM 13.||ITEM DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES||103|
|ITEM 14.||MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS||103|
|ITEM 15.||CONTROLS AND PROCEDURES||103|
|16.A.||Audit Committee Financial Expert||105|
|16.B.||Code of Ethics||105|
|16.C.||Principal Accountant Fees and Services||105|
|16.D.||Exemptions From the Listing Standards for Audit Committees||106|
|16.E.||Purchases of Equity Securities by the Issuer and Affiliated Purchasers||106|
|16.F.||Change in Registrant’s Certifying Accountant||106|
|16.H.||Mine Safety Disclosure||106|
|ITEM 17.||FINANCIAL STATEMENTS||107|
|ITEM 18.||FINANCIAL STATEMENTS||107|
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS|
This annual report on Form 20-F contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based on our beliefs and assumptions and the information available to us from other sources we believe to be reliable as of the date these disclosures were prepared and we undertake no obligation to update these forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report. The words “anticipate,” “believe,” “expect,” “intend,” “seek,” “plan,” “estimate” and similar expressions, as they relate to us, are intended to identify a number of these forward-looking statements. Our actual results of operations, financial condition or business prospects may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons, including, among other things and not limited to:
|·||the cyclical nature of our industry;|
|·||further declines in selling prices;|
|·||our ability to comply with the applicable covenants under the terms of our debt instruments;|
|·||litigation and regulatory investigations against us;|
|·||our dependence on introducing new products on a timely basis;|
|·||our dependence on growth in the demand for our products;|
|·||our continued ability to achieve high-capacity utilization rates;|
|·||our ability to effectively manage inventories;|
|·||our dependence on a small number of customers for a substantial portion of our net revenue;|
|·||our ability to allocate capacity efficiently and in a timely manner;|
|·||implementation of our expansion plans and our ability to obtain capital resources for our planned growth;|
|·||our ability to compete effectively;|
|·||our ability to expand into new businesses, industries or internationally and to undertake mergers, acquisitions, investments or divestments;|
|·||changes in the accounting standard as required by the ROC government;|
|·||our dependence on key personnel;|
|·||our relationship with our affiliates;|
|·||our ability to acquire sufficient raw materials and key components and obtain equipment and services from our suppliers in suitable quantity and quality;|
|·||changes in technology and competing products;|
|·||possible disruptions in commercial activities caused by natural and human-induced disasters, including terrorist activity and armed conflict;|
|·||general political, economic, financial and regulatory conditions;|
|·||fluctuations in foreign currency exchange rates; and|
|·||other factors in the “Risk Factors” section in this annual report. Please see “Item 3. Key Information—3.D. Risk Factors.”|
We publish our financial statements in New Taiwan dollars (“NT dollars”), the lawful currency of the Republic of China (“ROC”). This annual report contains translations of NT dollar amounts, Renminbi (“RMB” or “CNY”) amounts, Japanese Yen (“JPY”) amounts and Euro (“EUR”) amounts, into United States dollars (“U.S. dollars”), at specific rates solely for the convenience of the reader. For convenience only and unless otherwise noted, all translations between NT dollars and U.S. dollars, between RMB and U.S. dollars, between JPY and U.S. dollars and between EUR and U.S. dollars in this annual report were made at a rate of NT$29.91 to US$1.00, RMB6.9618 to US$1.00, JPY108.67 to US$1.00 and EUR0.8907 to US$1.00, respectively, the exchange rates set forth in the H.10 weekly statistical release of the Federal Reserve System of the United States (the “Federal Reserve Board”) on December 31, 2019. No representation is made that the NT dollar, RMB, JPY, EUR or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars, RMB, JPY, EUR or NT dollars, as the case may be, at any particular rate or at all. On March 13, 2020, the exchange rates set forth in the H.10 weekly statistical release of the Federal Reserve Board were NT$30.13 to US$1.00, RMB7.0079 to US$1.00, JPY107.15 to US$1.00 and EUR0.9037 to US$1.00, respectively. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.
Unless otherwise indicated, in this annual report, the following terms shall have the meaning set out below:
|“Acer Display”||Acer Display Technology, Inc.|
|“ACTW”||AUO Crystal Corp.|
|“ADSs”||American Depositary Shares|
|“AHVA”||Advanced Hyper-Viewing Angle|
|“AMOLED”||Active-matrix organic light emitting diode, is an organic light emitting diode display technology|
|“A.R.T”||Advanced Reflectionless Technology|
|“AUKS”||AU Optronics (Kunshan) Co., Ltd.|
|“AUSP”||AUO SunPower Sdn. Bhd.|
|“AUSZ”||AU Optronics (Suzhou) Corp., Ltd.|
|“AUUS”||AU Optronics Corporation America|
|“BMC”||BenQ Materials Corp.|
|“BTA”||The basic tax amount|
|“CADE”||Conselho Administrativa de Defesa Economica|
|“CGU”||Cash-generating unit, the smallest identifiable group of assets that generates cash inflows which are largely independent of the cash inflows from other assets or group of assets|
|“China” or “PRC”||The People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau|
|“CID”||Center Information Display|
|“Code”||The Internal Revenue Code of 1986, as amended|
|“Convertible Securities”||Bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants|
|“COSO”||Committee of Sponsoring Organizations of the Treadway Commission|
|“Deposit Agreement”||Deposit agreement and its amendment|
|“DG COMP”||The Commission of the European Communities Directorate-General for Competition|
|“DTC”||The Depository Trust Company|
|“EPA”||Environmental Protection Administration|
|“Exchange Act”||Securities Exchange Act of 1934, as amended|
|“FDTC”||Fujitsu Display Technologies Corporation (which was merged into Fujitsu Limited)|
|“Federal Reserve Board”||The Federal Reserve System of the United States|
|“FSC”||The ROC Financial Supervisory Commission|
|“FTA”||Free Trade Agreement|
|“GOA”||Gate on Array|
|“HDR”||High dynamic range technology|
|“Hydis”||Hydis Technologies Co., Ltd.|
|“IFRS”||The International Financial Reporting Standards as issued by the International Accounting Standards Board|
|“IJP”||Ink Jet Printing|
|“Investment Regulations”||The ROC Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals|
|“Investment tax credit”||Invest brand-new smart machine tax credit|
|“Israeli Court”||District Court of the Central District in Israel|
|“large-size panels”||Panels ten inches and above in diagonal length|
|“LTPS”||Low temperature poly-silicon method|
|“LG Display” or “LGD”||LG Display Co., Ltd.|
|“M.Setek”||M.Setek Co., Ltd.|
|“MOEAIC”||Investment Commission of Ministry of Economic Affairs|
|“non-ROC resident”||A person who is not a resident of the ROC|
|“NTSC”||National Television System Committee|
|“NYSE”||New York Stock Exchange|
|“Northern California Court”||The United States District Court for the Northern District of California|
|“OLED”||Organic light emitting diode, a light emitting display technology|
|“our company,” “us” or “we”||AU Optronics Corp. and/or its consolidated subsidiaries, unless the context suggests otherwise|
|“PCAOB”||Public Company Accounting Oversight Board|
|“PCBA”||Printed Circuit Board Assembly|
|“PID”||Public Information Display|
|“PFIC”||A passive foreign investment company|
|“Pre-release”||American depositary shares released before delivery of shares to the depositary|
|“QCSZ”||Qisda (Suzhou) Co., Ltd.|
|“QDI”||Quanta Display Inc.|
|“QDIIs”||Qualified domestic institutional investors|
|“Raydium”||Raydium Semiconductor Corporation|
|“RCEP”||Regional Comprehensive Economic Partnership|
|“R&D tax credit”||Research and development expenditures tax credit|
|“ROC” or “Taiwan”||The island of Taiwan and the areas under the effective control of the Republic of China|
|“ROC government”||The government of the ROC|
|“Samsung”||Samsung Electronics Co., Ltd.|
|“Samsung Display”||Samsung Display Co., Ltd.|
|“Samsung Group”||Samsung Electronics Co., Ltd. and its subsidiaries|
|“SEC”||The United States Securities and Exchange Commission|
|“Securities Act”||Securities Act of 1933|
|“Seiko Epson”||Seiko Epson Corporation|
|“SID”||Society for Information Display|
|“SSEC”||Star Shining Energy Corp.|
|“subsidiary”||A company owned directly or indirectly by AU Optronics Corp., unless the context suggests otherwise|
|“SPTL”||SunPower Technology, Ltd., a subsidiary of SunPower Corporation|
|“Taiwan IFRS”||The International Financial Reporting Standards as issued by the International Accounting Standards Board and endorsed by the FSC, which are required to be adopted by applicable companies in Taiwan|
|“TDDI”||Touch and display driver integration|
|“UHD”||Ultra high definition|
|“U.S. DOJ”||The United States Department of Justice|
|“Unipac”||Unipac Optoelectronics Corp.|
|“VESA”||Video Electronics Standards Association|
|“VPV”||Vista Peak Ventures, LLC|
|ITEM 1.||IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS|
|ITEM 2.||OFFER STATISTICS AND EXPECTED TIMETABLE|
|ITEM 3.||KEY INFORMATION|
The selected consolidated financial data set forth below as of December 31, 2018 and 2019 and for the years ended December 31, 2017, 2018 and 2019 have been derived from our audited consolidated financial statements and the related notes, which have been prepared in accordance with IFRS, included elsewhere in this annual report. The selected consolidated statement of financial position data as of December 31, 2015, 2016 and 2017 and selected consolidated statement of comprehensive income data for the years ended December 31, 2015 and 2016 have been derived from our audited consolidated financial statements prepared in accordance with IFRS that are not included herein. The selected financial data set forth below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and the accompanying notes included elsewhere in this annual report.
|Year Ended and As of December 31,|
|(in millions, except percentages and earnings per share and per ADS data)|
|Consolidated Statement of Comprehensive Income Data:|
|Selling and distribution expenses||(4,206.1||)||(3,895.1||)||(3,889.0||)||(3,946.5||)||(3,751.1||)||(125.4||)|
|General and administrative expenses||(9,206.0||)||(9,176.7||)||(8,158.9||)||(7,978.3||)||(7,363.2||)||(246.2||)|
|Research and development expenses||(8,903.8||)||(9,080.8||)||(9,854.7||)||(9,546.8||)||(9,809.6||)||(328.0||)|
|Profit (loss) before income tax||7,598.9||11,185.9||39,363.6||11,216.2||(19,844.8||)||(663.5||)|
|Income tax expense (benefit)||384.9||2,432.5||(1,125.2||)||322.4||1,336.1||44.7|
|Profit (loss) for the year||7,214.0||8,753.4||40,488.8||10,893.8||(21,180.9||)||(708.2||)|
|Total comprehensive income (loss) for the year||6,482.3||1,423.5||39,669.9||9,510.0||(22,592.7||)||(755.4||)|
|Profit (loss) for the year attributable to:|
|Shareholders of AU Optronics Corp.||7,242.2||9,965.1||42,609.5||13,071.6||(18,767.2||)||(627.5||)|
|Total comprehensive income (loss) for the year attributable to: |
Shareholders of AU Optronics Corp.
|Earnings (loss) per share—Basic||0.75||1.04||4.43||1.36||(1.96||)||(0.07||)|
|Earnings (loss) per share—Diluted||0.70||1.02||4.27||1.34||(1.96||)||(0.07||)|
|Year Ended and As of December 31,|
|(in millions, except percentages and earnings per share and per ADS data)|
|Earnings (loss) per ADS equivalent—Basic||7.52||10.35||44.27||13.58||(19.55||)||(0.65||)|
|Earnings (loss) per ADS equivalent—Diluted||6.98||10.24||42.73||13.35||(19.55||)||(0.65||)|
|Consolidated Statement of Financial Position Data:|
|Total current assets||161,992.1||163,346.2||180,175.5||149,067.6||143,200.2||4,787.7|
|Property, plant and equipment||208,785.6||222,741.8||224,933.1||221,586.5||206,734.5||6,911.9|
|Total current liabilities||141,867.7||118,031.6||110,264.7||129,364.2||90,535.8||3,027.0|
|Total noncurrent liabilities||76,708.3||110,992.9||107,088.1||61,401.7||116,919.3||3,909.0|
|Non-controlling interests in subsidiaries||22,648.6||18,388.2||17,068.5||14,416.6||11,304.9||377.9|
|Total equity attributable to shareholders of AU Optronics Corp.||158,012.5||158,448.1||195,749.4||193,368.7||167,597.0||5,603.4|
|Other Financial Data:|
|Depreciation and amortization||47,745.8||39,693.2||36,429.8||34,227.5||36,257.7||1,212.2|
|Net cash flows provided by operating activities||62,003.4||36,695.8||84,363.3||40,200.7||20,730.6||693.1|
|Net cash flows used in investing activities||(31,734.7||)||(42,267.3||)||(43,667.5||)||(34,497.8||)||(28,112.4||)||(939.9||)|
|Net cash flows provided by (used in) financing activities||(34,277.0||)||10,721.2||(13,410.4||)||(41,846.7||)||20,742.1||693.5|
|Segment profit (loss)(3)|
|(1)||Gross margin is calculated by dividing gross profit by net revenue.|
|(2)||Net margin is calculated by dividing profit (loss) for the year by net revenue.|
|(3)||Segment profit (loss) represents gross profit (loss) minus selling and distribution expenses, general and administrative expenses and research and development expenses.|
Fluctuations in the exchange rate between NT dollars and U.S. dollars will affect the U.S. dollar equivalent of the NT dollar price of our shares on the Taiwan Stock Exchange and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the U.S. dollar conversion by the depositary of cash dividends paid in NT dollars on, and the NT dollar proceeds received by the depositary from any sale of, our shares represented by ADSs.
Risks Relating to Our Financial Condition, Business and Industry
Our industry is cyclical, with recurring periods of capacity increases. As a result, price fluctuations in response to supply and demand imbalances could harm our results of operations.
The display panel industry in general is characterized by cyclical market conditions. From time to time, the industry has been subject to imbalances between excess supply and a slowdown in demand, and in certain periods, resulting in declines in selling prices. For example, the average selling price per square meter for our large-size panels decreased by 15% in 2019 compared to 2018. In addition, capacity expansion anticipated in the display panel industry may lead to excess capacity. Capacity expansion in the display panel industry may be due to scheduled ramp-up of new fabs, and any large increases in capacity as a result of such expansion could further drive down the selling prices of our panels, which would affect our results of operations. We cannot assure you that any continuing or further decrease in selling prices or future downturns resulting from excess capacity or other factors affecting the industry will not be severe or that any such continuation, decrease or downturn would not seriously harm our business, financial condition and results of operations.
Our ability to maintain or increase our revenues will primarily depend upon our ability to maintain market share, increase unit sales of existing products and introduce and sell new products that offset the anticipated fluctuation and long-term declines in the selling prices of our existing products. We cannot assure you that we will be able to maintain or expand market share, increase unit sales, and introduce and sell new products, to the extent necessary to compensate for market oversupply.
We may experience declines in the selling prices of our products irrespective of cyclical fluctuations in the industry.
The selling prices of our products have declined in general and are expected to continually decline with time irrespective of industry-wide cyclical fluctuations as a result of, among other factors, technology advancements and cost reductions. Although we may be able to take advantage of the higher selling prices typically associated with new products and technologies when they are first introduced into the market, prices decline over time and in certain cases, very rapidly as a result of market competition. If we are unable to anticipate effectively and counter the price erosion that accompanies our products, or if the selling prices of our products decrease faster than the rate at which we are able to reduce our manufacturing costs, our profit margins will be affected adversely and our results of operations and financial condition may be affected materially and adversely.
Our results of operations have fluctuated in the past. If we are unable to achieve profitability in 2020 or beyond, the value of the ADSs and our shares may be adversely affected.
Our business is significantly affected by cyclical market conditions for the display panel industry. From time to time, the industry has experienced imbalances between excess supply and slowdowns in demand, and in certain periods, resulting in declines in selling prices. In addition, other factors such as technology advancement and cost reductions have driven down and may continue to drive down our average selling prices irrespective of cyclical market conditions for the display panel industry.
The solar industry has undergone challenging business conditions in the past years, including downward pricing pressure for solar modules, solar cells, solar wafers and ingots mainly as a result of oversupply and reductions in applicable governmental subsidies. Although the solar industry may continue to grow in the long run, there is no assurance that the solar industry will not suffer significant downturns or significant reductions in the scope or discontinuation of government incentive programs in the future, especially in markets where we operate or we target, which will adversely affect demands for our solar products as well as our results of operations.
Our results of operations have fluctuated in the past. Our net revenue decreased by approximately 12.6% to NT$268.8 billion (US$9.0 billion) in 2019 compared to net revenue of NT$307.6 billion in 2018, while our net profit for the year decreased from NT$10.9 billion in 2018 to negative NT$21.2 billion (negative US$0.7 billion) in 2019. We cannot assure you that we will be profitable in 2020 or beyond. In addition, we expect that selling prices for many of our existing products will continue to decline over the long term. If we are unable to introduce new products, reduce our production cost to offset the declines in selling prices and maintain a high-capacity utilization rate, our gross margin will decline, which could seriously harm our business and reduce the value of our equity securities. If we are unable to achieve profitability in 2020 or beyond, the value of the ADSs and our shares may be adversely affected.
Our future net revenue, gross profit, net income and financing capabilities may vary significantly due to a combination of factors, including, but not limited to:
|·||our ability to develop and introduce new products to meet customers’ needs in a timely manner;|
|·||our ability to develop or acquire and implement new manufacturing processes and product technologies;|
|·||our ability to control our fixed and variable costs and operating expenses;|
|·||our ability to reduce production cost, such as raw materials and components;|
|·||our ability to manage our product mix;|
|·||our ability to obtain raw materials and components at acceptable prices and in a timely manner;|
|·||lower than expected growth in demand resulting in oversupply in the market;|
|·||our ability to obtain adequate external financing on satisfactory terms; and|
|·||other unforeseen circumstances resulting from the above factors which might lead to derecognition of deferred tax assets.|
We must comply with certain financial and other covenants under the terms of our debt instruments, the failure to comply with which may put us in default under those instruments.
We are a party to numerous loans and other agreements relating to the incurrence of debt, many of which include financial covenants and broad default provisions. The financial covenants primarily include current ratios, leverage ratio, interest coverage ratios, tangible net worth and other technical requirements, which, in general, govern our existing long-term debt and debt we may incur in the future. These covenants could limit our ability to plan for or react to market conditions or to meet our capital needs in a timely manner and we may have to curtail some of our operations and growth plans to maintain compliance. In addition, any global or regional economic deterioration may cause us to incur significant net losses or force us to assume considerable liabilities, which would adversely impact our ability to comply with the financial covenants of our outstanding loans. If the relevant creditors decline to grant waivers for any noncompliance with the covenants, such noncompliance will constitute an event of default which may trigger a requirement for acceleration of the amounts due under the applicable loan agreements. Some of our loan agreements also contain cross-default clauses, which could enable creditors under our other debt instruments to declare an event of default when there is a default in other loan agreements. We cannot assure you that we will be able to remain in compliance with our financial covenants. In the event of default, we may not be able to cure the default or obtain a waiver on a timely basis. An event of default under any agreement governing our existing or future debts, if not cured by us or waived by our creditors, could have a material adverse effect on our liquidity, financial condition and results of operations. If we breach our financial or other covenants, our financial condition will be adversely affected to the extent we are not able to cure such breaches or repay the relevant debt. We have on occasion failed to comply with certain financial covenants in some of our loan agreements. Although in the past we have either obtained waivers for such noncompliance from the relevant banks or fully repaid the facility, we cannot assure you that we will always be able to do that in the future.
We are involved in a number of legal proceedings concerning matters arising from our business and operations, and as a result we may face significant liabilities. If we or our employees are found to have violated any applicable law, including antitrust and competition laws in pending actions or new claims, or if our appeals regarding such violations are not successful, we may be subject to severe fines or penalties that would have a material adverse effect on our business and operations.
We are involved in a number of legal proceedings concerning matters arising from our business and operations, primarily related to the development and the sale of our products, including patent infringements, investigations by government authorities such as antitrust investigations and proceedings and other legal matters. In addition, we may have compliance issues with regulatory bodies in the course of our operations, which may subject us to administrative proceedings and unfavorable decrees that result in liabilities and cause delays to our production. Our products may also be subject to anti-dumping or countervailing duty proceedings as a result of protectionist measures adopted by governments in any of our export markets. We may be involved in other proceedings or disputes in the future that may have a material adverse effect on our business, financial condition, results of operations or cash flows.
See “Item 8. Financial Information—8.A.7. Litigation” for a discussion of certain legal proceedings in which we are involved.
We may be subject to other new claims, charges or investigations. Defending against any of these pending or future actions will likely be costly and time-consuming and could significantly divert management’s efforts and resources. The ultimate outcome of the pending investigations cannot be predicted with certainty. Any penalties, fines, damages or settlements made in connection with these criminal, civil and/or administrative investigations and/or lawsuits may have a material adverse effect on our business, results of operations and future prospects.
Our results of operations fluctuate from quarter to quarter, which makes it difficult to predict our future performance.
Our results of operations have varied significantly in the past and may fluctuate significantly from quarter to quarter in the future due to a number of factors, many of which are beyond our control. Our business and operations may be adversely affected by the following factors, among others:
|·||rapid changes from month to month, including shipment volume and product mix change;|
|·||the cyclical nature of the industry, including fluctuations in selling prices, and imbalances between excess supply and slowdowns in demand;|
|·||the speed at which we and our competitors expand production capacity;|
|·||access to raw materials and components, equipment, electricity, water and other required utilities on a timely and economical basis;|
|·||the loss of a key customer or the postponement, rescheduling or cancellation of large orders from customers;|
|·||the outcome of ongoing and future litigation and government investigations;|
|·||changes in end-users’ spending patterns;|
|·||changes to our management team;|
|·||access to funding on satisfactory terms;|
|·||our customers’ adjustments in their inventory;|
|·||changes in general political, economic, financial and legal conditions; and|
|·||natural disasters, such as typhoons and earthquakes, and industrial accidents, such as fires and power failures, as well as geopolitical instability as a result of terrorism or political or military conflicts.|
Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, you should not rely on quarter-to-quarter comparisons to predict our future performance.
Unfavorable changes in any of the above factors may seriously harm our business, financial condition and results of operations. In addition, our results of operations may be below the expectations of public market analysts and investors in some future periods, which may result in a decline in the price of the ADSs or shares.
Our results of operations may be affected adversely if we cannot timely introduce new products or if our new products do not gain market acceptance.
Early product development by itself does not guarantee the success of a new product. Success also depends on other factors such as product acceptance by the market. New products are developed in anticipation of future demand. Our delay in the development of commercially successful products with anticipated technological advancement may adversely affect our business. We cannot assure you that the launch of any new product will be successful, or that we will be able to produce sufficient quantities of these products to meet market demand.
We plan to continue to expand our operations to meet the needs of applications in televisions, monitors, mobile PCs and devices and commercial and other applications as demand increases. Because these products are expected to be marketed to a diversified group of end-users with demands for different specifications, functions and prices, we have developed different marketing strategies to promote our panels for these products. We cannot assure you that our strategies to expand our market share for these panels will be successful. If we fail to successfully market panels for these products, our results of operations will be adversely affected.
Our net revenue and results of operations depend on continuing demand for televisions, monitors, mobile PCs and devices and commercial and other applications with display panels. Our sales may not grow at the rate we expect if there is a downturn in the demand for, or a further decrease in the selling prices of, panels for these products.
Currently, our total sales are derived principally from customers using our products in televisions, monitors, mobile PCs and devices, and commercial and other applications with display devices. For example, a substantial percentage of our sales are derived from our panels and other related products for televisions, which accounted for approximately 44.7%, 36.8% and 32.5% of our net revenue in 2017, 2018 and 2019, respectively. We will continue to be dependent on the growth of the televisions, monitors, mobile PCs and devices, and commercial and other applications for a substantial portion of our net revenue, and any downturn in these industries would result in reduced demand for our products, reduced net revenue, lower selling prices and/or reduced margins, and our business prospects and results of operations may be materially and adversely affected.
If we are unable to achieve high-capacity utilization rates, our results of operations will be affected adversely.
High-capacity utilization rates allow us to allocate fixed costs over a greater number of products produced. Increases or decreases in capacity utilization rates can impact significantly our gross margins. Accordingly, our ability to maintain or improve our gross margins will continue to depend, in part, on achieving high-capacity utilization rates. In turn, our ability to achieve high-capacity utilization rates will depend on the ramp-up progress of our advanced production facilities and our ability to efficiently and effectively allocate production capacity among our product lines, as well as the demand for our products and our ability to offer products that meet our customers’ requirements at competitive prices.
From time to time, our results of operations in the past have been adversely affected by low capacity utilization rates. We cannot assure you that we will be able to achieve high-capacity utilization rates in 2020 or beyond. If we are unable to efficiently ramp-up our production facilities for advanced technology or demand for our products does not meet our expectations, our capacity utilization rates will decrease, our gross margins will suffer and our results of operations will be materially and adversely affected.
We may experience losses on inventories.
Frequent new product introductions in the technology industry can result in a decline in the selling prices of our products and the obsolescence of our existing inventory. This can result in a decrease in the stated value of our inventory, which we value at the lower of cost or net realizable value.
