X FAB Silicon Foundries : Annual Report English | Dutch

1. ANNUAL

1. REPORT

We empower

FOR THE ANALOG WORLD

YOUR SPECIALTY FOUNDRY the future.

Annual Report 2020 | Contents

CONTENTS

1. Letter to our stakeholders . . . . . . . . . 04
2. X-FABat a glance . . . . . . . . . . . . . 06

3. Our culture	08
4. Our business . . . . . .	. . . . . . . . . . 12

5. X-FAB consolidated financial statements . . 26

1. Summary of important developments . . . 26
2. Statement of the Board of Directors . . . . 27
3. Statutory auditor's report to the general meeting of X-Fab Silicon Foundries SE on the consolidated financial statements as of and for the year ended December 31, 2020 . . . 27
4. Consolidated financial statements . . . . . 32

Notes to the consolidated financial statements

1 Basic information and description of the X-FAB Silicon Foundries SE Group's business . . . . 39

2 Group structure . . . . . . . . . . . . . . 40

3 Basis of preparation . . . . . . . . . . . . 41

1. Statement of compliance . . . . . . . 41
2. Basis of measurement . . . . . . . . .41

3.3 Functional and presentation currency

41

3.4 Use of judgments, assumptions,

and estimation uncertainties . . . . . . 41

4 Summary of accounting policies . . . .	. . . 42
4.1 Basis of consolidation	42

1. Foreign currency translation . . . . . . 42
2. Revenue from contracts with customers 43

4.4 Research and development expenses 43

1. Finance income and finance costs . . . 43
2. Rental income from investment
   properties . . . . . . . . . . . . . 44
3. Employee benefits . . . . . . . . . 44
4. Property, plant, equipment,
   and investment properties . . . . . . 44
5. Intangible assets . . . . . . . . . . . 45

4.10 Impairment

45

1. Financial instruments . . . . . . . . . 45
2. Derivative financial instruments . . . . 48
3. Inventories . . . . . . . . . . . . . 48
4. Cash and cash equivalents . . . . . . 48
5. Equity . . . . . . . . . . . . . . . 48
6. Provisions . . . . . . . . . . . . . 48

4.17 Leases

49

1. Subsidies . . . . . . . . . . . . . . 50
2. Income taxes . . . . . . . . . . . . 50
3. Changes to accounting policies . . . . . 51

5 Business combinations . . . . . . . . . . . 52

6 Notes to the consolidated statement
of profit or loss	52

6.1 Revenue . . . . . . . . . . . . . . 52

6.2	Cost of sales	53
6.3	Research and development expenses	53

1. Selling expenses . . . . . . . . . . . 53
2. General and administrative expenses . . 53
3. Expenses by nature . . . . . . . . . . 53
4. Rental income from investment
   properties . . . . . . . . . . . . . 54
5. Rental expenses related to
   investment properties . . . . . . . . 54
6. Other income . . . . . . . . . . . . 54
7. Other expenses . . . . . . . . . . . 54

6.11	Finance income	55
6.12	Finance costs . . . . . . . . . . . .	55
6.13	Income tax expense	55
6.14	Earnings per share	58

• Notes to the statement of financial position . 59
• 1. Property, plant, equipment,
     and investment properties . . . . . . 59
  2. Intangible assets . . . . . . . . . . . 61
  3. Inventories . . . . . . . . . . . . . . 62
  4. Trade and other receivables . . . . . . 62

7.5 Other assets

63

1. Cash and cash equivalents . . . . . . 64
2. Equity . . . . . . . . . . . . . . . 64

7.8 Dividends

65

1. Non-controllinginterests . . . . . . . 65
2. Loans and borrowings . . . . . . . . 65
3. Other non-current liabilities . . . . . . 72
4. Trade payables and other current

	liabilities		73
	7.13 Provisions . . . . . . . . . . . .	.	. 73
8	Notes to the statement of cash flows . .	. .	74
9	Segment reporting		74

2

1. Financial instruments -
   fair values and risk management . . . . . . 76
2. Leases . . . . . . . . . . . . . . . . . . 79
3. Transactions with related parties . . . . . . 80

13 Other disclosures	81
13.1	Commitments and contingencies	81
13.2	Unresolved legal disputes and claims . . 82
13.3	Employees	82

1. List of shareholdings . . . . . . . . . 83
2. Consolidated financial statements

	of the ultimate parent	83
13.6	Auditor and auditor's remuneration . .	83
14 Events after the reporting period	83
6. Corporate social responsibility at X-FAB	86
6.1 Scope	86
6.1.1	Stakeholder engagement	87

1. Sustainable products . . . . . . . . . 89
2. The Covid-19 pandemic . . . . . . . 89

6.2 Environment . . . . . . . . . . . . . . . 90

1. Environmental awareness
   and responsibility . . . . . . . . . . 90
2. Materials and waste management . . . 90
   6.2.2.1 Energy efficiency . . . . . . . . 91

6.2.2.2 Water	91
6.2.2.3 Greenhouse gases	92

6.3 Social . . . . . . . . . . . . . . . . . . 92

1. Human rights and human resources . . 92
2. Social commitment . . . . . . . . . . 97
3. Healthy work environment . . . . . . 99

6.4 Governance	99
6.4.1 Anti-corruption and bribery	99

1. X-FAB'ssupply chain . . . . . . . . 100
2. 1. Selection and categorization

   of X-FAB suppliers . . . . . . 100

   1. Audits and continual
      improvement of suppliers . . . 100
   2. Handling of conflict minerals . . 101
3. Data Security . . . . . . . . . . . . 102
4. X-FAB'sresponsibility towards
   its customers and society . . . . . . . 102

