AMKOR TECHNOLOGY, INC. Overview
Amkor is one of the world's leading providers of outsourced semiconductor packaging and test services. Our financial goals are sales growth and improved profitability. To achieve these goals, we are focused on generating increased value from our investments in advanced technologies, improving utilization of existing assets, executing our balanced growth strategy and selectively growing our scale and scope through strategic investments. We are an industry leader in developing and commercializing cost-effective advanced packaging and test technologies. We believe these advanced technology solutions provide strong value to our customers and that this is particularly true in the mobile communications market, where growth generally outpaces the overall semiconductor industry. Advanced packages are now the preferred choice in both the high-end and the mid-range segments of the smartphone market, which together account for a high portion of mobile phone semiconductor value. The demand for advanced packages is also being driven by second-wave mobile device customers, who are transitioning out of wirebond into wafer-level and flip-chip packages. Interest in advanced packages for automotive applications is growing as well, largely due to new, data-intensive applications, which require increased pin count and performance. We believe that our technology leadership and this technology transition create significant growth opportunities for us. We typically look for opportunities in the advanced packaging and test area where we can generate reasonably quick returns on investments made for customers seeking leading edge technologies. We also focus on developing a second wave of customers to fill the capacity that becomes available when leading edge customers transition to newer packaging and test equipment and platforms. In addition, we are seeking to add new customers and to deepen our engagement with existing customers. This includes an expanded emphasis on the automotive end market where semiconductor content continues to grow and in the analog area for our mainstream wirebond technologies. From time to time, we identify attractive opportunities to grow our customer base and expand the markets we serve through joint ventures, acquisitions and other strategic investments. For example, inMay 2017 we acquired Nanium, which has strengthened our position in the market for wafer-level fan-out packaging, and inDecember 2015 , we completed the acquisition of ourJapan operations. We believe that taking advantage of these opportunities helps to diversify our revenue streams, improve our profits, broaden our portfolio of services and maintain our technological leadership. As a supplier in the semiconductor industry, our business is cyclical and impacted by broad economic factors. Historically, there has been a strong correlation between world-wide gross domestic product levels, consumer spending and semiconductor industry cycles. The semiconductor industry has experienced significant and sometimes prolonged cyclical upturns and downturns in the past. While customer demand for our services was strong throughout the third quarter of 2020, particularly in the communications and consumer end markets, there remains a risk that the Covid-19 pandemic, as well as its related impact on the world economy, will affect our results of operations in the future. We have experienced only minor Covid-19 related disruptions to our operations. The full potential effect of the Covid-19 pandemic is unknown, and there is significant uncertainty related to the ultimate impact that the Covid-19 pandemic will have on our business, results of operations and financial condition. See Part II, Item 1A, including, "The Covid-19 Outbreak Has Impacted and May Continue to Impact the Supply Chain and Consumer Demand for Our Customers' Products and Services, Which May Adversely Affect Our Business, Results of Operations, and Financial Condition" and "Dependence on the Highly Cyclical Semiconductor Industry - Our Packaging and Test Services Are Used inVolatile Industries and Industry Downturns, and Declines in Global Economic and Financial Conditions Could Harm Our Performance." We operate in a capital-intensive industry and have a significant level of debt. Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures, which are generally made in advance of the related revenues and without firm customer commitments. We fund our operations, including capital expenditures and debt service requirements, with cash flows from operations, existing cash and cash equivalents, short-term investments, borrowings under available credit facilities and proceeds from any additional financing. Maintaining an appropriate level of liquidity is important to our business and depends on, among other considerations, the performance of our business, our capital expenditure levels, our ability to repay debt out of our -20-
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operating cash flows or proceeds from debt or equity financings and our investment strategy. As ofSeptember 30, 2020 , we had cash and cash equivalents and short-term investments of$566.7 million and$356.2 million , respectively. Our net sales, gross profit, operating income, cash flows, liquidity and capital resources have historically fluctuated significantly from quarter to quarter as a result of many factors, including the seasonality of our business, the cyclical nature of the semiconductor industry and other factors discussed in Part II, Item 1A of this Quarterly Report on Form 10--Q. Financial Summary Our net sales increased$270.1 million or 24.9% to$1,354.0 million for the three months endedSeptember 30, 2020 from$1,083.9 million for the three months endedSeptember 30, 2019 . This increase was due to higher sales of advanced products in the communications and