We manage our inventory based on our customers’ and our own forecasts. Although we regularly make adjustments based on market conditions, we typically deliver our goods to our customers several weeks after a firm order is placed. While we maintain open channels of communication with our major customers to avoid unexpected decreases in firm orders or subsequent changes to placed orders, and try to minimize our inventory levels, such actions by our customers may have a material adverse effect on our inventory management and our results of operations.
We depend on a small number of customers for a substantial portion of our net revenue, and a loss of any one of these customers, a significant decrease in orders from any of these customers or difficulty in collecting of accounts receivable would result in the loss of a significant portion of our net revenue and/or material adverse effect on our results of operation.
We depend on a small number of customers for a substantial portion of our business. In 2017, 2018 and 2019, our five largest customers accounted for approximately 39.0%, 36.6% and 38.7%, respectively, of our net revenue. In addition, our major customer, Samsung Group, individually accounted for more than 10% of our net revenue in the last three years, which were 12.8%, 11.5% and 12.3% of our net revenue in 2017, 2018 and 2019, respectively.
In recent years, our major customers have varied due to changes in our product mix. We expect that we will continue to depend on a relatively small number of customers for a significant portion of our net revenue and may continue to experience fluctuations in the distribution of our sales among our largest customers as we periodically adjust our product mix. Our ability to maintain close and satisfactory relationships with our customers is important to the ongoing success and profitability of our business. Our ability to attract potential customers is also critical to the success of our business. If any of our significant customers reduces, delays or cancels its orders for any reason, or the financial condition of our key customers deteriorates, our business could be seriously harmed. Similarly, a failure to manufacture sufficient quantities of products to meet the demands of these customers may cause us to lose customers, which may affect adversely the profitability of our business as a result. Furthermore, if we experience difficulties in the collection of our accounts receivables from our major customers, our results of operation may be materially and adversely affected.
Our customers generally do not place purchase orders far in advance, which makes it difficult for us to predict our future revenues and allocate capacity efficiently and in a timely manner.
Our customers generally provide rolling forecasts several months in advance of, and do not place firm purchase orders until several weeks before, the expected shipment date. There is no assurance that there will not be unexpected decreases in firm orders or subsequent changes to placed orders from our customers. In addition, due to the cyclical nature of the display panel industry, our customers’ purchase orders have varied significantly from period to period. As a result, we do not typically operate with any significant backlog. The lack of significant backlog makes it difficult for us to forecast our revenues in future periods. Moreover, we incur expenses and adjust inventory levels of raw materials and components based on customers’ forecast, and we may be unable to allocate production capacity in a timely manner to compensate for shortfalls in sales. We expect that, in the future, our sales in any quarter will continue to be dependent substantially upon purchase orders received in that quarter. The inability to adjust production costs, to obtain necessary raw materials and components or to allocate production capacity quickly to respond to the demand for our products may affect our ability to maximize results of operations, which may result in a negative impact on the value of your investment in the ADSs or our shares.
Our future competitiveness and growth prospects could be affected adversely if we are unable to successfully expand or improve our fabs to meet market demand.
As part of our business growth strategy, we have been undertaking and may undertake in the future a number of significant capital expenditures for our fabs.
The successful expansion of our fabs and commencement of commercial production is dependent upon a number of factors, including timely delivery of equipment and machinery and the hiring and training of new skilled personnel. Although we believe that we have the internal capabilities and know-how to expand our fabs and commence commercial production, no assurances can be given that we will be successful. We cannot assure you that we will be able to obtain from third parties, if necessary, the technology, intellectual property or know-how that may be required for the expansion or improvement of our fabs on acceptable terms. In addition, delays in the delivery of equipment and machinery as a result of increased demand for such equipment and machinery or the delivery of equipment and machinery that do not meet our specifications could delay the establishment, expansion or improvement of these fabs. Moreover, the expansion of our fabs may also be disrupted by governmental planning activities. If we face unforeseen disruptions in the installation, expansion and/or manufacturing processes with respect to our fabs, we may not be able to realize the potential gains and may face disruptions in capturing the growth opportunities.
If capital resources required for our planned growth or development are not available, we may be unable to successfully implement our business strategy.
Historically, we have been able to finance our capital expenditures through cash flow from our operating activities and financing activities, including long-term borrowings, the issuance of convertible and other debt securities and the issuance of equity securities. Our ability to expand our production facilities and establish advanced technology fabs will continue to largely depend on our ability to obtain sufficient cash flow from operations as well as external funding. We expect to make capital expenditures in connection with the development of our business, including investments in connection with new capacity, technological upgrade and the enhancement of capacity value. These capital expenditures will be made well in advance of any additional sales to be generated from these expenditures. Our results of operations may be affected adversely if we do not have the capital resources to complete our planned growth, or if our actual expenditures exceed planned expenditures for any number of reasons, including changes in:
|·||our growth plan and strategy;|
|·||manufacturing process and product technologies;|
|·||prices of equipment;|
|·||costs of construction and installation;|
|·||market conditions for financing activities of display panel manufacturers;|
|·||interest rates and foreign exchange rates; and|
|·||social, economic, financial, political and other conditions in Taiwan and elsewhere.|
If adequate funds are not available on satisfactory terms at appropriate times, we may have to curtail our planned growth, which could result in a loss of customers, adversely affect our ability to implement successfully our business strategy and limit the growth of our business.
We operate in a highly competitive environment and we may not be able to sustain our current market position if we fail to compete successfully.
The markets for our products are highly competitive. We experience pressure on our prices and profit margins, due largely to additional and growing industry capacity from competitors in Taiwan, Korea, Japan and the PRC. The ability to manufacture on a large scale with greater cost efficiencies is a competitive advantage in our industry. Some of our competitors have expanded through mergers and acquisitions. Some of our competitors have greater access to capital and substantially greater production, research and development, intellectual property, marketing and other resources than we do. Some of our competitors have announced their plans to develop, and have already invested substantial resources in new capacity. Our competitors may be able to grasp the market opportunities before us by introducing new products using such capacity. In addition, some of our larger competitors have more extensive intellectual property portfolios than ours, which they may use to their advantage when negotiating cross-licensing agreements for technologies. As a result, these companies may be able to compete more aggressively over a longer period of time than we can.
The principal elements of competition in the display industry include:
|·||product performance features and quality;|
|·||customer service, including product design support;|
|·||ability to reduce production cost;|
|·||ability to provide sufficient quantity of products to fulfill customers’ needs;|
|·||research and development, including the ability to develop new technologies;|
|·||access to capital and financing ability.|
Our ability to compete successfully in the display industry also depends on factors beyond our control, including industry and general political and economic conditions as well as currency fluctuations.
If we are unable to manage our growth effectively, our business could be affected adversely.
We have experienced, and expect to continue to experience, growth in the scope and complexity of our operations. For example, we may make capital expenditures in connection with new capacity and technological upgrade. This growth may strain our existing managerial, financial and other resources. In order to manage our growth, we must continue to implement additional operating and financial controls and may hire and train suitable personnel for these functions. We cannot assure you that we will be able to do so in the future, and our failure to do so could jeopardize our planned growth and seriously harm our operations.
We may encounter difficulties expanding into new businesses or industries, which may affect adversely our results of operations and financial condition.
We may encounter difficulties and face risks in connection with our expansion into new businesses or industries. We cannot assure you that our expansion into new businesses will be successful, as we may have limited experience in such industries. We cannot assure you that we will be able to generate sufficient profits to justify the costs of expanding into new businesses or industries. Any new business in which we invest or which we intend to develop may require our additional capital investment, research and development efforts, as well as our management’s attention. If such new business does not progress as planned, our results of operations and financial condition may be affected adversely.
We may undertake mergers, acquisitions or investments to diversify or expand our business, which may pose risks to our business and dilute the ownership of our existing shareholders, and we may not realize the anticipated benefits of these mergers, acquisition or investments.
As part of our growth and product diversification strategy, we may continue to evaluate opportunities to acquire or invest in other businesses or existing businesses, intellectual property or technologies and expand the breadth of markets we can address or enhance our technical capabilities. For example, we acquired a total of 42,310,407 common shares from ADLINK Technology Inc. on March 12, 2020 in connection to the tender offer. Mergers, investments or acquisitions, such as the ADLINK share acquisition, that we have entered into and may enter into in the future entail a number of risks that could materially and adversely affect our business, operating and financial results, including, among others:
|·||problems integrating the acquired operations, technologies or products into our existing business and products;|
|·||diversion of management’s time and attention from our core business;|
|·||conflicts with joint venture partners;|
|·||adverse effect on our existing business relationships with customers;|
|·||need for financial resources above our planned investment levels;|
|·||failures in realizing anticipated synergies;|
|·||difficulties in retaining business relationships with suppliers and customers of the acquired company;|
|·||risks associated with entering markets in which we lack experience;|
|·||potential loss of key employees of the acquired company; and|
|·||potential write-offs of acquired assets.|
Our failure to address these risks successfully may have a material adverse effect on our financial condition and results of operations. Any such acquisition or investment will likely require a significant amount of capital investment, which would decrease the amount of cash available for working capital or capital expenditures. In addition, if we use our equity securities to pay for acquisitions, the value of your ADSs and the underlying ordinary shares may be diluted. If we borrow funds to finance acquisitions, such debt instruments may contain restrictive covenants that can, among other things, restrict us from distributing dividends. Please refer to “Item 4. Information on the Company—4.A. History and Development of the Company” for further details about the ADLINK share acquisition.
Our annual consolidated financial statements for Taiwan reporting purposes and the basis for our earnings distribution may differ from those included in the annual report on Form 20-F.
We have adopted Taiwan IFRS for reporting in Taiwan our annual consolidated financial statements beginning in 2013 and our interim quarterly earnings releases beginning in the first quarter of 2013. While we have adopted Taiwan IFRS for Taiwan reporting purposes and earnings distribution purposes, we have also adopted and will continue to adopt IFRS, which differs from Taiwan IFRS, for certain filings with the SEC, including this annual report and future reports on Form 20-F.
Taiwan IFRS differs from IFRS in certain significant respects, including, but not limited to, the extent that any new or amended standards or interpretations applicable under IFRS may not be timely endorsed by the FSC. Consequently, our annual consolidated financial statements for Taiwan reporting purposes and the basis for our earnings distribution may differ from those included in the annual report on Form 20-F.
Any disagreement between applicable tax authorities and us with respect to our tax estimates, adverse changes in tax law, and any noncompliance with changes in tax laws or their application could adversely affect our results of operations.
We are subject to income taxes in Taiwan and many foreign jurisdictions and might be under tax audit by local tax authorities within certain assessment periods. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our recorded income tax accruals. For example, our taxable income in any jurisdiction depends on the acceptance of our operational practices and intercompany transfer pricing by local tax authorities as being on an arm’s-length basis. In addition, each country’s tax authority has its own regulations on transfer pricing and its own interpretations of those regulations, such as China State Administration of Taxation Public Notice  No. 6, which regulates the special tax investigation and adjustment. Due to inconsistencies in the application of the arm’s-length standard among taxing authorities, as well as a lack of adequate treaty-based protection, challenges to transfer pricing by tax authorities could, if successful, substantially increase our income tax liability and interest expense.
As a multinational enterprise, we are subject to distinct tax regulations in multiple jurisdictions; these different regulations may change adversely over time, which can materially impact our business. For example, although we file a country-by-country reporting return that requires us to disclose the global allocation of our business income, taxes paid, and select indicators of economic activity in the tax jurisdictions where we have business operations, we cannot assure you that the relevant tax authority in every tax jurisdiction in which we operate will consider our transfer pricing policy acceptable. Any increase in tax liability, tax penalty or tax-related interest could adversely affect our financial position and results of operation. In addition, many countries where we have commercial operations may amend their tax laws in accordance with the Base Erosion and Profit Shifting project as set out by the Organization for Economic Co-operation and Development. Rapid shifts in tax regulation can increase our risk of regulatory incompliance in the relevant jurisdiction.
Any impairment charge may have a material adverse effect on our operating results.
Under IFRS, we are required to evaluate our investments and long-term non-financial assets, such as property, plant and equipment, right-of-use assets and long-term purchase agreements, for impairment whenever triggering events or changes in circumstances indicate that the asset may be impaired and carrying value may not be recoverable. If certain criteria are met, we are required to recognize an impairment charge.
The determination of an impairment charge at any given time is based significantly on our expected results of operations over a number of years subsequent to that time. As a result, an impairment charge is more likely to occur during a period when our operating results are otherwise already depressed. The valuation of long-term non-financial assets is subjective and requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic, industry or market conditions, changes in business operations, changes in competition or potential changes in our stock price and market capitalization. Changes in these estimates and assumptions, or changes in actual performance compared with estimates of our future performance, may affect the fair value of long-term non-financial assets, which may result in an impairment charge. See “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates” for a discussion of how we assess if an impairment charge is required and, if so, how the amount is determined.
In addition, under IFRS, we are required to determine the realizability of our deferred tax assets. Our deferred tax assets are reviewed on the annual reporting date, by considering global economic environment, industry environment, statutory tax deduction years and projected future taxable income. The deferred tax assets are then reduced by the amount that any related tax benefits will be no longer probable to be realized.
Any impairment charge on our investments and long-term non-financial assets, or the inability to recognize or the subsequent derecognition of previously recognized deferred tax assets may have a material adverse effect on our operating results.
Our divestiture strategies and divestment activities may affect our financial performance and the market price of our shares and ADSs.
From time to time, we evaluate possible divestments and may, if a suitable opportunity or condition arises, make divestments or decisions to dispose of certain businesses or assets. We may reduce our holdings of equity securities or dispose of certain of our businesses or assets in order to reduce financial or operational risks. As part of our ongoing strategic plan, we have selectively divested, and may in the future continue to pursue divestitures of certain of our businesses or assets as part of our portfolio optimization strategy. We make divestments based on, among other considerations, management’s evaluation of or changes in business strategies and performance and valuation of divested businesses or assets. For example, AU Optronics (Slovakia) s.r.o., one of our subsidiaries, sold its land and building in December 2018 for a total selling price of EUR$87.7 million and recorded a profit from the disposal of approximately EUR$30.4 million. These divestment activities may result in either gains or losses and we cannot assure you that we can always make divestment with a gain. We may be subject to continuing financial obligations for a period of time following the divestments, and any claims such as warranty or indemnification claims, if determined against us, would negatively affect our financial performance. Moreover, divestures may require us to separate integrated assets and personnel from our retained businesses and devote our resources to transitioning assets and services to purchasers, resulting in disruptions to our ongoing business and distraction of management. Any losses due to our divestments of businesses or disposal of assets could adversely affect our financial performance and may affect the market price of our shares and ADSs.
The loss of any key management personnel or the undue distraction of any such personnel may disrupt our business.
Our success depends on the continued services of key senior management, including our Chairman and President. If any legal proceedings are brought against our senior management in the future, these proceedings may divert such senior management’s attention from our business operations. Our reputation may also be harmed as a result of any negative publicity associated with these charges or otherwise.
Although our talent development committee, a high-level committee that comprises the Chairman, President and other senior executives, convenes quarterly to review our mid-and long-term strategic positioning for talent acquisition, organizational risk indicators and development of our senior managers, there can be no assurance that we will not lose the services of key senior management personnel. If we are not able to find suitable replacements or integrate replacement personnel in a timely manner or at all, our business operations will suffer material harm. In addition, our continuing growth will, to a large extent, depend on the attention of key management personnel to our day-to-day affairs. If any of our key management personnel is unable to devote enough time to our company, our operations may be affected adversely. We do not carry key person life insurance for any of our senior management personnel.
If we are not able to attract and retain skilled technical personnel, including research and development and other personnel, our operations and planned growth would be affected adversely.
Our success depends on our ability to attract and retain skilled employees, particularly engineering and technical personnel in the research and development and manufacturing processing areas. We also have established a professional on-the-job training program for employees. Without a sufficient number of skilled employees, our operations and production quality could suffer. Competition for qualified technical personnel and operators in Taiwan and many other places where we operate is intense and the replacement of skilled employees is difficult. We may encounter this problem in the future, as we require an increased number of skilled employees for any expansion we may choose to undertake if market demand arises. If we are unable to attract and retain our technical personnel and other employees, this may adversely affect our business and our operating efficiency may deteriorate.
Potential conflicts of interest with our affiliates may cause us to lose opportunities to expand and improve our operations.
We face potential conflicts of interest with our affiliates, such as Qisda Corporation (“Qisda”) and its subsidiaries, including BenQ Corporation. Qisda is our largest shareholder, owning directly 6.99% of our outstanding shares as of December 31, 2019 and is also one of our large customers. Qisda and its subsidiaries accounted for approximately 3.5%, 3.9% and 3.8% of our net revenue in 2017, 2018 and 2019, respectively. Qisda and its subsidiaries’ substantial interest in our company may lead to conflicts of interest affecting our sales decisions or allocations. One of our directors, Mr. Peter Chen, is the Chairman and President of Qisda. Furthermore, Mr. Kuen-Yao (K.Y.) Lee, our director and former Chairman, is also a director of Qisda and Chairman of BenQ Corporation. See “Item 6. Directors, Senior Management and Employees—6.A. Directors and Senior Management.” As a result, conflicts of interest between their duties to Qisda and/or its subsidiaries and us may arise. We cannot assure you that when conflicts of interest arise with respect to Qisda and/or its subsidiaries, the conflicts of interest will be resolved in our favor. These conflicts may result in lost corporate opportunities, including opportunities that are never brought to our attention, or actions that may prevent us from taking advantage of opportunities to expand and improve our operations.
If we fail to maintain an effective system of internal controls, we may not be able to report accurately our financial results or prevent fraud.
The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In addition, an independent registered public accounting firm must report on the effectiveness of the company’s internal controls over financial reporting unless the company is exempt from such requirement. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may conclude that our internal controls over financial reporting are not effective. Furthermore, during the course of the evaluation, documentation and attestation, we may identify deficiencies that we may not be able to remedy in a timely manner. If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls, on an ongoing basis, over financial reporting in accordance with the Sarbanes-Oxley Act of 2002. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs.
Our planned international expansion poses additional risks and could fail, which could cost us valuable resources and adversely affect our results of operations.
To meet our clients’ requirements, we have expanded our operations internationally, which has led to operations across many countries. For example, we have established a 6-generation LTPS fab in Kunshan, PRC in November 2016, to produce LTPS panels for high-end applications to provide services to our customers in China and other regions. If a suitable opportunity or condition arises, we may continue to expand into new geographic areas. We intend to run our operations in compliance with local regulations, such as tax, civil, environmental and other laws in conjunction with our business activities in each country where we may have a presence or operations. However, there are inherent legal, financial and operational risks involved in having international operations. We may encounter different challenges due to differences in local market conditions, culture, government policies, regulations and taxation. In addition, we may also face established competitors with stronger local experience, more familiarity with the local regulations and practices and better relationships with local suppliers, contractors and purchasers. We cannot assure you that we will be able to develop successfully and expand our international operations or we will be able to overcome the significant obstacles and risks of international operations. If our international expansion plans are unsuccessful or do not deliver an appropriate return on our investments, our results of operations, financial condition and future prospects could be materially and adversely affected.
Regulations related to conflict minerals could adversely affect our business, financial condition and results of operations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, which are defined as cassiterite, columbite-tantalite, gold, wolframite or their derivatives and other minerals determined by the U.S. government to be financing conflict in the Democratic Republic of Congo and adjoining countries. As a result, in August 2012, the SEC adopted annual disclosure and reporting requirements for those companies who use conflict minerals in their products. These requirements require companies that manufacture or contract to manufacture products for which conflict minerals are necessary to the functionality or production to begin scrutinizing the origin of conflict minerals in their products starting from January 1, 2013, and file Form SD, containing the conflict minerals disclosure for the prior calendar year, beginning May 31, 2014. We may be subject to the new disclosure requirements related to the conflict minerals. There will be costs associated with complying with these disclosure requirements, including costs for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict-free” minerals, we cannot be sure that we will be able to obtain necessary “conflict-free” minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face adverse effects to our reputation if we determine that certain of our products contain minerals to be not conflict-free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.
A cybersecurity breach could interfere with our business operations, compromise confidential information, adversely impact our business reputation and operating results and potentially lead to litigation and other liabilities.
Cybersecurity threats continue to expand and evolve globally. While we actively take measures to manage information technology security risks, there can be no assurance that these measures will be sufficient to mitigate all potential risks to our system, networks and data. Cybersecurity is an integral part of our risk management program. Our cybersecurity response system involves a risk evaluation mechanism that categorizes and escalates different levels of cybersecurity risks towards different countermeasures. In general, our cybersecurity protocols react against lower-level cybersecurity risks within 24 hours and react against higher-level cybersecurity risks within eight hours.
A failure or breach in our cybersecurity response system could expose us and our customers, vendors and suppliers to risks of unauthorized access to information technology systems, misuse and compromise of confidential information, manipulation and destruction of data. These occurrences may result in the disruption of our business operations and adversely affect our business reputation, market leadership, financial condition and results of operations. Cybersecurity breaches could also involve us in litigation with third parties, regulatory scrutiny and increase our costs from having to implement additional data protection measures.
Risks Related to Our ADSs and Our Trading Market
We have voluntarily delisted our ADSs from NYSE and may terminate the registration of our securities with the SEC in the future, and this may adversely affect our share price.
On September 9, 2019, our board of directors resolved to delist our ADSs from NYSE. The voluntary delisting was sought in view of the costs of maintaining the listing of the ADSs in the United States. On September 20, 2019, we filed with the SEC a Form 25 to effect the delisting from the NYSE. As soon as we are eligible, we intend to file a Form 15 with the SEC to terminate the registration of the ADSs and the underlying ordinary shares under the Exchange Act. We will remain subject to all SEC requirements, including reporting obligations, until such time as our ADSs and the underlying ordinary shares are deregistered. Since the delisting came into effect on October 1, 2019, our ADSs have been traded in the U.S. over-the-counter market, and Citibank, N.A. has continued to act as our ADSs depositary pursuant to the existing deposit agreement.
The delisting of the ADSs from the NYSE and the possible deregistration under the Exchange Act may have a negative impact on the price of our ADSs and shares of common stock. Following the delisting from NYSE, the ADSs have traded on the U.S. over-the-counter market. Compared with the NYSE, the U.S. over-the-counter market has a smaller trading volume, less liquidity and an information disclosure regime that is less robust. These characteristics may make it more difficult for holders of our ADSs to sell their securities. In addition, broker-dealers have certain regulatory burdens imposed upon them that may discourage them from effecting transactions in our ADSs, further limiting the liquidity of our ADSs. The delisting may result in holders of our ADSs surrendering their ADSs in exchange for the underlying shares and selling them on the Taiwan Stock Exchange. As a result, the market price of our ADSs may be depressed, and the investors may find it more difficult to sell our ADSs.
The market value of our ADSs may fluctuate due to the volatility of the securities markets.
The securities markets in the United States and other countries have experienced significant price and volume fluctuations. Volatility in the price of our ADSs may be caused by factors beyond our control and may be unrelated to, or disproportionate to changes in, our results of operations. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has been instituted against that company. Litigation of this kind could result in substantial costs and a diversion of our management’s attention and resources.
Restrictions on the ability to deposit shares into our ADS facility may adversely affect the liquidity and price of our ADSs.
The ability to deposit shares into our ADS facility is restricted by ROC law. A significant number of withdrawals of shares underlying our ADSs would reduce the liquidity of our ADSs by reducing the number of ADSs outstanding. As a result, the prevailing market price of our ADSs may differ from the prevailing market price of our shares on the Taiwan Stock Exchange. Under current ROC law, no person or entity, including you and us, may deposit its shares in our ADS facility without specific approval of the Financial Supervisory Commission of the Republic of China (the “FSC”), unless:
|(1)||we pay stock dividends on our shares;|
|(2)||we make a free distribution of shares;|
|(3)||ADS holders exercise preemptive rights in the event of capital increases for cash; or|
|(4)||investors purchase our shares, directly or through the depositary, on the Taiwan Stock Exchange, and deliver our shares to the custodian for deposit into our ADS facility, or our existing shareholders deliver our shares to the custodian for deposit into our ADS facility.|
With respect to (4) above, the depositary may issue ADSs against the deposit of those shares only if the total number of ADSs outstanding following the deposit will not exceed the number of ADSs previously approved by the FSC, plus any ADSs issued pursuant to the events described in the subparagraph (1), (2) and (3) above. Issuance of additional ADSs under item (4) above will be permitted to the extent that previously issued ADSs have been canceled. In addition, in the case of a deposit of our shares requested under item (4) above, the depositary will refuse to accept deposit of our shares if such deposit is not permitted under any legal, regulatory or other restrictions notified by us to the depositary from time to time, which restrictions may specify blackout periods (during which deposits may not be made), minimum and maximum amounts and frequencies of deposits.
Notwithstanding the above, per the directive issued by the FSC to us in connection with the FSC’s review of the delisting of ADSs from the NYSE (Reference No. Zheng-Qi-Fa-Zi-1080335017), the total number of the ADSs permitted for trading in the over-the-counter market shall be capped at the outstanding number of the ADSs as of December 2, 2019, New York Time, which is 51,036,874 ADSs, and from December 3, 2019, New York Time, no additional reissuance after redemption of the ADSs will be permitted.
