20 ANNUAL 20 REPORT We empower YOUR SPECIALTY FOUNDRY FOR THE ANALOG WORLD the future. Annual Report 2020 | Contents CONTENTS 1. Letter to our stakeholders . 04 4.11 Financial instruments . 45 4.12 Derivative financial instruments . 48 4.13 Inventories . 48 2. X-FAB at a glance . 06 4.14 Cash and cash equivalents . 48 4.15 Equity . 48 4.16 Provisions . 48 3. Our culture. .08 4.17 Leases. 49 4.18 Subsidies . 50 4.19 Income taxes . 50 4. Our business . 12 4.20 Changes to accounting policies . .51 5 Business combinations . 52 5. X-FAB consolidated financial statements . 26 6 Notes to the consolidated statement 5.1 Summary of important developments . 26 of profit or loss. .52 6.1 Revenue . 52 5.2 Statement of the Board of Directors . 27 6.2 Cost of sales. 53 6.3 Research and development expenses. 53 5.3 Statutory auditor’s report to the general 6.4 Selling expenses . 53 meeting of X-Fab Silicon Foundries SE on the 6.5 General and administrative expenses . .53 consolidated financial statements as of and 6.6 Expenses by nature . .53 for the year ended December 31, 2020 . 27 6.7 Rental income from investment properties . 54 5.4 Consolidated financial statements . 32 6.8 Rental expenses related to investment properties . 54 Notes to the consolidated financial statements 6.9 Other income . 54 6.10 Other expenses . 54 1 Basic information and description of the X-FAB 6.11 Finance income. 55 Silicon Foundries SE Group’s business . 39 6.12 Finance costs . 55 6.13 Income tax expense. 55 2 Group structure . 40 6.14 Earnings per share. 58 3 Basis of preparation . 41 7 Notes to the statement of financial position . 59 3.1 Statement of compliance . 41 7.1 Property, plant, equipment, 3.2 Basis of measurement . .41 and investment properties . 59 3.3 Functional and presentation currency . .41 7.2 Intangible assets . 61 3.4 Use of judgments, assumptions, 7.3 Inventories . .62 and estimation uncertainties . 41 7.4 Trade and other receivables . 62 7.5 Other assets. 63 4 Summary of accounting policies . 42 7.6 Cash and cash equivalents . 64 4.1 Basis of consolidation. 42 7.7 Equity . 64 4.2 Foreign currency translation . 42 7.8 Dividends. 65 4.3 Revenue from contracts with customers 43 7.9 Non-controlling interests . 65 4.4 Research and development expenses. 43 7.10 Loans and borrowings . 65 4.5 Finance income and finance costs . 43 7.11 Other non-current liabilities . 72 4.6 Rental income from investment 7.12 Trade payables and other current properties . 44 liabilities. 73 4.7 Employee benefits . 44 7.13 Provisions . 73 4.8 Property, plant, equipment, and investment properties . 44 8 Notes to the statement of cash flows . 74 4.9 Intangible assets . 45 4.10 Impairment. 45 9 Segment reporting . .74 2 10 Financial instruments – 7. Corporate governance statement . 106 fair values and risk management . 76 7.1 Shareholders . 106 11 Leases . 79 7.2 Management structure . 106 12 Transactions with related parties . .80 13 Other disclosures. 81 7.3 Board of Directors . 107 13.1 Commitments and contingencies. .81 13.2 Unresolved legal disputes and claims . .82 7.4 Committees . 110 13.3 Employees . 82 13.4 List of shareholdings . 83 7.5 Executive Management . .110 13.5 Consolidated financial statements of the ultimate parent. 83 7.6 Diversity policy . 111 13.6 Auditor and auditor’s remuneration . 83 7.7 Remuneration report. 111 14 Events after the reporting period. .83 7.8 Policy on certain transactions . 114 6. Corporate social responsibility at X-FAB. .86 7.9 Internal control and risk assessment procedures in relation to financial reporting . 115 6.1 Scope . .86 6.1.1 Stakeholder engagement . 87 7.10 Description of certain information from 6.1.2 Sustainable products . 89 the Articles of Association and elements 6.1.3 The Covid-19 pandemic . 89 pertinent to a takeover bid . .116 6.2 Environment . .90 7.11 Auditor . 117 6.2.1 Environmental awareness . and responsibility . 90 7.12 Compliance with the 2020 Belgian 6.2.2 Materials and waste management . 90 Code on Corporate Governance. .118 6.2.2.1 Energy efficiency . 91 6.2.2.2 Water. .91 6.2.2.3 Greenhouse gases. 92 8. Shareholder information . 120 6.3 Social . 92 6.3.1 Human rights and human resources . 92 9. X-FAB SE statutory accounts. 122 6.3.2 Social commitment . .97 6.3.3 Healthy work environment . 99 10. Risk factors . 124 6.4 Governance. .99 6.4.1 Anti-corruption and bribery. 99 6.4.2 X-FAB’s supply chain . 100 11. Glossary . 128 6.4.2.1 Selection and categorization of X-FAB suppliers . 100 6.4.2.2 Audits and continual improvement of suppliers . 100 6.4.2.3 Handling of conflict minerals . 101 6.4.3 Data Security . 