7. Corporate governance statement . . . . . 106

1. Shareholders . . . . . . . . . . . . . . 106
2. Management structure . . . . . . . . . . 106
3. Board of Directors . . . . . . . . . . . . 107
4. Committees . . . . . . . . . . . . . . . 110

7.5	Executive Management	110
7.6	Diversity policy	111
7.7	Remuneration report	111

1. Policy on certain transactions . . . . . . . 114
2. Internal control and risk assessment procedures in relation to financial reporting . 115

7.10Description of certain information from
the Articles of Association and elements
pertinent to a takeover bid	116

1. Auditor . . . . . . . . . . . . . . . . . 117
2. Compliance with the 2020 Belgian

	Code on Corporate Governance		118
8.	Shareholder information . . . . . . . . . . . .	. .	120
9.	X-FAB SE statutory accounts		122
10.	Risk factors . . . . . . . . . . . . . .	.	124
11.	Glossary . . . . . . . . . . . . . . . .	.	128

3

Annual Report 2020 | Letter to our stakeholders

Dear stakeholders,

No matter where you are located, we have all been going through challenging times, and 2020 will certainly go down in history as the year of the Covid-19 pandemic that impacted all aspects of our lives. There has been a lot of tragedy, but on the other hand the pandemic also stands for the joint efforts across the globe to fight Covid-19 as well as the solidarity that was required from all of us. This being said, I would like to express my gratitude to our employees and all our stakeholders for their contributions in successfully maneuvering X-FAB through these difficult times and for ensuring the health and safety of all employees and business partners.

X-FAB closed the year with revenues amounting to USD

477.6 million, down 6% compared to 2019. While proto- typing activities remained at a high level throughout the year, production revenues decreased 7%, reflecting the impact of the Covid-19 pandemic on the global econo- my. The main contributor to the overall revenue decline was the CCC business (communication, consumer, computing), which decreased 22% year-on-year, mainly driven by the planned decrease of the legacy business at X-FAB France. Revenues in our core markets, namely

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 exceptionally 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 all these fields. And despite the weakness of the global economy in 2020, our customers continued to be very active in developing new products, reflected in full-year prototyping revenues of USD 67.7 million, which is a 2% increase against 2019.

At X-FAB, we think automotive; and this is not only because of the fact that half of what we produce goes into the automotive market. Our technologies serve applications that range from sensors, sensor interfaces, and actuators for combustion vehicles to current sen- sors, li-battery monitoring ICs, and silicon carbide (SiC) transistors for electric vehicles. A car produced today has on average 16 chips manufactured by X-FAB inside. And this number will go up as the electrification of cars keeps progressing. With our SiC offering, our expertise in high-voltage CMOS technologies, and our on-chiphigh-voltage isolation capabilities, we are well positioned to benefit from this turning point in the history of the automotive industry. After the Covid-19-related fall of automotive revenues during the summer months, we have been seeing a strong recovery since September. Fourth quarter revenues went up 15% year-on-year and 60% quarter-on-quarter.

4

Our SiC activities progressed well, despite a difficult environment in 2020. We recorded a substantial increase in SiC bookings and more than doubled the number of new designs compared to 2019. This is reflecting our strong customer and projects pipeline, which is pointing to the positive development of our SiC business going forward. In 2020, we successfully launched our SiC in-house epitaxy line as well as the qualification process with more than ten customers, some of which have already started SiC epitaxy production with X-FAB. While it has taken longer than we expected for the SiC projects to materialize, our SiC customers continue to be very bullish, and I am excited about the many positive feedback comments we have received from customers relating to the quality of the products that they receive from X-FAB.

X-FAB's industrial business has been growing steadily over the past years and also did in 2020. Industrial projects accounted for 44% of our annual prototyping revenues, indicating future growth in this market. With our SiC and high-voltage technologies, X-FAB supports the transition to greener energy, spurred by worldwide initiatives, such as the "Green Deal" in Europe. This has been a major growth driver for our industrial business; others include applications in the context of Industry

4.0 as well as applications to make cities and buildings smart. Here we can contribute with our expertise in everything that has to do with sensing, transmission, and actuation.

I am absolutely thrilled about our medical business and how it has evolved. X-FAB's medical revenues grew strongly in 2020. Apart from applications for personal medical devices and medical equipment, lab-on-a- chip for point-of-care applications continued to be the major growth driver. A lab-on-a-chip integrates laboratory functions on a single IC capable of performing automated and accurate diagnostics. These highly complex applications are deployed for various uses, such as DNA and RNA sequencing, virus or sepsis de- tection, cell sorting, or allergy testing. The demand for such applications was further pushed by the Covid-19 pandemic, and I am proud that with our expertise in the development and manufacturing of such systems we can contribute to overcoming the Covid-19 pandemic. In the fourth quarter, we achieved record medical sales amounting to USD 12.0 million, representing a 9% share of total revenues. Medical is truly the next automotive for us.

The drop in bookings and the resulting low operational activity during the second and third quarter made us continue and intensify our cost-saving program, which had been initiated in 2019 in response to the automotive crisis, and we were able to achieve significant savings throughout the year. Despite the 2020 decline in revenues by USD 28.8 million against 2019 we were able to reduce the operational loss by USD 29.2 million, laying the foundation for greater profitability going forward.

After the strong recovery of our business that we have been seeing since September 2020 we are fully committed to ensuring a reliable supply for our customers and to managing the fast increase in production volumes with a strong focus on execution and manufacturing excellence. I am very excited about our specialty technologies that enable a great variety of smart and much sought-after applications, and this will continue driving the organic growth of X-FAB going forward.

After the close of 2020, there have been no major events that would require disclosure.

I would like to thank all X-FAB employees for their commitment in a very tough year, and our customers, investors, and business partners for the trust they continue to place in us.

Best regards,

Rudi De Winter

CEO

5