ADS holders will not have the same rights as our shareholders, which may affect the value of the ADSs.
ADS holders’ rights as to the shares represented by such holders’ ADSs are governed by the deposit agreement. ADS holders will not be able to exercise voting rights on an individual basis. If holders representing at least 51% of our ADSs outstanding at the relevant record date instruct the depositary to vote in the same manner regarding a resolution, including the election of directors, the depositary will cause all shares represented by the ADSs to be voted in that manner. If, at the relevant record date, the depositary does not receive instructions representing at least 51% of ADSs outstanding to vote in the same manner for any resolution, including the election of directors, ADS holders will be deemed to have instructed the depositary or its nominee to authorize all the shares represented by the ADS holders’ ADSs to be voted at the discretion of our Chairman or his designee, which may not be in the ADS holders’ interest. Moreover, while shareholders who own 1% or more of our total issued shares are entitled to submit one proposal to be considered at our annual general meetings and submit a roster of candidates to be considered for nomination to our board of directors at our shareholders’ meeting for the election of directors, only holders representing at least 51% or more of our ADSs outstanding at the relevant record date are entitled to submit one proposal to be considered at our annual general meetings or one nomination to our board of directors, in accordance with the deposit agreement. Hence, only one proposal or one nomination can be submitted on behalf of all ADS holders.
ADS holders’ rights to participate in our rights offerings are limited, which could cause dilution to the holdings of ADS holders.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement, the depositary will not offer ADS holders those rights unless both the distribution of the rights and the underlying securities to all our ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. Although we may be eligible to take advantage of certain exemptions under the Securities Act available to certain foreign issuers for rights offerings, we can give no assurances that we will be able to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement for any of these rights. Accordingly, ADS holders may be unable to participate in our rights offerings and may experience dilution with respect to their holdings.
Non-ROC holders of ADSs who withdraw our shares will be required to obtain a foreign investor investment identification and appoint a local custodian and agent and a tax guarantor in the ROC.
Under current ROC law, if you are a non-ROC person (other than a PRC person) and wish to withdraw and hold our shares from a depositary receipt facility, you will be required to obtain a foreign investor investment identification, or a Foreign Investor Investment I.D., issued in accordance with the ROC Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals (the “Investment Regulations”). You also will be required to appoint an eligible agent in the ROC to open a securities trading account and a Taiwan Depository & Clearing Corporation book-entry account and a bank account, to pay ROC taxes, remit funds, exercise shareholders’ rights and perform such other functions as you may designate upon such withdrawal. In addition, you will be required to appoint a custodian bank to hold the securities in safekeeping, make confirmation and settle trades and report all relevant information. Without obtaining such Foreign Investor Investment I.D. under the Investment Regulations and opening such accounts, the non-ROC withdrawing holder would be unable to hold or subsequently sell our shares withdrawn from the depositary receipt facility on the Taiwan Stock Exchange or otherwise. There can be no assurance that such withdrawing holder would be able to obtain the Foreign Investor Investment I.D. and open such accounts in a timely manner.
With the exception of a foreign institutional investor with a fixed place of business or business agent within the ROC, non-ROC holders of ADSs (other than a PRC person) withdrawing our shares represented by ADSs also are required under current ROC law and regulations to appoint an agent in the ROC for filing tax returns and making tax payments. Such agent must meet certain qualifications set by the ROC Ministry of Finance and, upon appointment, becomes a guarantor of such withdrawing holder’s ROC tax obligations (“Tax Guarantor”). Generally, the evidence of the appointment of such agent and the approval of such appointment by the ROC tax authorities may be required as conditions to such withdrawing holder’s repatriation of the profits. There can be no assurance that such withdrawing holder would be able to appoint and obtain approval for such agent in a timely manner.
Also, if any non-ROC person (other than a PRC person) receives 10% or more of our total issued shares upon a single withdrawal, such non-ROC person must obtain prior approval from the Investment Commission of the Ministry of Economic Affairs (the “MOEAIC”). There can be no assurance that such withdrawing holder would be able to obtain such approval in a timely manner.
Pursuant to the Regulations Governing Securities Investment and Futures Trading in Taiwan by Mainland Area Investors (the “Mainland Investors Regulations”), only qualified domestic institutional investors (“QDIIs”) approved by the China Securities Regulatory Commission and registered with the Taiwan Stock Exchange or Taiwan Futures Exchange are permitted to withdraw and hold our shares from a depositary receipt facility. In order to hold our shares, such QDIIs are required to appoint an agent, custodian and Tax Guarantor as required by the Mainland Investors Regulations. If the aggregate amount of our shares held by any QDII or shares received by any QDII upon a single withdrawal reaches 10% or more of our total issued shares, such QDII must obtain the prior approval from the MOEAIC. We cannot assure you that such approval would be granted.
In addition, PRC investors’ investments in our shares are subject to various restrictions; specifically, there are restrictions on the amount remitted to the ROC for investments by QDIIs, either individually or jointly. Accordingly, the qualification criteria for a PRC person to make an investment and the investment threshold imposed by the ROC government might cause an ADS holder who is a PRC person to be unable to withdraw and hold our shares.
The protection of the interests of our public shareholders available under our Articles of Incorporation and the laws governing ROC corporations is different from that which applies to a U.S. corporation.
Our corporate affairs are governed by our Articles of Incorporation and by the laws governing ROC corporations. The rights and responsibilities of our shareholders and members of our board of directors under ROC law are different from those that apply to a U.S. corporation. Directors of ROC corporations are required to conduct business faithfully and act with the care of good administrators. However, the duty of care required of a ROC corporation’s directors may not be the same as the fiduciary duty of a director of a U.S. corporation. In addition, controlling shareholders of U.S. corporations owe fiduciary duties to minority shareholders, while controlling shareholders in ROC corporations do not. The ROC Company Act also requires that a shareholder continuously hold at least 1% of our issued shares for at least six months in order to request that our independent director institute an action against a director on the company’s behalf. Therefore, our public shareholders may have more difficulty protecting their interests against actions of our management, members of our board of directors or controlling shareholders than they would as shareholders of a U.S. corporation.
As a foreign private issuer, we are permitted to follow certain home-country corporate governance practices instead of applicable SEC and NYSE requirements, which may result in less protection than is accorded to investors under rules applicable to domestic issuers.
As a foreign private issuer, we are permitted to follow certain home-country corporate governance practices instead of those otherwise required under the NYSE rules for domestic issuers, including, but not limited to:
|·||the evaluation standards for director’s independence;|
|·||the requirements for non-management directors to meet regularly without management;|
|·||the requirement to have nominating committee;|
|·||the requirement to have a remuneration committee/corporate governance committee set up pursuant to the NYSE rules;|
|·||the requirement for shareholders’ approval on all equity-based compensation and material revisions thereto; and|
|·||the requirement to adopt NYSE corporate governance guidelines.|
For a detailed discussion of the differences between our corporate governance practices and the NYSE listing standards, see “Item 16—16.G. Corporate Governance” for more information.
Following our home-country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the NYSE may provide less protection than is accorded to investors under the NYSE rules applicable to domestic issuers. In addition, as a foreign private issuer, we are exempt from certain rules and regulations under the Exchange Act, related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act, to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
You may not be able to enforce a judgment of a foreign court in the ROC.
We are a company limited by shares and incorporated under the ROC Company Act. Most of our directors and executives, and some of the experts named herein, are residents of the ROC. As a result, it may be difficult for holders of our shares or ADSs to enforce against us judgments obtained outside the ROC, including those predicated upon the civil liability provisions of the federal securities laws of the United States. It is also not entirely certain that an action for civil liability predicated solely on the United States federal securities laws could be brought directly in the ROC courts.
Risks Relating to Manufacturing
Our manufacturing processes are highly complex, costly and potentially vulnerable to disruptions that can significantly increase our production costs and delay product shipments to our customers.
Our manufacturing processes are highly complex, require advanced and costly equipment and are modified periodically to improve manufacturing yields and production efficiency. We face the risk of production difficulties from time to time that could cause delivery delays and reduced production yields. These production difficulties include capacity constraints, construction delays, difficulties in upgrading or expanding existing facilities, difficulties in changing our manufacturing technology and delays in the delivery or relocation of specialized equipment. We may encounter these difficulties in connection with the adoption of new manufacturing process technologies. We cannot assure you that we will be able to develop and expand our fabs without equipment delays or difficulties, or that we will not encounter manufacturing difficulties in the future.
Concentration of our operations in one geographic area may increase our risk of production loss.
Our assets and operations are currently concentrated in one geographic area: the Greater China region (including the ROC and the PRC). For information on our principal facilities see “Item 4. Information on the Company—4.D. Property, Plants and Equipment”. Because our operations are not as diversified geographically, the success of our operations and our profitability may be disproportionately exposed to the effect of regional events, including: fluctuations in prices of raw materials, accidents or natural disasters, viruses, restrictive governmental regulations, curtailment of production, interruption in the availability of gathering, processing, or transportation infrastructure and services, and any resulting delays or interruptions of production from existing or planned production sites. Our concentration in Greater China, in particular, can also expose us to politically related risks, such as changes in region-wide government policies, which could adversely affect development activities or production. Although we have business interruption insurance for our production facilities, our business and results of operations may be significantly challenged if production at, transportation from or access to our production facilities in Greater China were interrupted by the above mentioned risks.
If we are unable to obtain raw materials and components in suitable quantity and quality from our suppliers, our production schedules would be delayed and we may lose substantial customers.
Raw materials and component costs represent a substantial portion of our cost of goods sold. We must obtain sufficient quantities of raw materials and components of the right quality at acceptable prices and in a timely manner. We source most of our raw materials and components, including critical materials like Backlight (“B/L”), driver ICs, glass substrates, Printed Circuit Board Assembly (“PCBA”) and polarizer from a limited group of suppliers, both foreign and domestic. Our operations would be affected adversely if we could not obtain raw materials and components in sufficient quantity and quality at acceptable prices. We may also experience difficulties in sourcing adequate supplies for our operations if there is a ramp-up of production capacity by display panel manufacturers, including our company, without a corresponding increase in the supply of raw materials and components. Further, our suppliers may also face shortage in supply of their key raw materials. The impact of any shortage in raw materials and components will be magnified as we establish new fabs and/or continue to increase our production capacity.
We depend on supplies of certain principal raw materials and components mainly from suppliers with production in certain jurisdictions, such as Taiwan, Japan and Korea. We cannot assure you that we will be able to obtain sufficient quantities of raw materials, components and other supplies of an acceptable quality in the future. Our inability to obtain raw materials and components of the right quality in a timely and cost-effective manner or our suppliers’ failure in obtaining their raw materials may cause us to delay our production and delivery schedules, which may result in the loss of our customers and revenues.
If we are unable to obtain equipment and services from our suppliers, we may be forced to delay our planned growth.
We have purchased, and expect to purchase, a substantial portion of our equipment from foreign suppliers for our new capacity and advanced technology fabs. These foreign suppliers also provide assembly, testing and/or maintenance services for our purchased equipment. From time to time, increased demand for new equipment may cause lead time to extend beyond those normally required by equipment vendors. For example, in the past, increased demand for equipment caused some equipment suppliers to satisfy only partially our equipment orders in the normal time frame. The unavailability of equipment, delays in the delivery of equipment or the delivery of equipment that does not meet our specifications could delay implementation of our planned growth and impair our ability to meet customer orders. Furthermore, if our equipment vendors are unable to provide assembly, testing and/or maintenance services in a timely manner for any reasons, our planned growth may be adversely affected. In addition, the availability or the timely supply of equipment and services from our suppliers and vendors also could be affected by factors such as natural disasters. We may have to use assembly, testing and/or maintenance service providers with which we have no established relationship, which could expose us to potentially unfavorable pricing, unsatisfactory quality or insufficient capacity allocation. As a result of these risks, we may be unable to implement our planned growth on schedule or in line with customer expectations, and our business may be materially and adversely affected.
If we are unable to manufacture successfully our products within the acceptable range of quality, our results of operations could be affected adversely.
Display panel manufacturing processes are complex and involve a number of precise steps. Defective production can result from a number of factors, including, but not limited to:
|·||the level of contaminants in the manufacturing environment;|
|·||use of substandard raw materials and components; and|
|·||inadequate sample testing.|
From time to time, we have experienced, and may in the future experience, lower than anticipated production yields as a result of the above factors, particularly in connection with the expansion of our capacity or change in our manufacturing processes. We remediate our customers mainly through repairing or replacing the defective products or refunding the purchase price relating to defective products if they are within the warranty period. We recognize a provision for warranty obligations based on the estimated costs that we expect to incur under our basic limited warranty for our products, which includes the provision of replacement parts and after-sale service for our products. The warranty provision is largely based on historical and anticipated rates of warranty claims, and therefore we cannot provide assurance that the provision would be sufficient to cover any surge in future warranty expenses that significantly exceed historical and anticipated rates of warranty claims. In addition, our production yield on new products will be lower than average as we develop the necessary expertise and experience to produce those products. If we fail to maintain high production yields and high-quality production standards, our reputation may suffer and our customers may cancel their orders or return our panels for rework, which could affect adversely our results of operations.
We face risks related to the recent coronavirus (COVID-19) outbreaks.
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, PRC. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. To date, the COVID-19 outbreak has caused significant disruption to the financial markets and international supply chains, which can substantially depress global business activities, restrict access to capital and result in a long-term economic downturn that would negatively affect our operating results. Any interruption to our supply chain can cause shortages in materials and labor supplies that are key to our commercial operations and negatively impact our business results. While there have been intensifying efforts to contain the spread of the COVID-19 by the governments of the countries and territories affected, the extent to which the COVID-19 impacts our results is highly uncertain and depends on future developments, including new information that emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
Climate change, other environmental concerns and green initiatives also present other commercial challenges, economic risks and physical risks that could harm our results of operations or affect the manner in which we conduct our business.
There is increasing concern that climate change is occurring and may adversely affect commercial activity. Public expectations for reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs. Scientific examination of, political attention to, and regulations on, issues surrounding the existence and extent of climate change may raise our cost of production through the increase in the price of energy and additional levy of energy or carbon tax. Various regulations that focus on restricting or managing emissions of carbon dioxide, methane and other greenhouse gases have recently been adopted by many countries. These regulatory and legislative developments could negatively affect our commercial operations. For example, emission-reporting obligations in newly enacted environmental regulations in the ROC could increase our compliance costs and insurance premiums, which may adversely affect our results of operation and financial condition.
Furthermore, energy costs in general could increase significantly due to climate change regulations and raise the cost for purchasing emission credits, new equipment or raw materials. Our energy costs may subsequently increase if utility or power companies and suppliers pass on their costs, fully or partially, to us through these indirect channels such as carbon taxation, emission cap and carbon credit trading programs.
If we violate environmental regulations, we may be subject to fines or restrictions that could cause our operations to be delayed or interrupted and our business to suffer.
Our operations can expose us to the risk of environmental claims that could result in damages awarded or fines imposed against us. We must comply with regulations relating to storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes resulting from our manufacturing processes. See “Item 4. Information on the Company—4.B. Business Overview—Environmental Matters.” In the past, we incurred small fines for failure to meet certain effluent standards and air pollution control regulations. Future changes to existing environmental regulations or unknown contamination of our sites, including contamination by prior owners and operators of our sites, may give rise to additional compliance costs or potential exposure to liability for environmental claims that may seriously affect our business, financial condition and results of operations. In addition, we may face possible disruptions in our manufacturing and production facilities caused by environmental activists, which may affect adversely our business operations.
If we violate labor regulations, we may be subject to fines or restrictions that could have an adverse effect on our business, financial condition and results of operations.
We must comply with the various labor regulations in the jurisdictions in which we operate. The cost of compliance with such regulations may increase as regulations change or new regulations are adopted. For instance, China has been experiencing rapid changes in its labor policies and it is uncertain how any such changes in China as well as other jurisdictions will impact our current employment policies and practices. Our employment policies and practices may violate current or future laws and we may be subject to related penalties, fines or legal fees. In addition, compliance with any new labor regulations may increase our operating expenses as we may incur substantial administrative and staffing cost.
Risks Relating to Our Technologies and Intellectual Property
If we cannot successfully introduce, develop or acquire advanced technologies, our profitability may suffer.
Technology and industry standards in the display panel industry evolve quickly, resulting in steep price declines in the advanced stages of a product’s life cycle. To remain competitive, we must develop or acquire advanced manufacturing process technologies and build advanced technology fabs to lower production costs and enable the timely release of new products. In addition, we expect to utilize more advanced display technologies, such as curved display, OLED, quantum dot wide color gamut, high dynamic range (“HDR”), bezel-less, touch, 8K4K (7680 x 4320 pixel), mini LED, micro LED and other sensor technologies like fingerprinting, to develop new products. Our ability to manufacture products by utilizing more advanced manufacturing process technologies to increase production efficiency will be critical to our sustained competitiveness. We may undertake in the future a number of significant capital expenditures for advanced technology fabs and new capacity subject to market demand and our overall business strategy. See “Item 5. Operating and Financial Review and Prospects—5.B. Liquidity and Capital Resources.” However, we cannot assure you that we will be successful in completing our planned growth or in the development of other future technologies for our fabs, or that we will be able to complete them without material delays or at the expected costs. If we fail to do so, our results of operations and financial condition may be materially and adversely affected. We also cannot assure you that there will be no material delays in connection with our efforts to develop new technology and manufacture more technologically advanced products. If we fail to develop or make advancements in product technologies or manufacturing process technologies on a timely basis, we may become less competitive.
Other flat panel display technologies or alternative display technologies could render our products uncompetitive.
We currently manufacture products primarily using TFT-LCD technology, which is currently one of the most commonly used flat panel display technologies. We may face competition from flat panel display manufacturers utilizing alternative flat panel technologies, such as OLED. OLED technology is currently at various stages of development and production by us and other display panel makers. OLED technologies may, in the future, gain wider market acceptance than TFT-LCD technology for application in certain consumer products, such as televisions, mobile phones, tablets and wearable devices. Failure to further refine our OLED technology or any other alternative display technology could render our products uncompetitive or obsolete, which in turn could cause our sales and revenues to decline. Moreover, if the various alternative flat panel technologies currently commercially available or in the research and development stage are developed to have better performance-to-price ratios and begin mass production, such technologies may pose a great challenge to TFT-LCD technology. Even though we seek to remain competitive through research and development of flat panel technologies, we may invest in research and development in certain technologies that do not come to fruition.
If we lose the support of our technology partners or the legal rights to use our licensed manufacturing process or product technologies, our business may suffer.
Enhancing our manufacturing process and product technologies is critical to our ability to provide high-quality products to our customers at competitive prices. We intend to continue to advance our manufacturing process and product technologies through internal research and development and licensing from other companies. We currently have certain licensing arrangements with certain companies for product and manufacturing process technologies related to the production of certain products, including certain display panels. See “Item 4. Information on the Company—4.B. Business Overview—Intellectual Property—License Agreements.” If we are unable to renew our technology licensing arrangements with some or all of these companies on mutually beneficial economic terms, we may lose the legal right to use certain of the processes and designs that we may have employed to manufacture our products. Similarly, if we cannot license or otherwise acquire or develop new manufacturing process and product technologies that are critical to the development of our business or products, we may lose important customers because we are unable to continue providing our customers with products based on advanced manufacturing process and product technologies.
We have entered into patent and intellectual property license or cross-license agreements, some of which require periodic royalty payments. In the future, we may need to obtain additional patent licenses or renew existing license agreements. We cannot assure you that these license agreements can be obtained or renewed on acceptable terms, if at all. If these license agreements are not obtained or renewed on acceptable terms or at all, our business and future results of operations may be affected materially and adversely.
Disputes over intellectual property rights could be costly and deprive us of the technology to stay competitive.
As technology is an integral part of our manufacturing process and product, we have, in the past, received communications alleging that our products or processes infringe product or manufacturing process technology rights held by others, and expect to continue to receive such communications. We are involved in intellectual property disputes with third parties. There is no means of knowing all of the patent applications that have been filed in the United States or elsewhere and whether, if the applications are granted, such patents would have a material adverse effect on our business. If any third party were to make valid intellectual property infringement claims against our customers or us, we may be required to:
|·||discontinue using disputed manufacturing process technologies;|
|·||pay substantial monetary damages;|
|·||seek to develop non-infringing technologies, which may not be feasible;|
|·||stop shipment to certain areas; and/or|
|·||seek to acquire licenses for certain technology, which may not be available on commercially reasonable terms, if at all.|
If our products or manufacturing processes are found to infringe third-party rights, we may be subject to significant liabilities and/or be required to change our manufacturing processes or products. Disputes over intellectual property rights could restrict us from making, using, selling or exporting some of our products, which in turn could affect materially and adversely our business and financial condition. In addition, any litigation, whether to enforce our patents or other intellectual property rights or to defend ourselves against claims that we have infringed the intellectual property rights of others, could affect materially and adversely our results of operations because of the management attention required and legal costs incurred. For detailed information regarding legal disputes we are involved in, please refer to “Item 8.A.7. Litigation.”
Our ability to compete will be harmed if we are unable to protect adequately our intellectual property.
We believe that the protection of our intellectual property rights is, and will continue to be, important to the success of our business. We rely primarily on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect our intellectual property. These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain, copy or use information that we regard as proprietary, such as product design and manufacturing process expertise. Although we have patent applications pending, our pending patent applications and any future applications may not result in issued patents or may not be broad enough to protect our proprietary technologies. Moreover, policing any unauthorized use of our products is difficult and costly, and we cannot be certain that the measures we have implemented will prevent misappropriation or unauthorized use of our technologies, particularly in foreign jurisdictions where the laws may not protect our proprietary rights as fully as the laws of the United States. Others independently may develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to protect effectively our intellectual property could harm our business.
Our rapid introduction of new technologies and products may increase the likelihood that third parties will assert claims that our products infringe upon their proprietary rights.
Although we take and will continue to take steps to endeavor that our new products do not infringe upon valid third-party rights, the rapid technological changes that characterize our industry require that we quickly implement new processes and components with respect to our products. Often with respect to recently developed processes and components, a degree of uncertainty exists as to who may rightfully claim ownership rights in such processes and components. Uncertainty of this type increases the risk that claims alleging that such components or processes infringe upon third-party rights may be brought against us. If our products or manufacturing processes are found to infringe upon third-party rights, we may be subject to significant liabilities and be required to change our manufacturing processes or be prohibited from manufacturing certain products, which could have a material adverse effect on our operations and financial condition.
We rely upon trade secrets and other unpatented proprietary know-how to maintain our competitive position in the industry and any loss of our rights to, or unauthorized disclosure of, our trade secrets or other unpatented proprietary know-how could affect adversely our business.
We rely upon trade secrets, unpatented proprietary know-how and information, as well as continuing technological innovation in our business. The information we rely upon includes price forecasts, core technology and key customer information. Our current standard employment agreement with our employees contains a confidentiality provision which generally provides that all inventions, ideas, discoveries, improvements and copyrightable material made or conceived by the individual arising out of the employment relationship and all confidential information developed or made known to the individual during the term of the relationship is our exclusive property. We cannot assure the enforceability of these types of agreements, or that they will not be breached. We also cannot be certain that we will have adequate remedies for any breach. The disclosure of our trade secrets or other know-how as a result of such a breach could adversely affect our business. Also, our competitors may come to know about or determine our trade secrets and other proprietary information through a variety of methods. Disputes may arise concerning the ownership of intellectual property or the applicability or enforceability of the relevant agreements and there can be no assurance that any such disputes would be resolved in our favor. Furthermore, others may acquire or independently develop similar technology, or if patents are not issued with respect to products arising from research, we may not be able to maintain information pertinent to such research as proprietary technology or trade secrets, and that could have an adverse effect on our competitive position within the industry.
Political, Geographical and Economic Risks
A slowdown in the global economy could affect materially and adversely our business, results of operations and financial condition.
A slowdown in the global economy could adversely affect the market demand and result in a negative impact on electronic products sales from which we generate our income. A global economic downturn could also lead to a slowdown in our business, with side effects including significant decreases in orders from our customers, insolvency of key suppliers resulting in raw material constraints and product delays, inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies and counterparty failures negatively impacting our operations. Because of such factors, we believe the level of demand for our products and projections of future revenue and operating results will be difficult to predict. If any economic downturn occurs in the future, our business, results of operations and financial condition may be affected materially and adversely.
We and many of our customers and suppliers are vulnerable to natural disasters and other events outside of our control, which may seriously disrupt our operations.