102 6.4.4 X-FAB’s responsibility towards its customers and society . .102 3 Annual Report 2020 | Letter to our stakeholders Dear stakeholders, automotive, industrial, and medical, recorded an annual increase of 1%. While the automotive business went down 3%, both our industrial and medical businesses grew strongly at 6% and 19% respectively. After the year was off to a good start with strong order intake in the first quarter, the Covid-19 pandemic led to a severe drop in bookings, which remained on the low side over the summer months. In September, bookings picked up strongly and continued to be exception- ally high until the end of the year, yielding a record of USD 190.7 million in the fourth quarter. This is also reflected in quarterly revenues, which recorded a strong year-on-year increase in Q4 2020 across all key mar- kets. The uptick in bookings, however, did not only relate to the recovery that had started towards the end of the third quarter but also to new products being launched by our customers. The world is facing key challenges, from climate change with the need for greener energy to a growing and aging population and, last but not least, the Covid-19 pandemic. We as X-FAB take pride in being a company that enables viable and smart technological solutions in No matter where you are located, we have all been all these fields. And despite the weakness of the global going through challenging times, and 2020 will certainly economy in 2020, our customers continued to be very go down in history as the year of the Covid-19 pandem- active in developing new products, reflected in full-year ic that impacted all aspects of our lives. There has been prototyping revenues of USD 67.7 million, which is a 2% a lot of tragedy, but on the other hand the pandemic increase against 2019. also stands for the joint efforts across the globe to fight Covid-19 as well as the solidarity that was required At X-FAB, we think automotive; and this is not only from all of us. This being said, I would like to express because of the fact that half of what we produce goes my gratitude to our employees and all our stakehold- into the automotive market. Our technologies serve ers for their contributions in successfully maneuvering applications that range from sensors, sensor interfaces, X-FAB through these difficult times and for ensuring and actuators for combustion vehicles to current sen- the health and safety of all employees and business sors, li-battery monitoring ICs, and silicon carbide (SiC) partners. transistors for electric vehicles. A car produced today has on average 16 chips manufactured by X-FAB inside. X-FAB closed the year with revenues amounting to USD And this number will go up as the electrification of cars 477.6 million, down 6% compared to 2019. While proto- keeps progressing. With our SiC offering, our expertise typing activities remained at a high level throughout the in high-voltage CMOS technologies, and our on-chip year, production revenues decreased 7%, reflecting the high-voltage isolation capabilities, we are well posi- impact of the Covid-19 pandemic on the global econo- tioned to benefit from this turning point in the history of my. The main contributor to the overall revenue decline the automotive industry. After the Covid-19-related fall was the CCC business (communication, consumer, of automotive revenues during the summer months, we computing), which decreased 22% year-on-year, mainly have been seeing a strong recovery since September. driven by the planned decrease of the legacy business Fourth quarter revenues went up 15% year-on-year and at X-FAB France. Revenues in our core markets, namely 60% quarter-on-quarter. 4 Our SiC activities progressed well, despite a difficult en- The drop in bookings and the resulting low operational vironment in 2020. We recorded a substantial increase activity during the second and third quarter made us in SiC bookings and more than doubled the number of continue and intensify our cost-saving program, which new designs compared to 2019. This is reflecting our had been initiated in 2019 in response to the auto- strong customer and projects pipeline, which is pointing motive crisis, and we were able to achieve significant to the positive development of our SiC business going savings throughout the year. Despite the 2020 decline forward. In 2020, we successfully launched our SiC in revenues by USD 28.8 million against 2019 we were in-house epitaxy line as well as the qualification process able to reduce the operational loss by USD 29.2 million, with more than ten customers, some of which have al- laying the foundation for greater profitability going ready started SiC epitaxy production with X-FAB.