Most of our existing manufacturing operations, and the operations of many of our customers and suppliers, are located in areas including Taiwan, the PRC, Japan, Singapore and Korea. Some locations are vulnerable to natural disasters, such as earthquakes and typhoons. We cannot assure you that natural disasters will not happen and will not have adverse impact on our operations in the future. Any disruption of operations at our fabs or the facilities of our customers and suppliers for any reason, including earthquakes, typhoons or other natural disasters, work stoppages, power outages, water supply shortages and fire, etc., could cause delays in or disrupt production and shipments of our products and raw materials. Any delays or disruptions could result in our customers seeking to source our products from other manufacturers. In addition, shortages or suspension of power supplies have occurred occasionally, and have disrupted our operations. The occurrence of a power outage or voltage sags in the future could seriously hurt our business. Besides, our manufacturing processes require a substantial amount of water. Although currently a significant portion of the water used in our production process is recycled in Taiwan, our production operations may be seriously disrupted by water shortages. We may encounter droughts in Taiwan and the PRC in the future, where most of our current or future manufacturing sites are located. If another drought were to occur and we or the authorities were unable to source water from alternative sources in sufficient quantity, we may be required to shut down temporarily or substantially reduce the operations of these fabs, which would affect seriously our operations. In addition, even if we were able to source water from alternative sources, our reliance on supplemental water supplies would increase our operating costs. Furthermore, the disruption of operations at our customers’ facilities could lead to reduced demand for our products. The occurrence of any of these events in the future could affect adversely our business.
We have made investments in, and are exploring the possibility of expanding our businesses and operations to, or making additional investments in, the PRC, which may expose us to additional social, political, regulatory and economic risks with respect to our investments and business operations in the PRC.
We have established subsidiaries in the PRC. Depending on our business needs, we may further expand or adjust our business operations in the PRC in the future.
However, in recent years, China has experienced rapid social, political and economic changes which have led to extensive environmental regulations, rising wages and a growing shortage of blue-collar workers. Environmental regulations, rising wages as well as a shortage of labor in China may increase our overall cost of production, cause delays in production and could have a material adverse effect on our results of operations. In addition, the interpretation of PRC laws and regulations involves uncertainties.
Furthermore, since mid-2018, increased political tensions between the United States and the PRC have escalated into a trade war. Although on January 15, 2020, the United States and the PRC signed the Phase One trade deal, which officially agreed to the rollback of tariffs, expansion of trade purchases, and renewed commitments on intellectual property, technology transfer and currency practices, any future re-adoption or expansion of United States trade restrictions and tariffs, quotas and embargoes, or further escalation of the United States and PRC trade war could adversely impact our business operations.
In addition, we cannot predict whether changes in the PRC’s political, economic and social conditions, laws, regulations and policies will have any adverse effect on our current or future investments and operations in the PRC. Therefore, we cannot assure you that changes in such laws and regulations, or in their interpretation and enforcement, will not have a material adverse effect on our investments, businesses and operations in the PRC.
The current restrictions imposed by the ROC government on investments in certain related businesses may limit our ability to compete with other display panel manufacturers that are permitted to establish display panel production operations in the PRC.
The ROC government imposes restrictions on investments made by Taiwan companies in the PRC, including, but not limited to, investments that relate to TFT-LCD manufacturing technology in the PRC. These restrictions limit our investment capacity in the PRC and may disadvantage us compared to other display panel manufacturers that are less restricted by their domestic regulators.
Recently, the ROC government has alleviated some of the relevant regulatory restrictions by offering exemptions, such as making certain investments in and conducting research for the next generation of display panel technology in Taiwan, to allow Taiwan-based TFT-LCD manufacturers to apply to the MOEAIC for investing up to three 6-generation or more advanced TFT-LCD manufacturing fabs in the PRC if these TFT-LCD manufacturers use the same or higher-generation manufacturing technology in Taiwan. In addition, the MOEAIC now also permits Taiwan-based TFT-LCD manufacturers to make equity investments or conduct mergers with PRC-based companies.
Many of our customers and competitors have expanded their businesses and operations to the PRC. To capture the growth trajectory of the PRC market and the lower production costs in the PRC, we started to invest in the PRC in 2002 with the establishment of a module-assembly facility. During the past few years, our investment and commercial presence in the PRC has significantly increased. As of December 31, 2019, we have 18 subsidiaries incorporated in the PRC. For further information of our PRC investments, see “Item 4. Information on the Company—4.C. Organizational Structure.”
Since some investment restrictions imposed by the ROC government are currently still effective, we cannot assure you that any of our future applications to the MOEAIC to make further investments in the PRC will be successful or timely approved. And as we do not know when or whether any of the ROC laws that govern the remaining investment restrictions in the PRC will be amended or repealed, we cannot assure you that future amendments to relevant ROC laws will enhance or hinder our capacity to invest in our commercial operations in the PRC; if amendments to relevant ROC laws impose further limitations on investing in the PRC, our business prospects may be materially and adversely affected.
If we fail to overcome the duty barrier, our revenue will be materially affected.
There are some trade tensions in the international solar market, especially in the United States, where we are undertaking efforts to avoid or alleviate the impacts from the present and foreseeable anti-dumping duty (“AD”), and countervailing duty (“CVD”) proceedings. However, we cannot guarantee that these efforts will be successful due to potential policy changes or other changes in the activities and practices of the various national trade authorities responsible for AD and CVD enforcement. Any material adverse change in trade policies and/or our failure to overcome any duty barrier could have a material adverse impact on our business and results of operation.
We may not be able to obtain or renew all licenses, approvals or permits necessary for our current and future operations.
Our current and future operations in Taiwan and other regions require a number of regulatory licenses, approvals and permits. We cannot assure you that we will be able to obtain licenses, approvals or permits necessary for our operations in these regions, or that upon the expiration of our existing licenses, approvals or permits, we will be able to successfully renew them.
In addition, if the relevant authorities enact new regulations, we cannot assure you that we will be able to meet successfully such requirements. If we fail to obtain or renew the necessary regulatory licenses, approvals or permits, we may have to cease construction or operation of the relevant projects, be subject to fines, or face other penalties, which could have a material adverse effect on our business, financial condition and results of operations. Even if we already obtained the licenses, approvals and permits, there could be parties or interest groups with different views who may take actions against the renewal of such licenses, approvals and permits, which may have an adverse effect on our business operations. For example, there have been environmental proceedings relating to the development project of the Central Taiwan Science Park in Houli, Taichung, where our second 8.5-generation fab is located. See “Item 8. Financial Information—Item 8.A.7. Litigation.”
If economic conditions in Taiwan change drastically or there are disruptions in Taiwan’s political environment, our current business, future growth and market price of our shares could be affected materially and adversely.
Most of our assets and operations are located in Taiwan and approximately 31.0% of our net revenue was derived from customers in Taiwan in 2019. Therefore, our business, financial condition and results of operations may be affected by changes in ROC government policies, taxation, inflation, interest rates and general economic conditions in Taiwan, as well as the global economies.
Our business and financial condition may also be affected by changes in local governmental policies and political and social instability. Taiwan has a unique international political status. The PRC government asserts sovereignty over mainland China and Taiwan and does not recognize the legitimacy of the government of the ROC. The PRC government has indicated that it may use military force to gain control over Taiwan if Taiwan declares independence or if Taiwan refuses to accept the PRC’s stated “One China” policy. In addition, on March 14, 2005, the National People’s Congress of the PRC passed what is widely referred to as the “anti-secession” law, a law authorizing the PRC military to respond to efforts by Taiwan to seek formal independence. An increase in tensions between the ROC and the PRC and the possibility of instability and uncertainty could adversely affect the prices of our ADSs and our shares. It is unclear what effects any of the events described above may have on relations with the PRC. Relations between Taiwan and the PRC and other factors affecting Taiwan’s political environment could affect our business.
The market value of our ADSs may fluctuate due to the volatility of the ROC securities market.
The trading price of our ADSs may be affected by the trading price of our shares on the Taiwan Stock Exchange. The Taiwan Stock Exchange is smaller and more volatile than the securities markets in the United States and a number of stock exchanges in Europe. The Taiwan Stock Exchange has experienced substantial fluctuations in the prices and volumes of trading of securities, and there are currently limits on the range of daily price fluctuations on the Taiwan Stock Exchange. During the period from January 1, 2019 to December 31, 2019, the Taiwan Stock Exchange Index peaked at 12,122.45 on December 18, 2019, and reached a low of 9,382.51 on January 4, 2019. Over the same period, daily closing values of our shares ranged from NT$7.03 per share to NT$12.75 per share. On March 12, 2020, the Taiwan Stock Exchange Index closed at 10,422.32, and the closing value of our shares was NT$8.04 per share.
The Taiwan Stock Exchange is particularly volatile during times of political instability, including when relations between the ROC and the PRC are strained. Several investment funds affiliated with the ROC government have also from time to time purchased securities from the Taiwan Stock Exchange to support the trading level of the Taiwan Stock Exchange. Moreover, the Taiwan Stock Exchange has experienced problems, including market manipulation, insider trading and settlement defaults. The recurrence of these or similar problems could have an adverse effect on the market price and liquidity of our shares and ADSs.
If the NT dollar or other currencies in which our sales, raw materials and components, capital expenditures and certain assets are denominated fluctuate significantly against the U.S. dollar, the Japanese yen or the Renminbi, our financial condition and results of operation may be affected seriously.
We have significant foreign currency exposure and are affected by fluctuations in exchange rates among the U.S. dollar, the Japanese yen, the NT dollar, the Renminbi and other currencies. Our sales, raw materials and components, capital expenditures and certain assets are denominated mainly in U.S. dollars, Japanese yen, NT dollars and Renminbi in varying amounts. For example, in 2019, approximately 93.7% of our net revenue was denominated in U.S. dollars. During the same period, approximately 72.2%, 14.4% and 11.0% of our raw materials and component costs were denominated in U.S. dollars, Japanese yen and NT dollars, respectively. In addition, in 2019, approximately 44.5%, 26.9%, 14.0% and 13.6% of our total capital expenditures (principally for the purchase of equipment) were denominated in NT dollars, Japanese yen, U.S. dollars and Renminbi, respectively. Also, results of operation of our foreign subsidiaries are accounted for in foreign currencies before their consolidation into our financial result. During periods of weakening foreign currencies, the value of certain assets of our foreign subsidiaries could be substantially reduced in NT dollars. Although from time to time, we enter into forward foreign currency contracts to hedge our foreign currency exposure, we may not be able to hedge all of the exposure, including foreign exchange exposure relating to the value of our foreign currency-denominated assets. We cannot assure you that we will fully minimize the risk against exchange rate fluctuations and the impact on our financial condition and results of operations.
Disruptions in the international trading environment and changing international trade regulation may seriously decrease our international sales.
A majority of our net revenue is derived from sales to customers located outside of Taiwan. In 2017, 2018 and 2019, sales to our overseas customers accounted for approximately 68.2%, 67.7% and 69.0%, respectively, of our net revenue. In addition, a significant portion of our sales to customers in Taiwan and PRC is made to major brand customers or their procurement entities located in Taiwan and the PRC. We expect sales to customers outside of Taiwan to continue to represent a significant portion of our net revenue. As a result, our business will continue to be vulnerable to disruptions in the international trading environment, including those caused by adverse changes in foreign government regulations, political unrest, international economic downturns, terrorist attacks and military unrest. These disruptions in the international trading environment may affect the demand for our products and change the terms upon which we sell our products overseas, which could seriously decrease our international sales.
In addition, our ability to compete effectively could be materially and adversely affected by a number of factors relating to international trade regulation. Higher tariffs, duties or our failure to comply with trade regulations could restrict our ability to export products or compete effectively with our competitors, resulting in a decrease in our international sales. For example, the display panel industry in Taiwan may be negatively impacted by the trilateral Free Trade Agreement (the “FTA”) among China, South Korea and Japan, under which tariff reduction may covers several areas of trade including display panels. The 16th round of FTA negotiations was held in Seoul in November 2019, with an aim of liberalization at a higher level than the Regional Comprehensive Economic Partnership (the “RCEP”). At this stage, the FTA is unlikely to have an immediate effect on our business operations as the FTA is still under negotiation.
Currently, the United States is undergoing political changes, which have created uncertainties for future United States trade policy developments. The U.S. administration has also shown inclinations to withdraw the United States from the World Trade Organization, which can lead to greater economic instability. Since mid-2018, political tensions have increased between the United States and the PRC and have escalated into a tariff war. Although on January 15, 2020, the United States and the PRC signed the Phase One trade deal, which officially agreed to the rollback of tariffs, expansion of trade purchases and renewed commitments on intellectual property, technology transfer and currency practices, any future readoption or expansion of United States trade restrictions and tariffs, quotas and embargoes, or further escalation of the United States and PRC trade war, could adversely impact our business operations.
We face risks related to health epidemics and outbreaks of contagious disease.
In the recent years, there have been reports of outbreaks of highly pathogenic diseases in Asia and other parts of the world. The outbreak of such contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries. Since most of our operations and customers and suppliers have a presence in Asia (mainly in Taiwan and the PRC), an outbreak of contagious diseases in Asia or elsewhere, or the perception that such an outbreak could occur, and the measures taken by the governments of countries affected, including the ROC and the PRC, could adversely affect our business, financial condition or results of operations.
|ITEM 4.||INFORMATION ON THE COMPANY|
We were incorporated as Acer Display Technology, Inc. (“Acer Display”) under the laws of the ROC as a company limited by shares in 1996. The shares of Acer Display were listed on the Taiwan Stock Exchange on September 8, 2000.
On September 1, 2001, we completed a merger with Unipac Optoelectronics Corp. (“Unipac”) pursuant to a merger agreement dated April 9, 2001, as amended by a supplemental agreement dated May 15, 2001. We changed our name to AU Optronics Corp. on May 22, 2001. Prior to the merger, Acer Display was primarily involved in the design, development, production and marketing of large-size TFT-LCD panels, and Unipac was primarily involved in the design, production and marketing of both small-size and large-size TFT-LCD panels.
On October 1, 2006, we completed our merger with Quanta Display Inc. (“QDI”), a company incorporated in Taiwan that manufactured and assembled TFT-LCD panels. As of the effective date of the merger, we became the surviving entity and assumed substantially all of the assets, liabilities and personnel of QDI. The purpose of the merger was to increase our competitiveness and expand our market share.
On October 1, 2014, our subsidiary BriView Corp. completed a merger with Forhouse Corporation (“Forhouse”), one of our investees. Both companies were primarily engaged in the manufacturing and selling of TFT-LCD modules and backlight modules. The purpose of the merger was to integrate resources and increase competitiveness. After the merger, Forhouse, as the surviving company, was renamed to Darwin Precisions Corporation and became our subsidiary.
At the end of 2008, we entered the solar business and formed our Solar Photovoltaic Business Unit in October 2009. In connection with this expansion, we obtained a controlling interest in M.Setek, a major polysilicon, ingot and solar wafer manufacturer in Japan, through equity investments in 2009. Furthermore, in May 2010, we formed a joint venture named AUO SunPower Sdn. Bhd. (“AUSP”) with SunPower Technology, Ltd. (“SPTL”). Since 2011 we have also operated an ingot- and solar-wafer related business through our subsidiary AUO Crystal Corp. In September 2016, we sold all of our interest in AUSP to SPTL for a consideration of US$170.1 million. Furthermore, we have built solar systems and invested in solar power plants in Taiwan since 2011.
On March 12, 2020, we acquired approximately 19.45% equity interest in ADLINK Technology. ADLINK Technology is one of the global leaders in industrial computers and provides edge computing products and solutions for numerous vertical fields of industrial and commercial applications. Through the ADLINK Tender Offer, our goal is to form a strategic partnership with ADLINK Technology to help our customers from different domains to gain access to more comprehensive Artificial Intelligence of Things software and hardware integration services.
Our principal executive offices are located at No. 1, Li-Hsin Road 2, Hsinchu Science Park, Hsinchu, Taiwan, ROC, and our telephone number is +886-3-500-8800. Our agent for service of process in the United States is Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19711, and our agent’s telephone number is 302-738-6680.
From May 2002 to September 2019, our ADSs were listed on the NYSE under the symbol “AUO” and we voluntarily delisted our ADSs from the NYSE, effective on October 1, 2019. After delisting, we have maintained our ADR program in the United States and our ADSs are still traded on the U.S. over-the-counter market under the symbol “AUOTY”.
For a description of our capital expenditures in the past three fiscal years and source of funding, see “Item 5. Operating and Financial Review and Prospects—5.B.—Liquidity and Capital Resources—Capital Expenditures.”
We are one of the world’s leading TFT-LCD panel providers. We operate in two business segments: display business and energy business.
Display business. We design, develop, manufacture, assemble and market flat panel displays and most of our products are TFT-LCD panels. We also provide smart solutions integrating software and hardware. TFT-LCD is currently the most widely used flat panel display technology. Our panels are primarily used in televisions, monitors, mobile PCs and devices, and commercial and other applications (such as displays for automobiles, industrial PCs, automated teller machines, point of sale terminals, pachinko machines, medical equipment, etc.). The display business was sub-divided into the Technology Group, the Business Group and the Manufacturing Group effective on November 1, 2018. The Technology Group is headed by Chief Technology Officer Dr. Wei-Lung Liau; the Business Group is headed by Vice President TY Lin; and the Manufacturing Group is headed by Vice President Ting-Li Lin. We expect this restructuring to optimize operational and human resource allocation and help us further advance our leadership position in R&D.
Energy business. We entered into the solar business at the end of 2008. We are capable of manufacturing products such as ingots, solar wafers and solar modules. We are also able to build solar systems, invest in solar power plant and provide various value-added services for solar systems projects.
For the year ended December 31, 2019, net revenue generated from our display business and energy business was NT$256,667.2 million (US$8,581.3 million) and NT$12,124.5 million (US$405.4 million), respectively, representing approximately 95.5% and 4.5% of our total net revenue, respectively. For more information on the financial performance of our two operating segments, see “Item 5. Operating and Financial Review and Prospects” and Note 30 and Note 46 to our consolidated financial statements.
We sell our panels primarily to companies that design and assemble products based on their customers’ specifications, commonly known as original equipment manufacturing service providers, and to brand customers. Our original equipment manufacturing service provider customers, most of whose production operations are located in Taiwan or the PRC, use our panels in the products that they manufacture on a contract basis for brand companies worldwide. Our operations in Taiwan and the PRC allow us to better coordinate our production and services with our customers’ requirements, especially in respect of delivery time and design support. We also sell our products to some brand companies on a direct shipment basis.
We currently manufacture TFT-LCD panels at fabrication facilities commonly known as “fabs”. With production facilities utilizing 3.5-, 4-, 4.5-, 5-, 6-, 7.5- and 8.5-generation technologies, we have the flexibility to produce a large number of panels of various sizes. As of February 29, 2020, all the fabs listed under “—4.D. Property, Plants and Equipment” have commenced commercial production. See “Item 4. Information on the Company—4.D. Property, Plants and Equipment” for information on our principal manufacturing and module assembly sites for the display business.
We design, develop, manufacture, assemble and market a wide range of display products for the following principal product categories:
|·||televisions, which utilize display panels ranging mainly from 21.5 inches to 85 inches, including panels for televisions, TV sets and other related products;|
|·||monitors, which utilize display panels ranging mainly from 17 inches to 35 inches, including products such as desktop monitors;|
|·||mobile PCs and devices, which utilize display panels ranging mainly from 6.21 inches to 17.3 inches, including products such as notebooks, tablets and mobile phones; and|
|·||commercial and other applications, which utilize display panels ranging mainly from 1.2 inches to 27 inches or above for use in products such as displays for automobiles, industrial PCs, automated teller machines, point of sale terminals, pachinko machines, medical equipment and others.|
The following table sets forth the shipment of our display products by category for the periods indicated:
|Year Ended December 31,|
|(Panels in thousands)|
|Products for Televisions||31,374.5||31,022.7||29,090.9|
|Products for Monitors||26,060.8||27,985.2||25,210.5|
|Products for Mobile PCs and Devices||166,290.2||157,489.9||120,365.4|
|Products for Commercial and Other Applications||56,930.0||64,889.1||64,591.2|
The following table sets forth our net revenue by product category for the periods indicated:
|Year Ended December 31,|
|(in millions, except for percentages)|
|Products for Televisions||152,442.2||44.7||113,194.6||36.8||87,269.7||2,917.7||32.5|
|Products for Monitors||45,696.2||13.4||47,024.4||15.3||39,522.3||1,321.4||14.7|
|Products for Mobile PCs and Devices||71,068.3||20.9||74,375.3||24.2||69,305.5||2,317.1||25.8|
|Products for Commercial and Others(1)||53,128.7||15.5||56,190.5||18.2||60,569.7||2,025.1||22.5|
|(1)||Others include sales from products for other applications and sales of raw materials, components and from service charges.|
Products for Televisions
Our current portfolio of products for televisions consists of 21.5-inch to 85-inch panels. In 2019, approximately 65.7% of the sales of products for televisions we produced were 50 inches and above. In 2017, 2018 and 2019, sales of products for televisions accounted for 44.7%, 36.8% and 32.5%, respectively, of our net revenue.
Products for Monitors
In recent years, demand for monitors has continued to migrate to larger sizes. In 2019, 21.5-, 24- and 27-inch panels were the major sizes produced by us for monitors. In 2017, 2018 and 2019, sales of products for monitors accounted for 13.4%, 15.3% and 14.7%, respectively, of our net revenue.
Products for Mobile PCs and Devices
In 2017, 2018 and 2019, sales of products for mobile PCs and devices accounted for 20.9%, 24.2% and 25.8%, respectively, of our net revenue. In 2019, 14.0-inch and 15.6-inch panels with an aspect ratio of 16:9 were the major sizes produced by us for notebooks, while 7-inch and 10.1-inch panels were the major sizes produced by us for tablets. The major sizes of mobile phones produced by us range from 4.97-inch to 7.12-inch.
Products for Commercial and Others
Our products for commercial and others are used in products such as displays for automobiles, industrial PCs, automated teller machines, point of sale terminals, pachinko machines, medical equipment and others. In 2017, 2018 and 2019, sales of products for commercial and others accounted for 15.5%, 18.2% and 22.5%, respectively, of our net revenue.
Customers, Sales and Marketing
We sell our panels mostly to brand companies and original equipment manufacturing service providers with operations in Taiwan, the PRC, Japan, Singapore and other areas. The following table sets forth the geographic breakdown of our net revenue by the location of our customers placing orders for the periods indicated:
|Year Ended December 31,|
|(in millions, except for percentages)|
|(1)||Include the United States, Europe and other regions.|
Our sales in Taiwan and the PRC, as set forth in the table above, represent a significant portion of our net revenue for the past three years, due to the fact that our major brand customers or their procurement entities are located in Taiwan and the PRC.
We market our panels to, and negotiate prices with, both our original equipment manufacturing service provider customers and brand customers, as display panels often constitute a significant part of the end product. A significant portion of our net revenue is attributable to a small number of our customers. In 2017, 2018 and 2019, our five largest customers accounted for approximately 39.0%, 36.6% and 38.7%, respectively, of our net revenue. In addition, our major customer, Samsung Group, individually accounted for more than 10% of our net revenue in the last three years, which were 12.8%, 11.5% and 12.3% of our net revenue in 2017, 2018 and 2019, respectively.
We focus our sales activities on a number of large customers with whom we seek to build long-lasting relationships. Each of our product categories have an independent sales and marketing division; each sales and marketing division is subdivided into smaller customer teams dedicated to each of our major customers.
Our customers typically provide monthly nonbinding rolling forecasts of their requirements for the coming several months, and typically place purchase orders several weeks before the expected shipment date.
We generally provide a limited warranty to our customers, including the provision of replacement parts and after-sale service for our products. In connection with these warranty policies, based on our historical experience, we set aside an amount as a reserve to cover these warranty obligations. As of December 31, 2019, our reserve for warranties totaled NT$1,292.2 million (US$43.2 million). In addition, we are required under several of our sales contracts to provide replacement parts for our products, at agreed prices, for a specified period of time.
We price our products in accordance with prevailing market conditions, giving consideration to factors such as the complexity of the product, the order size, the strength and history of our relationship with the customer and our capacity utilization. Selling prices and payment terms for sales to related parties are not significantly different from those for other customers. Our credit policy for sales to related parties and other customers typically requires payment within 25 to 60 days. From time to time, we may extend longer credit terms to our large customers as compared to our smaller customers. The average number of collection days extended for sales to our customers for the years ended December 31, 2017, 2018 and 2019 was 48 days, 52 days and 54 days, respectively. We believe the terms for customers and products are comparable to the terms offered by our industry peers.
Our business is subject to seasonal fluctuations common in the display panel industry, which in turn is affected by the seasonality of consumer demand and other end-products produced by our customers. Our low seasons typically start in the fourth quarter and may go lower in the first quarter; while our high seasons generally start in the second quarter and may go higher in the third quarter. The seasonality of our sales also may be affected by various factors, including economic downturn, our inventory management and certain special events such as government subsidies and sports events.
The TFT-LCD Manufacturing Process
The basic structure of a TFT-LCD panel may be thought of as two glass substrates sandwiching a layer of liquid crystal. The front glass substrate is fitted with a color filter, while the back glass substrate has transistors fabricated on it. A light source called a backlight unit is located at the back of the panel.
The manufacturing process consists of hundreds of steps, but may be divided into three primary steps. The first step is the array process, which involves fabricating transistors on the back substrate using film deposition, lithography and etching. The array process is similar to the semiconductor manufacturing process, except that transistors are fabricated on a glass substrate instead of a silicon wafer. The second step is the cell process, which joins the back array substrate and the front color filter substrate. The space between the two substrates is filled with liquid crystal. The third step is the module-assembly process, which involves connecting additional components, such as driver ICs and backlight units, to the TFT-LCD panel.
The array and cell processes are capital-intensive and require highly automated production equipment. TFT-LCD manufacturers typically design their own fabs and purchase production equipment from various suppliers. Each TFT-LCD manufacturer combines various equipment according to its manufacturing process technologies to form a TFT-LCD fab. In addition to developing our own manufacturing process technologies, we also license such technologies from other companies, such as Fujitsu Display Technologies Corporation (which was merged into Fujitsu Limited) (“FDTC”). We have automated our array and cell processes, with the exception of some steps in the cell process, such as panel inspection. In contrast to the array and cell processes, the module-assembly process is labor intensive, as it involves manual labor to assemble the pieces. A substantial portion of our module-assembly process is conducted in the PRC.
Raw Materials and Components and Suppliers
Our manufacturing operations require adequate supplies of raw materials and components of the right quality on a timely basis. The prices of these raw materials and components are subject to volatility. We purchase our raw materials and components based on forecasts from our customers, as well as our own assessments of our customers’ needs. We generally prepare forecasts one to four months in advance, depending on the raw materials and components, and update this forecast weekly or monthly. We source most of our raw materials and components, including critical materials such as B/L, driver ICs, glass substrates, PCBA and polarizer, from a limited group of suppliers. In order to reduce our raw materials and component costs and our dependence on any one supplier, we generally purchase our raw materials and components from multiple sources. We typically do not enter into contracts with our suppliers. However, during periods of supply shortages, we may enter into supply contracts with suppliers to ensure a stable supply of necessary raw materials and components.
From time to time, we experienced shortages of certain raw materials in the past. Our operations would be adversely affected if we could not obtain raw materials and components in sufficient quantity and quality. We may also experience difficulties in sourcing adequate supplies for our operations if there is a ramp-up of production capacity by display panel manufacturers, including our company, without a corresponding increase in the supply of raw materials and components.
Raw materials and components constitute a substantial portion of our cost of goods sold. An increase in the cost of our raw materials may adversely affect our gross margins. Set forth below are our major suppliers of key raw materials and components in alphabetical order by category:
|B/L||Driver ICs||Glass Substrates||PCBA||Polarizer|
|Epoch Chemtronics||Raydium(1)||Corning Taiwan||Regent Manner||Nitto Denko|
|Radiant||Nippon Electric Glass||Universal Global||Sumika Technology|
|(1)||Raydium is our investee. See “Item 7. Major Shareholders and Related Party Transactions—7.B. Related Party Transactions.”|
|(2)||Qisda is one of our major shareholders. See “Item 7. Major Shareholders and Related Party Transactions—7.B. Related Party Transactions.”|
|(3)||BMC is a subsidiary of one of our major shareholders, Qisda. See “Item 7. Major Shareholders and Related Party Transactions—7.B. Related Party Transactions.”|
We use a large amount of water and electricity in our manufacturing process. We mostly obtain water from government-owned entities and are in compliance with relevant local laws and regulations of water recovery rate. We use electricity supplied by the external power grids. We maintain backup generators that provide electricity in case of power interruptions, which we have experienced from time to time. Except for power outages, power interruptions in general have not materially affected our production processes.
Equipment and Suppliers
We depend on a number of equipment manufacturers that make and sell the equipment that we use in our manufacturing processes. Our manufacturing processes depend on the quality and technological capacity of our equipment. We purchase equipment that is customized to our specific requirements for our manufacturing processes. The principal types of equipment we use to manufacture display panels include chemical vapor deposition equipment, sputters, steppers, developers and coaters.
In 2019, we reduced our equipment purchases as compared to 2018 primarily due to the substantial completion of the installation of our 8.5-generation fab in Taichung. Going forward, we expect to maintain investments in advanced technology and new capacity based on market conditions. See “Item 5. Operating and Financial Review and Prospects—5.B. Liquidity and Capital Resources.” We purchase equipment from a small number of qualified vendors to assure consistent quality and performance. We typically order equipment six to twelve months or longer in advance of our planned installation.
The display business is highly competitive. Most of our competitors operate fabs in Korea, Taiwan, the PRC and Japan. We believe our principal competitors include LG Display and Samsung Display in Korea; Innolux and Hannstar Display in Taiwan; BOE, China Star Optoelectronics Technology, CEC-Panda LCD Technology, Xianyang CaiHong Optoelectronics Technology, HKC, Tianma, EverDisplay Optronics, Century, Truly Semiconductors Ltd and Visionox in the PRC and Sharp, Panasonic LCD and Japan Display in Japan.
In addition, we believe the principal elements of competition for customers in the display market include:
|·||price, based in large part on the ability to ramp up lower-cost, advanced technology production facilities before competitors;|
|·||product features and quality;|
|·||customer service, including product design support;|
|·||ability to keep production costs low by maintaining high yield and operating at full capacity;|
|·||ability to provide sufficient quantity of products to meet customer demand;|
|·||quality of the research and development team;|
|·||superior logistics; and|
|·||access to capital.|
Through our subsidiaries AUO Crystal Corp. and M.Setek, we mainly focus on research, production and sales of solar materials, such as ingots and solar wafers. Our principal manufacturing sites for ingots and solar wafers are located in Taiwan, Japan and Malaysia.
The rise in solar cell conversion efficiency has enabled high-efficiency mono crystalline solar wafers to replace gradually multi-crystalline solar wafers as the mainstream product. Reacting to this trend, we have shut down our multi-crystalline production at the end of 2018, which includes multi-crystalline brick production, multi-crystalline slicing operation and the cell production.
We also design, develop and manufacture solar modules, build solar systems, provide various value-added services for solar systems projects and invest in solar plants. A solar module is an assembly of solar cells that are electrically interconnected, laminated and framed in a durable and weatherproof package. Currently, our solar modules are mostly manufactured with mono-crystalline solar cells. A solar system consists of one or more solar modules that are physically mounted and electrically interconnected with system components such as inverters, mounting structures, wiring systems and other devices to produce and store electricity. See “Item 4. Information on the Company—4.D. Property, Plants and Equipment” for information on our principal manufacturing sites for the solar business.
We sell our ingot and solar wafer products primarily to solar cell manufacturers. We are also dedicated to reach out to new clients in emerging markets to enlarge our current customer base. We sell our solar modules to Taiwan, Japan, Europe and customers in other regions, including installers, solar system integrators, property developers and other value-added resellers.
In 2019, revenues generated from our energy business amounted to NT$12,124.5 million (US$405.4 million), representing 4.5% of our total net revenue for 2019.
Our quality management system includes design quality assurance, manufacturing quality assurance, vendor quality assurance and service quality assurance. By structuring a quality management system, building up product design and development procedures for our different business applications as well as conducting market analysis, feasibility study, risk assessment, product verification and validation in our product development process, we endeavor to achieve a “first time right” approach. We are also dedicated to production quality control and process technology enhancement upon failure modes and effect analysis, process control plan, statistical process control and measurement system analysis.
For vendor quality assurance, we cooperate with our primary suppliers through our extensive experience and effective management. We encourage suppliers to demonstrate quality control and reliability, and also perform an annual customer satisfaction survey to ensure that their needs are well understood and addressed. Customer feedbacks are critical to our continual improvement plans. In addition, we use a quality audit program, nonconformity management and the hazardous chemical management to secure long-term agreements and develop strategic relationships.
Our quality management system has received accredited International Standard of ISO 9001 and QC080000 certifications, as well as qualifications from our customers. We also received the IATF 16949 for most of our factories that design and manufacture the flat panel displays. In addition, all of our facilities have been certified as meeting the International Organization for Standardization ISO 14001 environmental protection standards and OHSAS 18001 occupational health and safety standard, and certain of our facilities have completed ISO 50001 certification for energy management. The International Standard assessment process involves subjecting our manufacturing processes and quality management systems to periodic reviews and observations. We believe that certification also provides independent verification to our customers regarding the quality control employed in our manufacturing and assembly processes.
We mostly maintain insurance policies on our production facilities, buildings, machinery and inventories covering property damage and damage due to fire, earthquakes, floods and other natural and accidental perils. As of December 31, 2019, our insurance coverage included protection from covered losses, including property damage up to maximum coverage of NT$30.1 billion (US$1.0 billion) for all of our inventories and NT$804.1 billion (US$26.9 billion) for our equipment and facilities. In addition, as of December 31, 2019, we had insurance coverage for business interruptions in the aggregate amount of NT$37.7 billion (US$1.3 billion).
In general, we also maintain insurance policies, including director and officer liability insurance, employee group health insurance, travel and life insurance, employer liability insurance, general liability insurance, and policies that provide coverage for risks during the shipment of goods and equipment, as well as during equipment installation at our fabs.
Our manufacturing processes involve the use of hazardous materials and generate a significant amount of pollution, including wastewater, solid/liquid waste and air pollution, which are strictly monitored by local environmental protection bureaus. We must comply with regulations relating to storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes resulting from our manufacturing processes. To meet the ROC and the PRC environmental standards, we employ various types of pollution control equipment for the treatment of exhaust gases, liquid waste, solid waste and the treatment of wastewater and chemicals in our fabs. We control exhaust gas and wastewater on-site. The treatment of solid and liquid wastes is subcontracted to third parties off-site in accordance with pollution control requirements.
Our operations can expose us to the risk of environmental claims which could result in damages awarded or fines imposed against us. We have identified certain factors associated with climate change that would have an impact on our operation, including the uncertainty surrounding new regulation, cap and trade schemes, change in precipitation patterns, change in weather conditions and fuel/energy taxes and regulations. We have taken the necessary steps to ensure the proper operation of our facilities to meet the necessary standards and strengthened the monitoring mechanisms against further violations, as well as obtained the appropriate permits, and believe that we are in compliance with the existing environmental laws and regulations in all material aspects in the ROC and the PRC.
In 2015, we launched a water recycling system at our Lungtan site. Through various recycling phases, the processed water is condensed and reduced to zero liquid discharge through an advanced evaporation platform. We will continue to create values and opportunities for sustainable development.
As of February 29, 2020, we had filed more than 26,600 patent applications in various jurisdictions, including Taiwan, the United States, the PRC, Japan, United Kingdom, European Union, Korea and others. These patent applications include patents for TFT-LCD and OLED manufacturing processes and products, and more than 19,500 patents were issued as of February 29, 2020. Most of these patents have a term of 20 years. In addition, we have registered “AU Optronics” as a trademark in some countries and jurisdictions where we operate, including Taiwan, United States, European Union and Korea and registered our corporate logo, “AUO” as a trademark in the Taiwan, the PRC, United States, European Union, Japan, Korea, Malaysia and Singapore, Turkey, the Philippines, Saudi Arabia, New Zealand and Australia.
We require all of our employees to sign an employment agreement which prohibits the unauthorized disclosure of any of our trade secrets, confidential information and proprietary technologies subject to the terms and conditions of the employment agreement, and we also require our technical personnel to assign to us any inventions related to our business that they develop during the course of their employment.
We have licenses to use certain technology and processes from certain companies. Our royalty expenses relating to intellectual property licenses may increase in the future due to increases in unit sales as well as the potential need to enter into additional license agreements or to renew existing license agreements on different terms.
We intend to continue to file patent applications, where appropriate, to protect our proprietary technologies. We may find it necessary to enforce our patents or other intellectual property rights or defend ourselves against claimed infringement of the rights of others through litigation, which could result in substantial cost and diversion of our resources. We may suffer legal liabilities and financial and reputational damages if we are found to infringe product or process technology rights held by others. We are currently involved in litigation regarding alleged patent infringement. See “Item 8. Financial Information—8.A.7. Litigation.”
We have entered into patent and intellectual property license and cross-license agreements, some of which require periodic royalty payments. For example: (i) we have license agreements with each of FDTC (subsequently assumed by Fujitsu Limited) and Toppan Printing Co., Ltd., which provides for the non-transferable and nonexclusive license under certain patents to manufacture certain LCD and OLED panels at our facilities, (ii) we entered into cross-license agreements with each of Sharp, LGD, Samsung and Hydis (E Ink’s Korean subsidiary), respectively. Under each of these agreements, each party granted to the other non-transferable and nonexclusive licenses in relation to certain patents involving LCD-related technologies, (iii) we have a cross-license agreement with Japan Display Inc. (formerly known as Japan Display East Inc./Hitachi Displays Ltd.) and Panasonic Liquid Crystal Display Co., Ltd. (formerly known as IPS Alpha Technology Ltd.), under which each party granted to the other non-transferrable and nonexclusive licenses under certain patents to manufacture certain TFT-LCD and OLED panels and modules, (iv) we have a license agreement with Semiconductor Energy Laboratory Co., Ltd., which provides for the non-transferable and nonexclusive licenses under certain patents to manufacture certain LCD and certain OLED products, (v) we have a cross-license agreement with Seiko Epson, under which AUO granted to Seiko Epson non-transferrable and nonexclusive licenses under certain patents involving certain technologies, and Seiko Epson granted to AUO a non-transferrable and nonexclusive license under certain patents involving LCD, related technologies, and (vi) we have a license agreement with Sanyo Electric Co., Ltd., which provides for non-transferable and nonexclusive licenses under certain patents to manufacture certain LCD and OLED panels and modules.
In addition to the above, we have also entered into license or cross-license agreements with other third parties in the course of our business operations in connection with certain patents which such third parties own or control. In the future, we may need to obtain additional patent licenses or renew existing license agreements.
The following chart sets forth our corporate structure and ownership interest in each of our principal operating subsidiaries as of December 31, 2019.
|(1)||28.56% held directly by AU Optronics Corp., 6.40% held indirectly through Konly Venture Corp. and 6.09% held indirectly through Ronly Venture Corp., respectively.|
|(2)||70.29% held indirectly through AU Optronics (L) Corp. and 29.71% held indirectly through Darwin Precisions Corporation, respectively.|
|(3)||In the process of liquidation.|
The following table sets forth summary information for our subsidiaries as of December 31, 2019.
|a. u. Vista Inc.||Research and development and IP-related business||United States||100.00%(1)|
|AFPD Pte., Ltd.||Manufacturing TFT-LCD panels based on low-temperature polysilicon technology||Singapore||100.00%(1)|
|AU Optronics (Czech) s.r.o.||Assembly of solar modules||Czech Republic||100.00%(1)|
|AU Optronics (Kunshan) Co., Ltd.||Manufacturing and sales of TFT-LCD panels||PRC||51.00%(1)|
|AU Optronics (L) Corp.||Holding and trading company||Malaysia||100.00%|
|AU Optronics (Shanghai) Co., Ltd.||Sales support of TFT-LCD panels||PRC||100.00%(1)|
|AU Optronics (Slovakia) s.r.o.||Repairing of TFT-LCD modules||Slovakia Republic||100.00%(1)|
|AU Optronics (Suzhou) Corp., Ltd.||Manufacturing, assembly and sales of TFT-LCD modules||PRC||100.00%(1)|
|AU Optronics (Xiamen) Corp.||Manufacturing, assembly and sales of TFT-LCD modules||PRC||100.00%(1)|
|AU Optronics Corporation America||Sales and sales support of TFT-LCD panels||United States||100.00%(1)|
|AU Optronics Corporation Japan||Sales support of TFT-LCD panels||Japan||100.00%(1)|
|AU Optronics Europe B.V.||Sales and sales support of TFT-LCD panels||Netherlands||100.00%|
|AU Optronics Korea Ltd.||Sales support of TFT-LCD panels||South Korea||100.00%(1)|
|AU Optronics Manufacturing (Shanghai) Corp.||Manufacturing and assembly of TFT-LCD modules; leasing||PRC||100.00%(1)|
|AU Optronics Singapore Pte. Ltd.||Holding company and sales support of TFT-LCD panels||Singapore||100.00%(1)|
|AUO Care Information Tech. (Suzhou) Co., Ltd.||Design, development and sales of software and hardware for health care industry||PRC||100.00%(2)|
|AUO Crystal (Malaysia) Sdn. Bhd.||Manufacturing and sales of solar wafers||Malaysia||100.00%(3)|
|AUO Crystal Corp.||Manufacturing and sales of ingots and solar wafers||ROC||100.00%|
|AUO Green Energy America Corp.||Sales support of solar-related products||United States||100.00%(5)|
|AUO Green Energy Europe B.V.||Sales support of solar-related products||Netherlands||100.00%(5)|
|BriView (Hefei) Co., Ltd.||Manufacturing and sales of liquid crystal products and related parts||PRC||100.00%(6)|
|BriView (L) Corp.||Holding company||Malaysia||100.00%(7)|
|BriView (Xiamen) Corp.||Manufacturing and sales of liquid crystal products and related parts||PRC||100.00%(8)|
|ComQi Canada Inc.||Research and development of content management system||Canada||100.00%(20)|
|ComQi Holdings Ltd.||Holding company||United Kingdom||100.00%(9)|
|ComQi Inc.||Sales of content management system and hardware||United States||100.00%(20)|
|ComQi Ltd.||Holding company||Israel||100.00%|
|ComQi UK Ltd.||Sales support of content management system||United Kingdom||100.00%(20)|
|Darwin Precisions (Hong Kong) Limited||Holding company||Hong Kong||100.00%(10)|
|Darwin Precisions (L) Corp.||Holding company||Malaysia||100.00%(11)|
|Darwin Precisions (Slovakia) s.r.o.||Manufacturing and sales of automotive parts||Slovakia Republic||100.00%(10)|
|Darwin Precisions (Suzhou) Corp.||Manufacturing and sales of backlight modules and related parts||PRC||100.00%(12)|
|Darwin Precisions (Xiamen) Corp.||Manufacturing and sales of backlight modules and related parts||PRC||100.00%(12)|
|Darwin Precisions Corporation||Manufacturing, design and sales of TFT-LCD modules, TV set, backlight modules and related parts||ROC||41.05%(13)|
|Edgetech Data Technologies (Suzhou) Corp., Ltd.||Design and sales of software and hardware integration system and equipment relating to intelligent manufacturing||PRC||100.00%(2)|
|Forefront Corporation||Holding company||Mauritius||100.00%(11)|
|Forhouse Electronics (Suzhou) Co., Ltd.||Manufacturing of motorized treadmills||PRC||100.00%(14)|
|Forhouse International Holding Ltd.||Holding company||BVI||100.00%(11)|
|Fortech Electronics (Kunshan) Co., Ltd.||Manufacturing and sales of backlight modules and related parts||PRC||100.00%(15)|
|Fortech Electronics (Suzhou) Co., Ltd.||Manufacturing and sales of backlight modules and related parts||PRC||100.00%(16)|
|Fortech International Corp.||Holding company||Mauritius||100.00%(17)|
|Forward Optronics International Corp.||Holding company||Samoa||100.00%(17)|
|JohnRyan Inc.||Development and sales of content management system and sales of related hardware||United States||100.00%(21)|
|JohnRyan Limited||Development and sales of content management system and sales of related hardware|| |
|Konly Venture Corp.||Venture capital investment||ROC||100.00%|
|Mega Insight Smart Manufacturing (Suzhou) Corp., Ltd.||Development and licensing of software relating to intelligent manufacturing, and related consulting services||PRC||100.00%(2)|
|M.Setek Co., Ltd.||Manufacturing and sales of ingots||Japan||99.9991%(18)|
|Prime Forward International Ltd.||Holding company||Samoa||100.00%(17)|
|Ronly Venture Corp.||Venture capital investment||ROC||100.00%|
|Sanda Materials Corporation||Holding company||ROC||100.00%(3)|
|Space Money Inc.||Sales and leasing of content management system and hardware||ROC||100.00%|
|Suzhou Forplax Optronics Co., Ltd.||Manufacturing and sales of precision plastic parts||PRC||100.00%(19)|
|U-Fresh Technology Inc.||Planning, design and development of construction for environmental protection and related project management||ROC||100.00%|
|U-Fresh Technology (Suzhou) Co., Ltd.||Planning, design and development of construction project for environmental protection and related project management||PRC||100.00%(2)|
|U-Fresh Environmental Technology (Shandong) Co., Ltd.||Planning, design and development of construction project for environmental protection and related project management||PRC||100.00%(4)|
|(1)||Indirectly, through our 100.00% ownership of AU Optronics (L) Corp.|
|(2)||Indirectly, through our 100.00% ownership of AU Optronics (Shanghai) Co., Ltd.|
|(3)||Indirectly, through our 100.00% ownership of AUO Crystal Corp.|
|(4)||Indirectly, through our 100.00% ownership of U-Fresh Technology (Suzhou) Co., Ltd.|
|(5)||Indirectly, through our 100.00% ownership of AU Optronics Singapore Pte. Ltd.|
|(6)||Indirectly, through our 100.00% ownership of BriView (L) Corp.|
|(7)||70.29% held indirectly through AU Optronics (L) Corp. and 29.71% held indirectly through Darwin Precisions Corporation, respectively.|
|(8)||Indirectly, through our 100.00% ownership of AU Optronics (Xiamen) Corp.|
|(9)||Indirectly, through our 100.00% ownership of ComQi Ltd.|
|(10)||Indirectly, through our 100.00% ownership of Darwin Precisions (L) Corp.|
|(11)||Indirectly, through our 41.05% ownership of Darwin Precisions Corporation.|
|(12)||Indirectly, through our 100.00% ownership of Darwin Precisions (Hong Kong) Limited.|
|(13)||28.56% held directly by AU Optronics Corp., 6.40% held indirectly by Konly Venture Corp. and 6.09% held indirectly by Ronly Venture Corp., respectively.|
(14) Indirectly, through our 100.00% ownership of Forefront Corporation.
(15) Indirectly, through our 100.00% ownership of Prime Forward International Ltd.
(16) Indirectly, through our 100.00% ownership of Fortech International Corp.
(17) Indirectly, through our 100.00% ownership of Forhouse International Holding Ltd.
(18) Indirectly, through our 100.00% ownership of Sanda Materials Corporation.
|(19)||65.52% held indirectly through Forward Optronics International Corp. and 34.48% held indirectly through Fortech International Corp., respectively.|
(20) Indirectly, through our 100.00% ownership of ComQi Holdings Ltd.
(21) Indirectly, through our 100.00% ownership of ComQi Inc.
As of December 31, 2019, we had a monthly capacity to produce approximately 2.5 to 2.9 million square meters of glass area of TFT-LCD panels. The capacity may be subject to change due to factors such as product mix, technological changes and production efficiency improvement.
As of February 29, 2020, our principal manufacturing sites were located in Taiwan, the PRC, Europe and Singapore. The following table sets forth certain information relating to our principal facilities as of February 29, 2020. The land in the Hsinchu Science Park, Lungke Science Park and Central Taiwan Science Park on which our facilities are located is leased from the ROC government. The land in Xiamen Torch Hi-tech Industrial Development Zone, Kunshan Economic and Technical Development Zone and Suzhou Industrial Park, on which our facilities are located, is leased from the PRC government.
|36, Keji 1st Rd., Tainan Technology Industrial Park, Annan Dist., Tainan City 70955, Taiwan, ROC|| |
|July 2002||Manufacturing of color filters|| |
· Building is owned
· Land is owned
|C5E||9, Luke 3rd Rd., Kaohsiung Science Park, Luzhu Dist., Kaohsiung City 82151, Taiwan, ROC||96,576||5|| |
|July 2008||Manufacturing of color filters|| |
· Building is owned
· Land is leased (expires in January 2028)
|L3C||No. 23, Li-Hsin Rd., |
|105,127||3.5||600x720||July 1999||Manufacturing of TFT-LCD panels|| |
· Building is owned
· Land is leased (expires in January 2037)
|No. 189, Hwaya Rd. 2, Kueishan Hwaya |
Kueishan Dist., Taoyuan 33383,
|Manufacturing of TFT-LCD panels|| |
· Building is owned
· Land is owned
|No. 1, Xinhe Rd., |
Taoyuan 32543, Taiwan, ROC
|Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters|| |
· Building is owned
· Land is owned
|L4B||10 Tampines |
Industrial Avenue 3,
|183,341||4.5||730x920||August 2002||Manufacturing of TFT-LCD panels|| |
· Building is owned
· Land is leased (expires in May 2031)
|No. 1, JhongKe Rd., |
Science Park, Xitun Dist.,
Taichung 40763, Taiwan, ROC
Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters
· Building is owned
· Land is leased (expires in December 2022)
|L6B||No. 228, Lungke St., Lungke |
Lungtan Dist., Taoyuan 32542, Taiwan, ROC
|867,955||6||1,500x1,850||August 2005||Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters|| |
· Building is owned
· Land is leased (expires in December 2027)
No. 6, LongTeng
Kunshan Economic and Technical Development Zone, Kunshan, the PRC
|598,299||6||1,500x1,850||November 2016||Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters|| |
· Building is owned
· Land is leased (expires in 2060)
|L8B||No. 1, Machang Rd., |
|587,746||8.5||2,200x2,500||June 2011||Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters|| |
· Building is owned
· Land is leased (expires in December 2025)
|Module S01, S02, S06||No. 398, |
Suhong Zhong Road,
Suzhou, the PRC
|413,035||N/A||N/A||July 2002||TFT-LCD module and component assembly|| |
· Building is owned
· Land is leased (expires in 2054)
|Module S11, S16, S17||No. 1689, North of XiangAn Rd., |
Torch Hi-tech Industrial Development Zone, Xiamen, the PRC
|289,744||N/A||N/A||April 2007||TFT-LCD module and component assembly|| |
· Building is owned
· Land is leased (expires in 2056)
As of December 31, 2019, our energy business had the capacity of producing 400 megawatts of solar modules per year, 37 million pieces of wafer per month, and 620 tons of ingot per month. The actual shipment may be subject to market conditions, customer demand and capacity outsourcing.
As of February 29, 2020, our principal manufacturing sites for our energy business were located in Taiwan, Japan, Europe and Malaysia. The following table sets forth certain information relating to our principal facilities for our energy business as of February 29, 2020.
|(in square |
No. 1, JhongKe Rd.,
|Manufacturing of solar cells and modules|| |
· Building is owned
· Land is leased (expires in December 2022)
No. 2, Jian 7th Rd.,
|19,888||October 2011||Production of ingots|| |
· Building is owned
· Land is leased (expires in July 2027)
|No. 335, sec. 2, |
Houke Rd., Houli Dist.,
|77,617||June 2012||Production of ingots and wafers|| |
· Building is owned
· Land is leased (expires in December 2030)
|(in square |
Kochi Site 1:
Kochi Site 2:
Susaki-shi, Kochi-ken, Japan
Kochi Site 1 and
Kochi Site 2)
Kochi Site 1:
Kochi Site 2:
Production of ingots
· Building is owned
· Land is owned
|Melaka World Solar Valley, 78000 Alor Gajah, Melaka, Malaysia||7,153||March 2011||Production of wafers|| |
· Building is leased
· Land is leased
|Shared the same facility with L6A, L5C, L7A, L7B and L8A fabs.|
In order to sustain our long-term profit model, we have invested in capacity expansion, new facilities and technology upgrades for manufacturing competitive products to differentiate ourselves from our competitors.
Set forth below is the description of our principal expansion projects:
8.5-Generation Capacity Expansion. To cater to the expected strong demand in large-size panels of televisions, we added 27 thousand substrates per month of capacity at our 8.5-generation facilities in Houli District, Taichung City in 2018. The expanded capacity was fully ramped up in the third quarter of 2018.
We estimate our capital expenditures in 2020 to be around NT$20.0 billion for purposes of operational maintenance and technology upgrades. Our principal sources of funds include cash on hand, cash flow from operations and financing activities, for instance the issuance of equity securities, long-term borrowings, and the issuance of convertible and other debt securities. For further descriptions with regard to our capital expenditures and source of funding, see “Item 5. Operating and Financial Review and Prospects—5.B.—Liquidity and Capital Resources—Capital Expenditures.”
|ITEM 4A.||UNRESOLVED STAFF COMMENTS|
|ITEM 5.||OPERATING AND FINANCIAL REVIEW AND PROSPECTS|
The following discussion should be read in conjunction with our audited consolidated financial statements and their accompanying notes included elsewhere herein which are prepared in accordance with IFRS.
Our operating results are affected by a number of factors, principally by general market conditions, operating efficiency and product mix.
General Market Conditions
The display panel industry in general has been characterized by cyclical market conditions. From time to time, the industry has experienced imbalances between excess supply and slowdowns in demand, and in certain periods, resulting in declines in selling prices. Our revenues primarily depend on the average selling prices and shipment volume of our panels and are affected by fluctuations in those prices and volumes.
The prices and shipment volume of our panels are affected by numerous factors, such as raw material costs, yield rates, supply and demand, competition, our pricing strategies and transportation costs. It is expected that the demand for panels is likely to continue to grow mainly driven by a shift towards larger screen and higher resolution products and the replacement cycle of TVs. However, there is still a lack of visibility into future demand and the outlook of the display industry remains highly uncertain. We expect selling prices of panels will fluctuate from time to time due to the changes of general market conditions and the global economy.
To meet a potential future increase in demand, many display panel manufacturers, including our company, may expand capacity. If such expansion in capacity is not matched by a comparable increase in demand, it could lead to overcapacity and declines in the selling prices of panels in the future. In addition, we expect that, as is typical in the display panel industry, the selling prices for our existing product lines will gradually decrease as the cost of manufacturing display panels declines. However, the impact of such decreases may be offset through the introduction of new products and cost control.
The demand for our solar products also highly depends on the general economic conditions in our target markets. The solar industry has undergone challenging business conditions in the recent years, including downward pricing pressure for solar modules, solar cells, solar wafers and ingots mainly as a result of oversupply, and the fluctuations in demand mainly due to reductions in applicable governmental subsidies.
In the past year, the United States, Europe, China, Japan and India remain the primary markets of solar products. In the meantime, other emerging markets have gradually become the growth engine of the industry. In September 2018, the European Union ended the Minimum Import Price policy that imposed a minimum import price and import volume restrictions on PRC solar manufacturers. We believe this policy shift will increase import demand for crystalline solar cells and modules in the European market.
Our results of operations have been affected by our operating efficiency. Our operating efficiency is impacted by production yield, cycle time, capacity utilization, production capacity and other factors.
Our manufacturing processes are highly complex and require advanced and costly equipment. In order to maintain our competitiveness and to meet customer demand, we must routinely upgrade our equipment. Upgrades and implementing new equipment to improve production yields and production efficiency takes time and training and may require adjustments to the manufacturing process. In addition, certain of our customers have different specification requirements than other customers. Specification requests may also require adjustments to or the use of different manufacturing processes which may accelerate or delay production. The turnaround time for production and our capacity utilization is also impacted by the availability of raw materials and components as well as the level of demand for our products.
We measure the capacity of a fab in terms of the number of substrates and the glass area of substrates that can be produced. As of December 31, 2019, we had a monthly capacity to produce approximately 2.5 to 2.9 million square meters of glass area of TFT-LCD panels. Our production capacity has been affected by the process of construction and the schedule of commencement of operation of our fabs. Once the design of a new fab is completed, it typically takes six to eight quarters before the fab commences commercial production, during which time we construct the building, install the machinery and equipment and conduct trial production at the fab. An additional two to four quarters are required for the fab to be in a position to produce at the installed capacity and with high production yield, where production yield is the number of good panels produced expressed as a percentage of the total number of panels produced. This process is commonly referred to as “ramp-up.” At the beginning of the ramp-up process, fixed costs, such as depreciation and amortization, other overhead expenses, labor, general and administrative and other expenses, are relatively high on a per panel basis, primarily due to the low output. Variable costs, particularly raw materials and component costs, are also relatively high on a per panel basis since production yield is typically low in the early stages of the ramp-up of a fab, resulting in greater waste of raw materials and components. In general, upon the completion of the ramp-up process, a fab is capable of producing at its installed capacity, leading to lower fixed costs per panel as a result of higher output, as well as lower raw material and component costs per panel as a result of higher production yield. We typically construct our new fabs in phases in order to allocate our aggregate capital expenditure across a greater period of time. As a result, the installed capacity in the early phases of production at a new fab is typically lower than the maximum capacity that can be installed at a fab.
Our product mix affects our sales and profitability, as the prices and costs of different size panels may vary significantly. Our product mix also affects the overall average selling prices of our products. In general, higher-valued products, such as higher-resolution panels, typically command higher average selling prices. If the percentage of sales in higher-valued products as a percentage of our net revenue increases, the overall average selling prices for all of our display products may likely improve. Moreover, higher-selling prices are typically associated with new products and technologies when they are first introduced into the market, thus our ability to introduce and sell new products that offset the anticipated fluctuation and long-term declines in the selling prices of our existing products is also one of the most important factors to maintain or increase our revenues. We periodically review and adjust our product mix based on the demand for and profitability of the different panel that we manufacture.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations contained elsewhere in this annual report are based on our audited consolidated financial statements which have been prepared in accordance with IFRS. Our reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements. We base our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an ongoing basis, our management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in detail in Note 5 to our consolidated financial statements included elsewhere herein. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition (policy applicable before January 1, 2018)
Revenue is recognized when title to the products and risk of ownership are transferred to the customers. We continuously evaluate whether our products meet our inspection standards and can reliably estimate sales returns expected to result from customer inspections. Allowance and related provisions for sales returns and discounts are estimated on the basis of historical experience, our management’s judgment and any known factors that would significantly affect such allowance. Such provisions are deducted from sales in the same period during which the related revenue is recognized. There was no change in this policy in 2017.
The following table sets forth the movement of the allowance for sales returns and discounts for the period indicated (1):
|Balance beginning of year||853,614|
|Provision charged to revenue||1,926,017|
|Balance at end of year||1,337,076|
|(1)||We have adopted IFRS 15, Revenue from Contracts with Customers, starting from January 1, 2018. Refer to Note 5 to our consolidated financial statements included elsewhere in this annual report.|
Revenue from Contracts with Customers (policy applicable from January 1, 2018)
Revenue is measured based on the consideration that we expect to be entitled to during the transfer of goods or services to a customer. We recognize revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. We estimate the amount of variable consideration by using either (i) the expected value or the most likely amount based on historical experience, market and economic situation and (ii) any known factors that would significantly affect the estimates. The amount of variable consideration is recognized as a reduction of revenue in the same period as the related revenue is recognized. We periodically review the reasonableness of the estimated variable consideration. However, the adequacy of estimations may be affected by factors such as market price competition and the evolution of product technology, which could result in significant adjustments to the variable consideration.
Loss Allowance for Accounts Receivables
We periodically evaluate our outstanding accounts receivables for collectability purposes on an individual and a collective basis. We first assess whether objective evidence of impairment exists for outstanding accounts receivables that are individually significant. If there is objective evidence indicating that an impairment loss has occurred, the amount of impairment loss is assessed individually. For accounts receivables other than those aforementioned, we group those assets and assess their impairment collectively. Our evaluation on a collective basis includes an analysis of the number of days outstanding for each outstanding accounts receivable account. When appropriate, we provide a provision that is based on the number of days for which the account has been outstanding. The provision provided on each aged account is primarily based on our average historical collection experience and current trends in the credit quality of our customers. We also carry accounts receivable insurance for potential defaults. There was no change in this policy in 2017.
Applicable from January 1, 2018, a new “expected credit loss” model under IFRS 9 is used to measure the impairment of financial assets, which replaces the “incurred loss” model in IAS 39. The expected credit loss is the weighted average of credit losses with the respective risks of a default occurring on the financial instrument as the weights. The Company measures loss allowances for accounts receivable at an amount equal to lifetime expected credit losses. The recognition or reversal of the loss allowance is recognized in profit or loss.
Provisions of Warranty Obligations
We make a provision for warranty obligations based on the estimated costs that we expect to incur. These liabilities are accrued when product revenue is recognized. We make the provisions based on the quantities within the warranty period, the historical and anticipated warranty claims rate associated with similar products and services, and the projected unit cost of maintenance. We regularly review the basis of the accrual and, if necessary, amend it as appropriate at the end of reporting period. There could be a significant impact on provisions for warranty obligations for any changes of the basis of the accrual. We recognized provisions for warranty obligations amounting to NT$1,463.9 million and NT$1,292.2 million (US$43.2 million) as of December 31, 2018 and 2019, respectively.
Realization of Inventory
Provisions for inventory obsolescence and devaluation are recorded when we determine that the amounts expected to be realized are less than their cost basis or when we determine that inventories cannot be liquidated, which may be affected by their prevailing market price and the number of months in which inventory items remain unsold. Additionally, our analysis of the amount we expect to realize ultimately is based in part on demand forecasts of our products and relevant adjustments to such forecasts. This policy has not changed for the last three years.
Inventory write-downs to net realizable value, which are charged to cost of sales, were NT$3,756.7 million, NT$5,171.8 million and NT$5,185.5 million (US$173.4 million) for the years ended December 31, 2017, 2018 and 2019, respectively. The larger provisions made in 2018 and 2019 were mainly due to the sharply decreased panel price of many products resulting from an oversupply market condition.
Recoverability of Long-Lived Assets, Excluding Goodwill
Our long-lived assets include property, plant and equipment, right-of-use assets and intangible assets. We assess the impairment of long-lived assets at the reporting date or whenever triggering events or changes in circumstances indicate that the asset may be impaired and carrying value may not be recoverable. If any such indication of impairment exists, then the recoverable amount of the relevant asset or cash-generating unit (“CGU”) is estimated. Recoverable amount is defined as the higher of (a) the fair value of an asset or a CGU less costs of disposal (if determinable) or (b) its “value in use,” which is defined as the present value of the expected future cash flows generated by the asset or CGU. An impairment loss is recognized in the consolidated statement of comprehensive income if the carrying amount of an asset or its related CGU exceeds its estimated recoverable amount.
The process of evaluating the potential impairment of long-lived assets requires significant judgment. Our present value of the expected future cash flows is determined on forecasted revenue, discount rate and other relevant factors. Due to the cyclical nature of our industry and changes in our business strategy, market requirements or the needs of our customers, if our estimates of future operating results change, or if there are changes to other assumptions, the estimate of the recoverable amounts of long-lived assets could change significantly. Such change could result in impairment charges in future periods, which could have a significant impact on our consolidated financial statements.
The solar industry has experienced significant fluctuations with oversupply capacity worldwide resulting in lower capacity utilization. Therefore, we performed an impairment assessment on ACTW and its subsidiaries, as a CGU, over its long-term assets in 2019 with the recoverable amount determined based on its value in use. Based on the assessment, the carrying amount of the CGU was determined to be higher than its estimated recoverable amount; consequently, we recognized an impairment loss of NT$2,232.7 million (US$74.6 million) in 2019. The estimated recoverable amount was calculated by pre-tax discount rate of 10.63%.
In addition, in 2017, 2018 and 2019, we wrote down certain long-term assets with extremely low capacity utilization associated with our energy segment and recognized impairment losses of NT$120.7 million, NT$399.4 million and NT$14.9 million (US$0.5 million), respectively.
In 2017 and 2019, we wrote down certain long-term assets with extremely low capacity utilization associated with our display segment and recognized impairment losses of NT$896.0 million and NT$52.8 million (US$1.8 million), respectively.
Recoverability of Goodwill
Goodwill is recognized when the purchase price exceeds the fair value of identifiable net assets acquired in a business combination. We assess the impairment of goodwill on an annual basis, or more frequently when there is an indication that goodwill may be impaired. For the purpose of impairment test, goodwill acquired in a business combination is allocated to CGUs that are expected to benefit from the synergies of the combination. If the recoverable amount of a CGU is less than its carrying amount, the difference is allocated first to reduce the carrying amount of any goodwill allocated to the unit, then the carrying amounts of the other assets in the unit on a pro rata basis. The impairment loss recognized on goodwill is not reversed in a subsequent period.
Based on the impairment assessments for the years ended December 31, 2018 and 2019, no impairment loss on goodwill was recognized as the recoverable amount of the CGU was higher than its carrying amount.
Investments in Equity-Accounted Investees
When we have the ability to exercise significant influence over the operating and financial policies of investees, or when we have contractual arrangements with other parties sharing equal control over the arrangements, and have rights to the net assets of the arrangements, those investments are accounted for using the equity method. Significant judgment is required to assess whether we have significant influence. Factors that we consider in making such judgment include, among other matters, participation in policymaking processes, material intercompany transactions, interchange of managerial personnel or technological dependency.
The difference between the acquisition cost and the carrying amount of net equity of the investee as of the acquisition date is allocated based upon the pro rata excess of fair value over the carrying value of noncurrent assets. Any unallocated difference is treated as goodwill. Under IFRS, such difference is not amortized, but the carrying value of the total investment is assessed for impairment. The allocation of excess basis in equity-accounted investments requires the use of judgments regarding, among other matters, the fair value and estimated useful lives of long-lived assets. Changes in those judgments would affect the amount and timing of amounts charged to our consolidated statements of comprehensive income.
An investment in an equity-accounted investee is considered to be impaired if there is objective evidence of impairment as a result of one or more events that had occurred as of the reporting date indicating that the recoverable amount is below the carrying amount of the investment. Impairment is assessed at the individual security level. The recoverable amount is determined based on one of the two following approaches: (1) the discounted expected future net cash flows from the investee company; or (2) the combination of expected cash dividends from the investee company and the discounted cash flows from the ultimate disposal of the investment. The impairment loss is recorded in the consolidated statement of comprehensive income. If the recoverable amount increases in the future period, the amount previously recognized as impairment loss could be reversed and recognized as a gain.
In 2017, 2018 and 2019, we did not recognize any impairment loss on our investments in equity-accounted investees.
Income Taxes Uncertainties and Recognition of Deferred Taxes
We are subject to the continuous examination of our income tax returns by the tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. A change in the outcome of the assessment could materially affect our consolidated financial statements.
We have recognized deferred tax assets for the carryforward of unused tax losses and unused tax investment credits to the extent that it is probable that sufficient taxable profits will be available against which the deferred tax assets can be utilized. At the annual reporting date, the deferred tax assets are reviewed for recoverability and reduced to the extent that it is no longer probable that the related tax benefit will be realized, by considering nature of industry cycles, projected future taxable income and expiration years of unused tax losses carryforwards and tax investment credits. As of December 31, 2018 and 2019, our unrecognized deferred tax assets were NT$32,190.3 million and NT$37,046.5 million (US$1,238.6 million), respectively. Besides, we also have unrecognized deferred tax liabilities associated with investments in subsidiaries amounting to NT$277.7 million (US$9.3 million) as of December 31, 2019.
The amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carryforwards or reversal periods are reduced.
From time to time, we are involved in disputes that arise in the ordinary course of business, and we do not expect this to change in the future. We are currently involved in certain legal proceedings as discussed in “Item 8. Financial Information—Item 8.A.7. Litigation.”
When we determine it is more likely than not our defense in a legal claim will be unsuccessful and therefore it is also more likely than not it will result in an outflow of our resources, and our management can reasonably estimate the amount or range of such outflow, we make appropriate provisions in our consolidated financial statements. In making this assessment we consider factors such as the nature of the litigation or claims, the materiality of the amount of possible loss, the progress of the case and the opinions or views of legal counsel and other advisors. In determining the appropriate amount of the provision to be recognized, we develop an estimated amount or range of such loss. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, we use the midpoint of the range to measure and recognize the provision. Such estimates are based on our assessment of the facts and circumstances at each reporting date and are subject to change based upon new information and intervening events. We had provisions for litigation and claims amounting to NT$431.2 million and NT$152.3 million (US$5.1 million) in the consolidated statements of financial position as of December 31, 2018 and 2019, respectively. See Note 25 and Note 45 to our consolidated financial statements included elsewhere in this annual report. However, our actual liability may be materially different from the estimates as of December 31, 2019 and may have a material adverse effect on our operating results, cash flows or financial condition.
Measurement of Defined Benefit Obligations
We use the Projected Unit Credit Cost Method for accrued pension liabilities and the resulting pension expenses under defined benefit pension plans. Actuarial assumptions comprise the discount rate, rate of employee turnover, and long-term average future salary increase, etc. The discount rate is determined by reference to the yield rate on the ROC government bonds at the reporting date. Changes in economic circumstances and market conditions will affect these assumptions and may have a material impact on the amount of the expense and the liability. As of December 31, 2018 and 2019, the accrued pension liabilities for our defined benefit obligations were NT$890.7 million and NT$613.2 million (US$20.5 million), respectively.
Consolidated Results of Operations
The following table sets forth certain information of our results of operations, in both monetary amounts and as a percentage of our net revenue for the periods indicated:
|Year Ended December 31,|
|(in millions, except for percentages)|
|Cost of sales||(279,986.6||)||(82.1||)||(279,494.9||)||(90.9||)||(268,335.8||)||(8,971.4||)||(99.8||)|
|Selling and distribution expenses||(3,889.0||)||(1.1||)||(3,946.5||)||(1.3||)||(3,751.1||)||(125.4||)||(1.4||)|
|General and administrative expenses||(8,158.9||)||(2.4||)||(7,978.3||)||(2.6||)||(7,363.2||)||(246.2||)||(2.7||)|
|Research and development expenses||(9,854.7||)||(2.9||)||(9,546.8||)||(3.1||)||(9,809.6||)||(328.0||)||(3.7||)|
|Other gains and losses||(976.5||)||(0.3||)||1,488.1||0.5||(1,595.6||)||(53.3||)||(0.6||)|
|Share of profit of equity-accounted investees||239.0||0.1||311.7||0.1||149.9||5.0||0.0|
|Profit (loss) before income tax||39,363.6||11.6||11,216.2||3.6||(19,844.8||)||(663.5||)||(7.4||)|
|Income tax expense (benefit)||(1,125.2||)||(0.3||)||322.4||0.1||1,336.1||44.7||0.5|
|Profit (loss) for the year||40,488.8||11.9||10,893.8||3.5||(21,180.9||)||(708.2||)||(7.9||)|
|Other comprehensive loss for the year, net of taxes||(818.9||)||(0.3||)||(1,383.8||)||(0.4||)||(1,411.8||)||(47.2||)||(0.5||)|
|Total comprehensive income (loss) for the year||39,669.9||11.6||9,510.0||3.1||(22,592.7||)||(755.4||)||(8.4||)|
In 2019, the average selling price of our panels had continued to fall as an increase in the production capacity of the industry led to an oversupply of panels. As a result, our gross margin decreased by 8.9% compared to 2018. In addition, an asset impairment associated with our energy business occurred in 2019 further decreasing our net margin. Therefore, in comparison to 2018, our net margin decreased by 11.4%.
In 2018, the average selling price of our panels had dropped considerably due to the expectation of an oversupply of panels. As a result, our gross margin and net margin decreased by 8.8% and 8.4% compared to 2017, respectively.
For the Years Ended December 31, 2019 and 2018
Net revenue decreased 12.6% to NT$268,791.7 million (US$8,986.7 million) in 2019 from NT$307,634.4 million in 2018.
Net revenue of large-size panels decreased 13.7% to NT$199,945.5 million (US$6,684.9 million) in 2019 from NT$231,564.7 million in 2018 primarily due to the continuing decline in average selling price resulting from an oversupply of panels.
Net revenue of small- to medium-size panels decreased 5.3% to NT$46,118.7 million (US$1,541.9 million) in 2019 from NT$48,719.1 million in 2018 mainly due to decreases in panel shipments.
Cost of sales
Cost of sales consisted primarily of raw material and component costs, direct labor costs and overhead expenses, which include depreciation expenses, maintenance expenses of production equipment, indirect labor costs, indirect material costs, utilities and supplies.
Cost of sales decreased 4.0% from NT$279,494.9 million in 2018 to NT$268,335.8 million (US$8,971.4 million) in 2019 primarily due to decreases in panel shipments overall in 2019 compared to 2018 and continued effort in cost control. However, the decrease in average selling price outpaced the decrease in cost of sales per panel. Therefore, as a percentage of net revenue, our cost of sales increased from 90.9% in 2018 to 99.8% in 2019.
Gross profit was NT$455.9 million (US$15.3 million) in 2019 compared to gross profit of NT$28,139.5 million in 2018. Gross margin mainly fluctuates, among other factors, with our capacity utilization rate, the yield rate of our products, market price change of our products and our product mix. Due to an increase in the production capacity of the industry, there was a downward pricing trend of panels, which resulted in a lower gross margin of 0.2% in 2019 compared with 9.1% in 2018.
Selling and Distribution Expenses
Selling and distribution expenses decreased 5.0% to NT$3,751.1 million (US$125.4 million) in 2019 from NT$3,946.5 million in 2018. The lower expenses in 2019 were mainly due to lower shipping costs resulting from a decrease in panel shipments overall in 2019 compared to 2018. However, due to a decrease in net revenue, as a percentage of net revenue, selling and distribution expenses increased to 1.4% in 2019 from 1.3% in 2018.
General and Administrative Expenses
General and administrative expenses decreased 7.7% to NT$7,363.2 million (US$246.2 million) in 2019 from NT$7,978.3 million in 2018. The decrease in 2019 was mainly due to a decrease in our personnel expenses as well as a lower depreciation expense resulting from a disposal of buildings in Slovakia in late 2018. However, due to a decrease in net revenue, as a percentage of net revenues, general and administrative expenses increased to 2.7% in 2019 from 2.6% in 2018.
Research and Development Expenses
Research and development expenses increased 2.8% to NT$9,809.6 million (US$328.0 million) in 2019 from NT$9,546.8 million in 2018. The increase in 2019 was primarily due to increases in purchase of tools and materials used for our research and development activities, which were partially offset by a decrease in our personnel expenses. As a percentage of net revenue, research and development expenses increased to 3.7% in 2019 from 3.1% in 2018.
Other Gains and Losses
Other gains and losses primarily include gains or losses on disposal of assets, impairment loss on assets, foreign exchange gains or losses, gains or losses on valuation of financial assets and liabilities measured at fair value through profit or loss and others. We had a total net other loss of NT$1,595.6 million (US$53.3 million) in 2019 and a total net other gain of NT$1,488.1 million in 2018. The total net other gain in 2018 was primarily attributable to the disposal gain of land and buildings from our subsidiaries. Apart from the aforementioned effect, the total net other loss in 2019 was primarily due to an asset impairment recognized associated with our energy business in 2019.
Finance costs consist of interest expenses, which have been primarily attributable to our bank loans. Finance costs increased 22.1% to NT$3,251.4 million (US$108.7 million) in 2019 from NT$2,663.6 million in 2018, primarily due to more bank borrowings in 2019 compared to 2018.
Income Tax Expense
Income tax expense increased to NT$1,336.1 million (US$44.7 million) in 2019 from NT$322.4 million in 2018, primarily due to an increase in unrecognized deferred tax assets in 2019 compared to 2018, which reflected changes in estimates of the recoverability of deferred tax assets. Owing to the fact that we had a net loss before income tax in 2019, our effective tax rate was negative 6.73% in 2019 compared to 2.87% in 2018.
Net Profit (loss) for the Year
As a result of the foregoing, we had a consolidated net loss of NT$21,180.9 million (US$708.2 million) in 2019 compared to a consolidated net profit of NT$10,893.8 million in 2018. Also, we had a net loss attributable to owners of our company of NT$18,767.2 million (US$627.5 million) in 2019 compared to a net profit of NT$13,071.6 million in 2018, with a basic loss per share of NT$1.96 (US$0.07) in 2019 compared to a basic earnings per share of NT$1.36 in 2018.
For the Years Ended December 31, 2018 and 2017
Net revenue decreased 9.8% to NT$307,634.4 million in 2018 from NT$341,028.3 million in 2017.
Net revenue of large-size panels decreased 12.4% to NT$231,564.7 million in 2018 from NT$264,203.5 million in 2017 primarily due to the decrease in average selling price resulting from the expectation of an oversupply of panels.
Net revenue of small- to medium-size panels slightly increased 0.9% to NT$48,719.1 million in 2018 from NT$48,277.9 million in 2017 due to a change in our product mix, despite a decline in the average selling price.
Cost of sales
Cost of sales consisted primarily of raw material and component costs, direct labor costs and overhead expenses, which include depreciation expenses, maintenance expenses of production equipment, indirect labor costs, indirect material costs, utilities and supplies.
Despite an increase in the amount of panels shipped, our cost of sales slightly decreased 0.2% from NT$279,986.6 million in 2017 to NT$279,494.9 million in 2018. The decrease in cost of sales was primarily due to a decline in our personnel expenses and depreciation expenses. However, the decrease in average selling price outpaced the decrease in cost of sales per panel. Therefore, as a percentage of net revenue, our cost of sales increased from 82.1% in 2017 to 90.9% in 2018.
Gross profit was NT$28,139.5 million in 2018 compared to gross profit of NT$61,041.7 million in 2017. Gross margin mainly fluctuates, among other factors, with our capacity utilization rate, the yield rate of our products, market price change of our products and our product mix. Due to the expectation of an oversupply of panels, there was a decrease in the average selling price, which resulted in a lower gross margin of 9.1% in 2018 compared with 17.9% in 2017.
Selling and Distribution Expenses
Selling and distribution expenses increased 1.5% to NT$3,946.5 million in 2018 from NT$3,889.0 million in 2017. As a percentage of net revenue, selling and distribution expenses increased to 1.3% in 2018 from 1.1% in 2017. The slight increase was primarily due to an increase in shipping costs, which was partially offset by a decrease in our personnel expenses.
General and Administrative Expenses
General and administrative expenses decreased 2.2% to NT$7,978.3 million in 2018 from NT$8,158.9 million in 2017. The decrease was mainly due to decreased personnel expenses and bank charge expenses. As a percentage of net revenues, general and administrative expenses increased to 2.6% in 2018 from 2.4% in 2017.
Research and Development Expenses
Research and development expenses decreased 3.1% to NT$9,546.8 million in 2018 from NT$9,854.7 million in 2017. The decrease in 2018 was primarily due to a decline in our personnel expenses and depreciation expenses resulting from the end of useful life for part of our equipment and tools. The aforementioned decrease was partially offset by an increase in our purchase of tools and materials used for our increased research and development activities. As a percentage of net revenue, research and development expenses increased to 3.1% in 2018 from 2.9% in 2017.
Other income primarily included interest income on bank deposits, rental income, interest income on government bonds with reverse repurchase agreements, dividend income and grants, etc. Other income significantly increased to NT$5,412.1 million in 2018 from NT$3,829.9 million in 2017, primarily due to an increase in government grants that our subsidiaries received.
Other Gains and Losses
Other gains and losses primarily include gains or losses on disposal of assets, impairment loss on assets, foreign exchange gains or losses, gains or losses on valuation of financial assets and liabilities measured at fair value through profit or loss and others. We had a total net other gain of NT$1,488.1 million in 2018 and a total net other loss of NT$976.5 million in 2017. The total net other gain in 2018 was primarily due to the disposal gain of land and buildings from our subsidiaries.
Income Tax Expense (Benefit)
We had an income tax expense of NT$322.4 million in 2018 and an income tax benefit of NT$1,125.2 million in 2017. As a result, our effective tax rate was 2.87% in 2018 compared to negative 2.85% in 2017. The income tax benefit in 2017 was primarily due to the recognition of deferred tax assets of NT$3,878.2 million from prior years’ tax losses carried forward, which are expected to be utilized in future period. Excluding the impact of the aforementioned tax benefit in 2017, the income tax expense significantly decreased from NT$2,753.0 million in 2017 to NT$322.4 million in 2018. The decline was primarily due to the decreased surtax on undistributed earnings resulted from the lower profit in 2018 and a decrease in surtax rate from 10% to 5% on undistributed earnings enacted in 2018. Moreover, we had a tax benefit arising from adjustment on deferred tax assets due to the amendment of statutory income tax rate from 17% to 20% enacted in 2018.
Net Profit for the Year
As a result of the foregoing, we had a consolidated net profit of NT$10,893.8 million in 2018 compared to NT$40,488.8 million in 2017. Also, we had a net profit attributable to owners of our company of NT$13,071.6 million in 2018 compared to NT$42,609.5 million in 2017, with a basic earnings per share of NT$1.36 in 2018 compared to NT$4.43 in 2017.
We have two operating segments: display business and energy business. Our management monitors and evaluates the performance of both operating segments based on the information of their revenue and segment profit (loss). Segment profit (loss) represents gross profit (loss) minus selling and distribution expenses, general and administrative expenses and research and development expenses. Segment profit (loss) excludes long-lived asset impairments, gains and losses on disposal of assets, litigation provisions for the display business, foreign currency exchange gains or losses, finance costs, income taxes, share of profit and losses of equity-accounted investees and other miscellaneous income and expenses. The following table sets forth our segments results for the years indicated.
|For the Year Ended December 31|
|Segment profit (loss)|
For the Years Ended December 31, 2019 and 2018
Net revenue from our display business segment decreased 11.7% to NT$256,667.2 million (US$8,581.3 million) in 2019 from NT$290,784.8 million in 2018, primarily due to a decline in the average selling price of our panels owing to an oversupply market condition.
Our segment loss was NT$19,484.4 million (US$651.4 million) in 2019 compared to a segment profit of NT$7,792.5 million in 2018. The segment loss in 2019 was primarily due to decreases in the average selling price of our panels as a result of an oversupply market condition.
For the Years Ended December 31, 2018 and 2017
Net revenue from our display business segment decreased 9.8% to NT$290,784.8 million in 2018 from NT$322,335.4 million in 2017, primarily due to a decline in average selling price of our panels resulting from an expectation of oversupply of panels.
Our segment profit was NT$7,792.5 million in 2018 compared to a segment profit of NT$39,971.4 million in 2017. The decrease in segment profit in 2018 was primarily due to the declining average selling price of our panels that resulted from an expectation of oversupply of panels.
For the Years Ended December 31, 2019 and 2018
Net revenue from our energy business segment decreased 28.0% to NT$12,124.5 million (US$405.4 million) in 2019 from NT$16,849.6 million in 2018. The decrease was primarily due to a downward pricing trend caused by industry oversupply and decreased shipments.
Segment loss decreased to NT$983.6 million (US$32.9 million) in 2019 from NT$1,124.6 million in 2018, primarily due to a favorable change in our product mix and our enhanced cost control in 2019, despite a decline in the selling price of wafers and modules.
For the Years Ended December 31, 2018 and 2017
Net revenue from our energy business segment decreased 9.9% to NT$16,849.6 million in 2018 from NT$18,692.9 million in 2017. The decrease was primarily due to a decline in the average selling price caused by oversupply and weaker demand as a result of reductions in applicable governmental subsidies received by our customers.
Segment loss increased to NT$1,124.6 million in 2018 from NT$832.3 million in 2017, primarily due to a downward pricing trend.
We do not believe that inflation in any of our key markets has had a material impact on our results of operations in 2019. However, we cannot provide assurance that significant variations in the nature, extent or scope of inflation within any of our key markets in the future would not have a material impact on our results of operations.
The corporate income tax rate in ROC was 17% in 2017 and increased to 20% from the year 2018 due to the amendments to the ROC Income Tax Law, and our subsidiaries outside ROC are subject to their country’s juridical tax rate.
Under regulations promulgated under the ROC Statute for Industrial Innovation, we are eligible to apply a research and development expenditures tax credit (“R&D tax credit”) and invest in a brand-new smart machine tax credit (“Investment tax credit”). For the R&D tax credit, we can select either (i) a one-time tax credit up to 15% of our research and development expenditures for that year or (ii) a tax credit of 10% of our research and development expenditures for three consecutive years. For the investment tax credit, we can select either (i) a one-time tax credit up to 5% of qualified machine expenditures for that year or (ii) a tax credit of 3% of qualified machine expenditures for three consecutive years. The maximum qualified machine expenditures ’cannot exceed NT$1,000 million. Either of the aforesaid tax credits shall not exceed 30% of our corporate income tax payable for that year. If we apply the R&D tax credit and the Investment tax credit at the same time, the tax credits shall not exceed 50% of our corporate income tax payable for that year.
Pursuant to the ROC Income Basic Tax Act, when a taxpayer’s income tax amount is less than the basic tax amount (“BTA”), a taxpayer is required to pay the regular income tax and the difference between the BTA and the regular income tax amount. For enterprises, BTA is determined using regular taxable income plus specific add-back items such as exempt capital gain or loss from securities trading.
We need cash primarily for technology advancement, capacity expansion and working capital. Although we have historically been able to meet our working capital requirements through cash flow from operations, our ability to upgrade our technology and expand our capacity has largely depended upon, and to a certain extent will continue to depend upon, our financing capability through long-term borrowings, the issuance of convertible and other debt securities and the issuance of equity securities. If adequate funds are not available, whether on satisfactory terms or at all, we may be forced to curtail our growth plans, including technology advancements, new capacity and advanced technology fabs. Our ability to meet our working capital needs from cash flow from operations will be affected by our business conditions, which in turn may be affected by several factors. Many of these factors are outside of our control, such as economic downturns and declines in the selling prices of our products caused by oversupply in the market. The selling prices of our existing product lines are reasonably likely to be subject to further downward pressure in the future if oversupply occurs. To the extent that we do not generate sufficient cash flow from our operations to meet our cash requirements, including technology advancement, capacity expansion, working capital, matured debt repayment and any accelerated debt obligations arising from defaults that are not waived by the relevant creditors, we may need to rely on a combination of additional borrowings, equity or debt securities offerings or other forms of capital financing. Other than as described below in “Item 5. Operating and Financial Review and Prospects—Item 5.E—Off-Balance Sheet Arrangements,” we have not historically relied, and we do not plan to rely in the foreseeable future, on off-balance sheet financing arrangements to finance our operations or expansion.
As of December 31, 2019, we had net current assets of NT$52,664.4 million (US$1,760.7 million) as our current assets of NT$143,200.2 million (US$4,787.7 million) exceeded our current liabilities of NT$90,535.8 million (US$3,027.0 million). We expect to meet our present working capital requirements through cash flow from operations, bank loans and borrowings and by financing activities from capital markets from time to time.
As of December 31, 2019, we had cash and cash equivalents of NT$80,449.8 million (US$2,689.7 million). As of December 31, 2019, we had total short-term credit facilities of NT$39,708.3 million (US$1,327.6 million), of which we had borrowed NT$1,725.6 million (US$57.7 million). All of our short-term facilities are revolving with a term of one year, which may be extended for terms of one year each with lender consent. Our repayment obligations under our short-term loans are unsecured. We believe that our existing credit lines under our short-term loans, together with cash generated from our operations, are sufficient to liquidity needs.
We also entered into reverse repurchase agreements with securities firms or banks in Taiwan covering government bonds for short-term yield enhancement purposes. The terms of these reverse repurchase agreements are typically less than one month. As of December 31, 2017, 2018 and 2019, we held government bonds with reverse repurchase agreements in amounts of NT$6,710.3 million, NT$90.0 million and NT$35.0 million (US$1.2 million), respectively; and these bonds yielded interest at rates ranging from 0.24% to 0.65%, and at 0.235% and 0.24%, respectively.
As of December 31, 2019, we had outstanding long-term borrowings of approximately NT$112.2 billion (US$3.8 billion) and unused credit facilities of NT$32.3 billion (US$1.1 billion). The interest rates in respect of these long-term borrowings are variable, and as of December 31, 2019 ranged between 1.00% and 5.43% per year.
Below is a summary of our major outstanding borrowings and loans. Please also see Note 24 to our consolidated financial statements for further information.
|·||In September 2014, we entered into a NT$25.8 billion five-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of repaying existing debts. The agreement for this syndicated facility contains covenants that require us to maintain certain financial ratios. Our obligations under this facility were secured by certain of our building, equipment and machinery. We fully repaid this credit facility in February 2019.|
|·||In May 2015, our subsidiary AU Optronics (Kunshan) Co., Ltd. (“AUKS”) entered into an RMB3,985 million and US$326 million eight-year syndicated credit facility, for which the Bank of China (Suzhou) acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment for our 6-generation LTPS fab in Kunshan, PRC. The agreement for this syndicated facility is guaranteed by AUKS’s shareholders, Kunshan Economic & Technical Development Zone Assets Operation Co., Ltd. and us, in accordance with the shareholding percentages, respectively. Under the guarantee, we are required to maintain certain financial ratios. As of December 31, 2019, RMB5.0 billion (US$718.2 million) was outstanding under this credit facility.|
|·||In September 2015, we entered into a NT$37.5 billion five-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of funding medium-term working capital and repaying existing debts. The agreement for this syndicated facility contains covenants that require us to maintain certain financial ratios. Our obligations under this facility were secured by certain of our building, equipment and machinery. We fully repaid this credit facility in April 2019.|
|·||In February 2016, our subsidiary AUO Crystal Corp. entered into a NT$3.0 billion three-year syndicated credit facility, for which First Commercial Bank acted as the agent bank, for the purpose of repaying AUO Crystal Corp.’s existing loan. The agreement for this syndicated facility contains covenants that require AUO Crystal Corp. to maintain certain financial ratios. AUO Crystal Corp. fully repaid this credit facility in January 2019.|
|·||In November 2016, we entered into a NT$10.0 billion five-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of funding purchase of machinery and equipment for 8.5-generation fab expansion. The agreement for this syndicated facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2019, NT$10.0 billion (US$334.3 million) was outstanding under this credit facility.|
|·||In July 2017, we entered into a NT$23.0 billion five-year syndicated credit facility with a right to extend two years of the loan repayment period based on each bank’s consent, for which the Bank of Taiwan acted as the agent bank, for the purpose of funding purchase of machinery and equipment for 8.5-generation fab expansion. The agreement for this syndicated facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2019, NT$23.0 billion (US$769.0 million) was outstanding under this credit facility.|
|·||In January 2018, our subsidiary AUO Crystal Corp. entered into a NT$3.3 billion five-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of financing capital expenditure needs. The agreement for this syndicated facility contains covenants that require AUO Crystal Corp. to maintain certain financial ratios. The obligations of AUO Crystal Corp. under this credit facility were secured by certain of building, equipment and machinery. AUO Crystal Corp. fully repaid this credit facility in October 2019.|
|·||In June 2018, we entered into a NT$42.0 billion five-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of repaying existing debts. The agreement for this syndicated facility contains covenants that require us to maintain certain financial ratios. Our obligations under this facility are secured by certain building, equipment and machinery. As of December 31, 2019, NT$42.0 billion (US$1,404.2 million) was outstanding under this credit facility.|
The carrying amount of our assets pledged as collateral to secure our obligations under our long-term borrowings, including land, building, machinery and equipment was NT$71.4 billion (US$2,386.9 million) as of December 31, 2019.
Our long-term loans and facilities contain various financial and other covenants that could trigger a requirement for early payment. Among other things, these covenants require the maintenance of certain financial ratios, such as current ratio, leverage ratio, interest coverage ratio, tangible net worth and other technical requirements. In general, covenants in the agreements governing our existing debt, and debt we may incur in the future, may materially restrict our operations, including our ability to incur debt, pay dividends, make certain investments and payments and encumber or dispose of assets. A default under one debt instrument may also trigger cross-defaults under our other debt instruments. An event of default under any debt instrument, if not cured or waived, could have a material adverse effect on our liquidity, as well as our financial condition and operations. See “Item 3. Key Information—3.D. Risk Factors-Risks Relating to Our Business—We must comply with certain financial and other covenants under the terms of our debt instruments, the failure to comply with which may put us in default under those instruments.”
Our principal sources of funds have been historically from long-term borrowings, the issuance of convertible and other debt securities as well as the issuance of equity securities. We believe that our existing cash, cash equivalents, short-term investments, expected cash flow from operations and borrowings under our existing and future credit facilities should be sufficient to meet our present capital expenditure, working capital, cash obligations under our existing debt and lease arrangements and other requirements. From time to time, we frequently need to raise additional capital for the needs of our business growth, including but not limited to, our investment in new capacity and new technologies to improve our economies of scale, reduce our production costs and enrich our product portfolio. However, we cannot assure you that we will be able to raise additional capital should it become necessary on terms acceptable to us or at all. See “Item 3. Key Information—3.D. Risk Factors—Risks Relating to Our Financial Condition, Business and Industry— If capital resources required for our planned growth or development are not available, we may be unable to successfully implement our business strategy.”
Net cash provided by operating activities was NT$84,363.3 million in 2017, NT$40,200.7 million in 2018 and NT$20,730.6 million (US$693.1 million) in 2019. The declining net cash provided by operating activities from 2017 to 2019 was primarily due to decreased cash collections from our ordinary business as a result of decreased net revenue.
Net cash used in investing activities were NT$43,667.5 million in 2017, NT$34,497.8 million in 2018 and NT$28,112.4 million (US$939.9 million) in 2019. Net cash used in investing activities primarily reflected capital expenditures for property, plant and equipment of NT$43,881.7 million in 2017, NT$34,770.3 million in 2018 and NT$29,546.6 million (US$987.9 million) in 2019. These capital expenditures were primarily funded with net cash provided by operating activities and proceeds from long-term bank borrowings.
Net cash used in financing activities was NT$13,410.4 million in 2017, reflecting primarily in the repayment of long-term borrowings for NT$47,443.8 million, partially offset by proceeds from long-term borrowings for NT$34,872.6 million. Net cash used in financing activities was NT$41,846.7 million in 2018, reflecting primarily in the repayment of long-term borrowings for NT$28,736.5 million and payment of cash dividends to our shareholders for NT$14,436.4 million, partially offset by the proceeds from long-term borrowings for NT$4,271.6 million. Net cash provided by financing activities was NT$20,742.1 million (US$693.5 million) in 2019, reflecting primarily in the proceeds from long-term borrowings for NT$79,880.0 million (US$2,670.7 million), partially offset by the repayment of long-term borrowings for NT$53,378.8 million (US$1,784.6 million) and the payment of cash dividends to our shareholders for NT$4,812.1 million (US$160.9 million).
We have made, and expect to continue to make, capital expenditures in connection with technology advancement and the expansion of our production capacity. For the past three years, substantially all of our capital expenditures were invested in facilities located in Taiwan and the PRC.
We are sometimes required to prepay our purchases of equipment. Prepayments for purchases of equipment result from contractual agreements involving down payments to suppliers when the equipment is ordered by us. As of December 31, 2017, 2018 and 2019, prepayments for purchases of equipment were NT$27,646.0 million, NT$6,721.0 million, and NT$5,022.0 million (US$167.9 million), respectively.
Our capital expenditures paid in 2019 were approximately NT$29,546.6 million (US$987.9 million), primarily for the technology upgrades and payments in the capacity expansion at our 8.5-generation fab in Taiwan. Our capital expenditures in 2020 are expected to be approximately NT$20.0 billion, which, depending on cash flow generated from our operations, the progress of our planned growth and market conditions, may be adjusted later. Our capital expenditures in 2020 are planned to be used primarily for operational maintenance and technology upgrades.
Our research and development activities are principally directed toward advancing our technologies in key components, manufacturing processes and product development, with the objective of improving the features of our products and services to bring added value to our customers in addition to design products that meet their specific requirements. We have a product development team dedicated to each of our primary product categories. Each of these teams focuses on the development of our existing and potential new products. In addition, we have several research and development teams to develop new and advanced display technologies, such as curved display, OLED, quantum dot wide color gamut, HDR, bezel-less, touch, 8K4K, Mini LED, Micro LED and other sensor technologies like finger printing. Monetary incentives are provided to our employees if research projects result in successful patents. As of December 31, 2019, we employed approximately 1,756 research and development engineers.
In 2017, we announced and exhibited a series of new developments of advanced display technologies. For example, we enhanced ALCD technology, which can achieve as high as 2000-nit brightness with significantly higher contrast. Its low reflective quality helps to deliver high HDR image quality even in daylight, perfectly capturing both bright and dark image details. By adopting quantum dots high color saturation materials, the display can reveal rich and detailed color depth, with a wide color gamut exceeding NTSC 110% in all environments. We showcased the world’s largest 85-inch 8K4K bezel-less ALCD TV display with a 120Hz high refresh rate to deliver smooth motion flow with impressive image quality. We partnered with NVIDIA, an industry leader in visual computing, to jointly develop NVIDIA G-Sync HDR technology, which improves the contrast and enriches the details of gaming display through advanced HDR technology. We also presented the world’s first 27-inch gaming monitor panel combining a 144Hz refresh rate and UHD 4K ultra-high resolution and applying advanced HDR technology and Adobe RGB 99% high color saturation. We showcased UHD 4K Ultra Narrow Border LTPS notebook panels that integrate on-cell touch function. This display combines an ultra-high resolution, power-saving function and higher touch sensitivity features to provide a richer user experience with more flexibility. We presented a series of Public Information Display (“PID”) Total Solutions, including ultra large 85-inch UHD 4K signage for the outdoors, equipped with 2500-nit ultra-brightness and capability to operate for long periods of time with stability. This also includes stretched type PID from 28.6- to 42-inch that could be installed in semi-outdoor areas; these displays typically function as traffic information displays to provide real-time information and advertisement for passengers. We also presented the 18:9 full screen LTPS in-cell touch panel, including 6-inch full HD LTPS in-cell touch panel that integrates the display driver IC and touch IC to simplify the overall module structure. This product uses a new circuit and display design that enables the bottom module border to decrease by 40% in width, and the left and right module borders to be 0.6 mm wide. The in-cell touch technology enhances touch precision and the 18:9 full screen aspect ratio produces more space to accommodate a virtual HOME button, which together offers a boundless audio-visual experience. In addition, we developed free-form and curved car displays, including the 12.3-inch full HD LTPS display for cluster application with a 1.5mm ultra slim border to streamline the product appearance. The display also integrates high resolution, high color saturation, high contrast and wide viewing angle technologies to high-end car displays. We exhibited AMOLED Smartwatch displays, including the AUO 1.2-inch and 1.4-inch true circle AMOLED displays, which both have resolution as high as 326 ppi and consume 30% less power when compared with other products in the market. The displays are equipped with a brightness increase mode, so that information and color on the watches are still clearly visible when users are out under strong sunlight. The 1.3-inch AMOLED touch panel, possessing touch function and power-saving strength, offers intuitive touch experience and is light to carry, making it especially suitable for children’s smartwatch. We also exhibited two flexible AMOLED display applications, applying plastic substrate and special structural layer design to make the panels foldable and rollable.
In 2018, we announced and exhibited a series of new developments in advanced display technologies. For example, we showcased a 85-inch 8K4K bezel-less ALCD TV display, which possesses several industry-leading strengths, including the all-around bezel-less design for maximized viewing effect, achieved by the proprietary use of Gate on Array (“GOA”) technology. We presented the world’s first 65-inch gaming display panel, with a 144Hz refresh rate, UHD 4K resolution, advanced HDR technology and high color saturation. We also presented 27- and 32-inch 144Hz gaming monitor displays adopting direct-lit mini LED backlight, equipped with UHD 4K high resolution and quantum dot wide color gamut and exceptional local dimming effect combined with 1,000 nits ultra-high brightness; the displays boasts HDR images to meet the highest HDR performance level, allowing gamers to capture both bright and dark image details in games. Furthermore, the display’s bezel-less design offers gamers with a more immersive gaming experience. We exhibited the 13.3-inch UHD 4K LTPS notebook PC display, with a pixel density as high as 332 ppi, wide color gamut, and a 2500:1 ultra-high contrast ratio. The border of the notebook is 1.5mm wide, and the display is 1.8mm thick, making this notebook the industry’s slimmest and lightest UHD 4K notebook PC display. We also exhibited the 13.2-inch free-form Center Information Display (“CID”), the world’s first display utilizing the technique of moving gate circuit to the display active area, which can release extra space on the sides for free-form designs. The 13-inch AMOLED display we showcased has world’s highest transparency. With a transparency of up to 68%, the display features 1150x575 resolution and high color saturation. Showing a single-sided image with low reflectance, the display is well suited for future security check and diagnostic devices, and augmented reality applications. In addition, we developed the highest resolution full-color TFT driven micro LED display technology, which won the 2018 SID Best in Show Award. We showcased a 12.1-inch micro LED display with a 169 ppi pixel density and 1920x720 resolution, which was achieved by using micro LEDs less than 30 micrometers in size. Each pixel can be independently lighted to realize high dynamic range and low power consumption. Combining various advanced color conversion technologies, the display is able to yield superior color performance.
In 2019, we announced and exhibited a series of new developments in advanced display technologies, including but not limited to the following:
|·||85-inch 8K bezel-less ALCD TV display possesses advanced HDR technology which increases dimming zones up to 1,024 zones and offers peak brightness up to 2,000 nits with a strengthened local dimming effect. We already mass-produced ultra-large 8K4K TV displays, included 85-inch and 75-inch.|
|·||32-inch UHD 4K gaming display adopts direct-lit mini LED backlight with as many as 1,152 local dimming zones. Its 1,000-nit peak brightness meets the highest VESA Display HDR performance level. The product line also includes a 27-inch UHD 4K gaming display with 576 local dimming zones.|
|·||The world’s largest 15.6-inch LTPS in-cell touch notebook PC panel. The slim and light design with integrated TDDI IC offers the benefits of high resolution, an ultra-narrow border and power-saving.|
|·||Vehicle cockpit display combines a 12.3-inch cluster and a 20-inch CID/front passenger seat panel by direct bonding lamination.|
|·||AUO has introduced a series of advanced reflectionless technology (“A.R.T.”) displays, which can reduce light reflection and glare from ambient lighting and present excellent image quality under complex illumination conditions at the same time. The complete lineup of 75-inch 8K, 32-inch 4K, and 17-inch square 2K displays, incorporated with high resolution, high contrast and color performance, can be nicely implemented at art galleries and other artwork showcasing venues.|
|·||6-inch full screen optical in-cell fingerprint LTPS LCD is the first of its kind to have installed an optical sensor within the LCD structure. Equipped with AHVA technology, full HD resolution and 403 ppi pixel density, the smartphone panel has a full-screen sensing area, which can sense smoothly and accurately.|
|·||17.3-inch UHD 4K Ink Jet Printing (“IJP”) OLED display with high pixel density of 255 ppi, which can offer excellent image quality and dynamic motion pictures; it also integrates high brightness, a 120 Hz high refresh rate, and a wide color gamut to deliver rich depth, bright color as well as sharp and smooth details.|
|·||5.6-inch foldable AMOLED touch panel that can be folded inwards or outwards for customized design according to client requirements. Using a plastic substrate and integrated with AUO’s proprietary flexible touch panel, the foldable AMOLED technology can still present outstanding image quality even at 4mm folding radius and can be continuously folded over 200,000 times, creating infinite possibilities for mobile devices.|
|·||12.1-inch micro LED cluster display and the 12.1-inch CID display employ LTPS-TFT backplane, which allows each pixel to be lighted independently to realize more refined images with high dynamic range. The display achieves an impressive pixel density of 169 ppi with micro LEDs less than 30 um in size, and advances color conversion technologies with over NTSC 100% wide color gamut.|
For trend information, see “Item 4. Information on the Company—4.B. Business Overview” and “Item 5. Operating and Financial Review and Prospects—5.A. Operating Results.”
We have, from time to time, entered into non-derivative financial instruments, including letters of credit, to finance or secure our purchase payment obligations. As of December 31, 2019, we had off-balance sheet outstanding letters of credit of US$5.8 million and JPY1,951.4 million.
The following table sets forth our contractual obligations with definitive payment terms as of December 31, 2019, which will require significant cash outlays in the future.
|Payments Due by Period|
|Total||Less than 1 year||1-3 years||4-5 years||More than 5 years|
|(1)||Includes estimated relevant interest payments in any given period in the future. See Note 24 to our consolidated financial statements for further information regarding interest rates.|
|(2)||Primarily represents our obligations to make lease payments to use the land on which our fabs and module assembly facilities are located.|
|(3)||Represents our significant outstanding purchase commitments for the machinery and equipment at our fabs.|
|(4)||Includes certain settlement agreements regarding certain alleged patent infringements with definitive payment terms as of December 31, 2019. See “Item 8. Financial Information─8.A.7. Litigation” for further information.|
In addition to the contractual obligations set forth above, we also have continuing obligations to make cash royalty payments under our technology license agreements, the amounts of which are determined based on our use of certain technology and/or patents. Furthermore, pursuant to relevant regulatory requirements, we estimate that we will contribute approximately NT$100.8 million (US$3.4 million) to our pension fund maintained with the Bank of Taiwan in 2020.
We have not entered into any financial guarantees or similar commitments to guarantee the payment obligations of non-affiliated third parties. Our long-term loans and lease agreements include provisions that require early payment under certain conditions. The terms of our credit facilities for long-term borrowings also contain financial covenants, including current ratio, leverage ratio, interest coverage ratio, tangible net worth and other technical requirements. Our debt under these facilities may be accelerated if there is a default, including defaults triggered by failure to comply with these financial covenants and other technical requirements. Please refer to “Item 5. Operating and Financial Review and Prospects—5.B. Liquidity and Capital Resources” for further information about our major outstanding borrowings and loans.
Please refer to Note 3 to the consolidated financial statements.
|ITEM 6.||DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES|
Members of our board of directors are elected by our shareholders. Our board of directors is composed of nine directors. The chairman of the board of directors is elected by the directors. The chairman of the board of directors presides at all meetings of the board of directors and also has the authority to act as our representative. The term of office for directors is three years.
Pursuant to the ROC Company Act, a person may serve as our director in his or her personal capacity or as the representative of another legal entity. A director who serves as the representative of a legal entity may be removed or replaced at any time at the discretion of that legal entity, and the replacement director may serve the remainder of the term of office of the replaced director. Of our nine current directors, one is the representative of AUO Foundation and one is the representative of BenQ Foundation.
In addition, pursuant to the ROC Securities and Exchange Act, a public company is required to either establish an audit committee or retain supervisors, provided that the FSC may, after considering the scale and business nature of a public company and other essential conditions, require the company to establish an audit committee in place of its supervisors. We replaced our supervisors by establishing an audit committee on June 13, 2007. The audit committee’s duties and powers include, but are not limited to, inspection of corporate records, verification of statements prepared by the board of directors, and giving reports at shareholders’ meetings. Each individual member of our audit committee is authorized to investigate our financial condition, represent us when a director is engaged in a sale, loan or other juristic acts with us for his own account or on behalf of another, call the shareholders meeting if the board of directors fails to do so, and give notification, when appropriate, to the board of directors to cease acting in contravention of applicable law or regulations or our Articles of Incorporation or our shareholder resolutions. Our audit committee is required to be composed of all of our independent directors, who are currently Chin-Bing (Philip) Peng, Mei-Yueh Ho, Yen-Shiang Shih, Yen-Hsueh Su and Jang-Lin (John) Chen.
Nine directors, including five independent directors, were elected at the 2019 Annual General Shareholders Meeting. The following table sets forth information regarding all of our directors as of February 29, 2020. The business address of all of our directors is the company’s principal executive office.
|Shuang-Lang (Paul) Peng||62||Chairman and Chief Executive Officer||2022||10|| |
· Director, Qisda Corporation
· Director, Darwin Precisions Corporation
|Kuen-Yao (K.Y.) Lee||68||Director||2022||24|| |
· Director, Qisda Corporation
· Director, Darfon Electronics Corp.
· Director, BenQ Materials Corp.
(Representative of AUO Foundation)
|48||Director, President and Chief Operating Officer||2022||1||· None|
(Representative of BenQ Foundation)
· Chairman and President, Qisda Corp.
· Director, Darfon Electronics Corp.
· Director, BenQ Materials Corp.
· Vice Chairman, Alpha Networks Inc.
· Chairman, DFI Inc.
· Chairman, BenQ Medical Technology Corporation
· Chairman, Partner Tech Corp.
|Chin-Bing (Philip) Peng||67||Independent Director||2022||7|| |
· Director and President, iD SoftCapital
· Director, ACER Incorporated
· Director, Wistron NeWeb Corporation
· Director, AOPEN Inc.
· Director, Wistron Information Technology & Services Corp.
· Director, Wistron Corporation
· Independent Director and member of Remuneration Committee and Audit Committee, Apacer Technology Inc.
|Mei-Yueh Ho||70||Independent Director||2022||10|| |
· Independent Director and member of Remuneration Committee and Audit Committee, Bank of Kaohsiung, Ltd.
· Independent Director and member of Remuneration Committee and Audit Committee, KINPO Electronics, Inc.
· Independent Director and member of Audit Committee, ASE Technology Holding Co., Ltd.
|Yen-Shiang Shih||70||Independent Director||2022||4|| |
· Independent Director and member of Remuneration Committee, Nomination Committee and Audit Committee, CTCI Corporation
· Director, Taiwan Research Institute
· Director, Taiwan Institute of Economic Research
· Chair Professor, Chung Yuan Christian University
· Independent Director and member of Remuneration Committee and Audit Committee, Formosa Plastics Corporation
· Policy Advisor, Taiwan Electrical and Electronic Manufacturer’s Association
· Chairman, Sustainable & Circular Economy Development Association
|Yen-Hsueh Su||51||Independent Director||2022||1|| |
· Independent Director and member of Remuneration Committee and Audit Committee, TXC Corporation
· Independent Director and member of Remuneration Committee and Audit Committee, Zhong Yang Technology Co., Ltd
· Director, KINSUS Interconnect Technology Corp.
|Jang-Lin (John) Chen||67||Independent Director||2022||1|| |
· ITRI Research Fellow, Electronics & Optoelectronics System Research Lab and Industry, Science and Technology International Strategy Center
· Executive Supervisor, SID Taipei Chapter
· Director, Taiwan Display Material & Devices Association
· Vice Chairman of Board, Taiwan Display Union Association
· Director, Taiwan TFT LCD Association
· Chair Professor, National Chiao-Tung University
Shuang-Lang (Paul) Peng. Mr. Peng has been our Chairman since May 11, 2015 and our Chief Executive Officer since November 1, 2015. He has been a director with us since 2010. Prior to his current position, Mr. Peng was our President from January 1, 2012 to October 31, 2015, Executive Vice President from 2008 to 2011, Senior Vice President from 2007 to 2008 and Vice President from 1998 to 2007. Prior to joining AUO, Mr. Peng worked as the Manager of the Material and Production Department at BenQ’s Malaysia branch. Mr. Peng received his master’s degree in Business Administration from Heriot-Watt University in the United Kingdom in 1995.
Kuen-Yao (K.Y.) Lee. Mr. Lee has been a director of our company since 1996. He was our Chairman from 1996 to May 10, 2015. Mr. Lee received his bachelor’s degree in Electrical Engineering from the National Taiwan University in Taiwan in 1974 and his Master of Business Administration from the International Institute for Management Development in Switzerland in 1990.
Frank Ko. Mr. Ko has been a director of our company since 2019. Mr. Ko joined AUO in 2000 and has since then worked in various functions, including manufacturing, research and development. Mr. Ko was appointed Associate Vice President in 2007 and further promoted to Vice President of the TV Display Business Group in 2010. In 2011, Mr. Ko served as Vice President of the Technology and Strategic Development Office, and led the development of our company’s technology roadmap and strategic direction. In 2014, he served as Chairman and CEO of E Ink Holdings Inc., focused on new technologies and application development of e-paper, strengthened ecosystem management, and successfully introduced e-paper to diverse and innovative fields of application. Mr. Ko obtained his Ph.D. in Photonics from National Chiao Tung University.
Peter Chen. Mr. Chen has been a director of our company since June 2016 and has been the Chairman and President of Qisda Corp. since June 22, 2017 and January 1, 2014, respectively. Mr. Chen is also the Chairman of DFI Inc., BenQ Medical Technology Corporation and Partner Tech Corp., Vice Chairman of Alpha Networks Inc., and Director of Darfon Electronics Corp. and BenQ Materials Corp. In addition, Mr. Chen is the Chairman of the Risk Management Committee in Qisda Corp. Prior to his current position, Mr. Chen was Executive Vice President of the Technology Product Center of BenQ Corp. from September 2007 to December 2013. Mr. Chen received his bachelor’s degree in Electrical Engineering from the National Cheng Kung University in Taiwan in 1985 and his EMBA from the Thunderbird American Graduate School in the United States in 2001.
Chin-Bing (Philip) Peng. Mr. Peng has been a director of our company since 2013. Mr. Peng is also a director of Acer Incorporated, Wistron Corporation, Wistron NetWeb Corporation, AOPEN Inc., Wistron Information Technology & Services Corporation, an Independent Director of Apacer Technology Inc. and the director and President of iD SoftCapital Inc., which offers consulting and asset and fund management services. Mr. Peng served as the Senior Vice President and Chief Financial Officer of ACER Incorporated from 2001 to 2004. Mr. Peng received his master’s degree in Business Administration from National ChengChi University in 1980.
Mei-Yueh Ho. Ms. Ho has been our director since 2010. Ms. Ho is also the independent director of the Bank of Kaohsiung, Ltd., Kinpo Electronics Inc. and ASE Technology Holding Co., Ltd. Ms. Ho served as the Minister of the Ministry of Economic Affairs of the ROC from 2004 to 2006. She was also the Council Minister of the Council for Economic Planning and Development of the ROC from 2007 to 2008. Ms. Ho received her bachelor’s degree in Agricultural Chemistry from the National Taiwan University in Taiwan in 1973.
Yen-Shiang Shih. Dr. Shih has been a director of our company since 2016. Dr. Shih is a Chair Professor of Business Management and Chemistry at Chung Yuan Christian University. Dr. Shih was the Chairman of Sinotech Engineering Consultants Inc. from 2014 to 2016 and served as the Minister of the Ministry of Economic Affairs of the ROC, the Chairman of CPC Corporation, Director General of the Taiwan Tobacco & Wine Bureau, Director General of the Industrial Development Bureau, Director General of the Small and Medium Enterprise Administration and in other posts from 1986 to 2013. Dr. Shih was a professor at National Taiwan University of Science and Technology from 1979 to 1986. Dr. Shih received his bachelor’s degree from National Taiwan University and his Ph.D. from the Massachusetts Institute of Technology in the United States.
Yen-Hsueh Su. Ms. Su has been our director since 2019. Ms. Su is also a director of KINSUS Interconnect Technology Corp. and an independent director of TXC Corporation and Zhong Yang Technology Co., Ltd. From 2001 to 2013, Ms. Su was the Managing Director and Head of Asia Technology Hardware Research of UBS and Chief Investment Officer of ASUSTEK Computer Inc. and Pegatron Corporation. Ms. Su received her master’s degree in Industrial Administration from Carnegie Mellon University in the United States.
Jang-Lin (John) Chen. Dr. Chen has been a director of our company since 2019. Dr. Chen presently is the Chair Professor of National Chiao-Tung University, a ITRI Research Fellow, Executive Supervisor of SID Taipei Chapter, Director of Taiwan Display Material & Devices Association, Vice Chairman of the Board of Taiwan Display Union Association, and Director of Taiwan TFT LCD Association. Dr. Chen was a ITRI Fellow of Electronics & Optoelectronics System Research Lab, ITRI VP and DTC General Director of Display Technology Center, CTO of Kodak LCD Polarizer Films Business and a Research Fellow of Eastman Kodak Company from 1982 to 2006. Dr. Chen received his master’s degree and Ph.D. in Polymer Material from NYU/Polytechnic University in the United States. Dr. Chen also participated in the Stanford Executive Program of Stanford University, Graduate School of Business.
The following table sets forth information regarding key executives as of February 29, 2020.
|Shuang-Lang (Paul) Peng||62||Chairman and Chief Executive Officer||24|
|Frank Ko||48||President and Chief Operating Officer||14|
|Wei-Lung Liau||49||Chief Technology Officer of Technology Group||22|
|TY Lin||48||Vice President of Business Group||17|
|Ting-Li Lin||48||Vice President of Manufacturing Group||22|
|Amy Ku||56||Chief Sustainability Officer||16|
|Benjamin Tseng||52||Chief Financial Officer / Spokesperson||12|
Shuang-Lang (Paul) Peng. See “—Directors.”
Frank Ko. See “—Directors.”
Wei-Lung Liau. Mr. Liau has been the Chief Technology Officer of the Technology Group since November 1, 2018. Prior to his current position, Mr. Liau was the General Manager of our Video Solutions Business Group from 2015 to 2018, the Vice President of our Video Solutions Technology Unit from 2013 to October 2015, Associate Vice President of our Video Solution Technology Development Center from 2012 to 2013, Associate Vice President of our Advanced Technology Research Center from 2010 to 2012 and the head of the LCD Technology Division from 2005 to 2010. Mr. Liau also worked in various divisions including Engineering and Manufacturing. Mr. Liau received his bachelor’s and master’s degrees in Applied Chemistry from National Chiao Tung University in Taiwan in 1994 and 1996, respectively, and received his Ph.D. in Applied Chemistry at National Chiao Tung University in Taiwan in 2017.
TY Lin. Mr. Lin has been our Vice President of our Business Group since November 1, 2018. Mr. Lin joined AUO in 1998 and had since then worked in various functions including manufacturing and quality management. In 2008, Mr. Lin was appointed Deputy Managing Director of AU Optronics (Suzhou) Corp., in charge of the company’s operation and development. In 2009, he was transferred to BenQ Materials Corp., where he was responsible for the polarizer business. From 2010 to 2015, Mr. Lin assumed the position of the President of BenQ Materials Corp. In 2015, he returned to AUO to take the position of Senior Associate Vice President of the Video Solutions Product Business Unit, and then of Solar Business. In 2018, Mr. Lin was promoted to Vice President and led AUO’s Mobile Solutions Business Group. Mr. Lin obtained his master’s degree in Industrial Engineering from Chung Yuan Christian University in Taiwan.
Ting-Li Lin. Mr. Lin is currently Vice President of Manufacturing Group, responsible for global manufacturing affairs. Mr. Lin joined AUO’s manufacturing unit in 1998. He was appointed Director of Quality Management in 2008. In 2011, he served as the Director of G8.5 fab plant and was appointed Associate Vice President of Video Solutions Manufacturing in 2016. Mr. Lin was then promoted to Vice President of Video Solutions Manufacturing in 2018. Mr. Lin has extensive operation and management experiences across different generations of fabs, ranging from G3.5, G5, G6, G7.5 to G8.5. Mr. Lin obtained his Master’s degree in Applied Chemistry from National Chiao Tung University in Taiwan.
Amy Ku. Ms. Ku is currently AUO’s Chief Sustainability Officer, responsible for the strategic direction of corporate sustainable development, stakeholder relations and communication, and corporate sustainable culture building and promotion. Ms. Ku joined AUO in 2004 as HR Manager of the Lung Tan Site. She was appointed as the Director of the Corporate HR Strategy Division, and then Associate Vice President of the Executive HR Division. In 2013, she was promoted as the Vice President of Human Resource Center. In 2018, Ms. Ku was appointed as Chief Sustainability Officer of the newly established Sustainability Development Unit. Ms. Ku obtained her master’s degree in Human Resource Management from National Central University.
Benjamin Tseng. Mr. Tseng has been our Chief Financial Officer since November 1, 2015. Prior to his current position, Mr. Tseng was the Financial Associate Vice President of our Finance Center in China from 2011 to October 2015 and the Director of our Finance Management Division from 2008 to 2011. Prior to joining AUO in 2008, Mr. Tseng served as the Director of Corporate Development at Coretronic Corporation from 2006 to 2008, and as the Vice President in the Corporate Clients Department of ABN AMRO Bank from 1995 to 2006. Mr. Tseng received his bachelor’s degree in Business Administration from Huntington College in the United States in 1993, and obtained his master’s degree in Business Administration from the University of Rochester in the United States in 1995.
The aggregate compensation paid or payable to the directors and executives for their services rendered in 2019 was approximately NT$243.2 million (US$8.1 million). According to our Articles of Incorporation approved by our annual shareholders’ meeting in June 2016, which are applicable to the distribution of compensation to our directors for the years after 2015, where we have a profit before tax for each fiscal year, we shall first reserve a certain amount of the profit to recover the loss for preceding years, and then distribute no more than 1% of the remaining profit to our directors as remuneration. In the event that a director serves as a representative of a legal entity, such compensation is paid to the legal entity. See “Item 10. Additional Information—10.B. Memorandum and Articles of Association—Dividends and Distributions.”
We have a long-term incentive program based on stock ownership trust that we implement to share the risks and rewards of the company’s results of operation with our senior management officers. Each year we evaluate the incentive program based on the company’s long-term strategic goals, operational results, market share and annual revenue. In conjunction, we periodically assess the performance of our senior management officers that participate in the long-term incentive program to record their progress and to determine whether corresponding milestones are achieved. In general, the duration of a long-term incentive program is three to four years.
The following tables provide a breakdown of our compensation scheme to our directors and executives in 2019:
|(I)||Compensation to Directors|
Unit: NT$1,000; 1,000 shares
|Director’s compensation||Ratio of sum of items A, B, C and D to profit (loss) (%) |
|Compensation earned by a Director who is an employee |
of the Company
|Ratio of sum of items A, B, C, D, E, F and G to profit (loss) (%) |
Compensation from investees other than AU Optronics Corp.’s subsidiaries or Parent Company
|Pension upon retirement(B) |
|Director's remuneration (C) |
|Business execution Expenses (D) |
|Salaries, bonuses and special expenses (E) |
|Pension upon retirement (F) |
|Employee’s remuneration (G)|
|AU Optronics Corp.|| |
AU Optronics Corp. and its subsidiaries
|AU Optronics Corp.|| |
AU Optronics Corp. and its subsidiaries
|AU Optronics Corp.|| |
AU Optronics Corp. and its subsidiaries
|AU Optronics Corp.|| |
AU Optronics Corp. and its subsidiaries
|AU Optronics Corp.|| |
AU Optronics Corp. and its subsidiaries
|AU Optronics Corp.|| |
AU Optronics Corp. and its subsidiaries
|AU Optronics Corp.|| |
AU Optronics Corp. and its subsidiaries
|AU Optronics Corp.|| |
AU Optronics Corp. and its subsidiaries
|AU Optronics Corp.|
AU Optronics Corp. and its subsid iaries
|Chairman and CEO||Shuang-Lang (Paul) Peng||6,000||6,000||-||-||-||-||2,070||2,120||(0.04)||(0.04)||42,737||42,737||-||-||-||-||-||-||(0.26)||(0.27)||60|
|Corporate Director||BenQ Foundation||2,000||2,000||-||-||-||-||-||-||(0.01)||(0.01)||-||-||-||-||-||-||-||-||(0.01)||(0.01)||4,933|
|Corporate Director Representative||Peter Chen||-||-||-||-||-||-||70||70||(0.00)||(0.00)||-||-||-||-||-||-||-||-||(0.00)||(0.00)||27,071|
|Corporate Director||AUO Foundation||1,101||1,101||-||-||-||-||-||-||(0.01)||(0.01)||-||-||-||-||-||-||-||-||(0.01)||(0.01)||-|
|Corporate Director Representative||Frank Ko(Note 2)||-||-||-||-||-||-||10||10||(0.00)||(0.00)||19,856||19,856||33||33||-||-||-||-||(0.10)||(0.10)||-|
|Corporate Director Representative||Kuo-Hsin (Michael) Tsai(Note 2)||-||-||-||-||-||-||750||1,443||(0.00)||(0.01)||20,564||20,564||157||157||-||-||-||-||(0.11)||(0.12)||90|
|Corporate Director||Qisda Corporation||899||899||-||-||-||-||-||-||(0.00)||(0.00)||-||-||-||-||-||-||-||-||(0.00)||(0.00)||-|
|Independent Director||Chin-Bing (Philip) Peng||2,820||2,820||-||-||-||-||160||160||(0.02)||(0.02)||-||-||-||-||-||-||-||-||(0.02)||(0.02)||-|
|Independent Director||Mei-Yueh Ho||2,400||2,400||-||-||-||-||140||140||(0.01)||(0.01)||-||-||-||-||-||-||-||-||(0.01)||(0.01)||-|
|Independent Director||Yen-Shiang Shih||2,510||2,510||-||-||-||-||150||150||(0.01)||(0.01)||-||-||-||-||-||-||-||-||(0.01)||(0.01)||-|
|Independent Director||Yen-Hsueh Su||1,432||1,432||-||-||-||-||90||90||(0.01)||(0.01)||-||-||-||-||-||-||-||-||(0.01)||(0.01)||-|
|Independent Director||Jang-Lin (John) Chen||1,322||1,322||-||-||-||-||80||80|