consumer end markets, partially offset by a decline in the automotive end market. Gross margin for the three months endedSeptember 30, 2020 increased to 17.8% from 16.8% for the three months endedSeptember 30, 2019 . The increase in gross margin was primarily due to the increase in net sales, partially offset by changes in the mix of products sold toward products with higher material content. Our capital expenditures totaled$275.5 million for the nine months endedSeptember 30, 2020 , compared to$328.5 million for the nine months endedSeptember 30, 2019 . Our spending was primarily focused on investments in advanced packaging and test equipment. Net cash provided by operating activities was$434.0 million for the nine months endedSeptember 30, 2020 , compared to$283.3 million for the nine months endedSeptember 30, 2019 . This increase was primarily due to higher net sales and higher operating profit, partially offset by changes in our working capital. InOctober 2020 , our Board of Directors approved the initiation of a regular quarterly cash dividend on our common stock. The initial quarterly dividend is$0.04 per share. -21-
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Results of Operations
The following table sets forth certain operating data as a percentage of net
sales for the periods indicated:
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2020 2019 2020 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Materials 46.9 % 40.4 % 45.8 % 39.0 %
Labor 12.8 % 15.8 % 13.6 % 16.8 %
Other manufacturing costs 22.5 % 27.0 % 23.7 % 29.4 %
Gross margin 17.8 % 16.8 % 16.9 % 14.8 %
Operating income 9.4 % 7.3 % 8.1 % 4.0 %
Net income attributable to Amkor 6.8 % 5.0 % 5.7 % 0.8 %
Net Sales
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2020 2019 Change 2020 2019 Change
(In thousands, except percentages)
Net sales $ 1,354,023 $ 1,083,917 $ 270,106 24.9 % $ 3,679,548 $ 2,874,186 $ 805,362 28.0 %
The increase in net sales for the three and nine months ended September 30, 2020
compared to the three and nine months ended September 30, 2019 was due to higher
sales of advanced products in the communications and consumer end markets,
partially offset by a decline in the automotive end market. The communications
end market benefited from the recovery in the smartphone market from the prior
year inventory correction. Sales increased in the consumer end market due to the
introduction of a new high-volume consumer product.
Gross Margin
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2020 2019 Change 2020 2019 Change
(In thousands, except percentages)
Gross profit $241,085 $182,240 $58,845 $622,313 $426,455 $195,858
Gross margin 17.8 % 16.8 % 1.0 % 16.9 % 14.8 % 2.1 %
Our cost of sales consists principally of materials, labor, depreciation and
manufacturing overhead. Since a substantial portion of the costs at our
factories is fixed, there tends to be a strong relationship between our revenue
levels and gross margin. Accordingly, relatively modest increases or decreases
in revenue can have a significant effect on margin and on labor and other
manufacturing costs as a percentage of revenue, depending upon product mix,
utilization and seasonality.
Gross margin increased for the three and nine months ended September 30, 2020
compared to the three and nine months ended September 30, 2019 , primarily due to
the increase in net sales, partially offset by changes in the mix of products
sold toward products with higher material content.
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Selling, General and Administrative
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2020 2019 Change 2020 2019 Change
(In thousands, except percentages)
Selling, general and
administrative $ 77,781 $ 70,458 $ 7,323 10.4 % $ 224,623 $ 206,803 $ 17,820 8.6 %
Selling, general and administrative expenses for the three and nine months ended
September 30, 2020 increased compared to the three and nine months ended
September 30, 2019 , primarily due to costs incurred for our factory
consolidation efforts in Japan and increased employee compensation costs. These
increases were partially offset by our efforts to control expenses, particularly
travel and professional fees. In addition, we had a gain from a sale of real
estate in the second quarter of 2019 which lowered our expenses that period.
Research and Development
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2020 2019 Change 2020 2019 Change
(In thousands, except percentages)
Research and development $ 35,835 $ 32,927 $ 2,908 8.8 % $ 99,624 $ 104,867 $ (5,243) (5.0) %
Research and development activities are focused on developing new packaging and
test services and improving the efficiency and capabilities of our existing
production processes. The costs related to our technology and product
development projects are included in research and development expense until the
project moves into production. Once production begins, the costs related to
production become part of the cost of sales, including ongoing depreciation for
the equipment previously held for research and development activities. Research
and development expenses for the three months ended September 30, 2020 increased
compared to the three months ended September 30, 2019 due to new development
projects. Research and development expenses for the nine months ended September
30, 2020 decreased compared to the nine months ended September 30, 2019 due to
projects that moved into production, partially offset by new development
projects.
Other Income and Expense
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2020 2019 Change 2020 2019 Change
(In thousands, except percentages)
Interest expense $ 16,404 $ 16,988 $ (584) (3.4) % $ 49,461 $ 54,914 $ (5,453) (9.9) %
Interest income (1,016) (1,269) 253 (19.9) % (4,975) (4,931) (44) 0.9 %
Foreign currency
(gain) loss, net 3,069 (174) 3,243 >(100)% 6,301 (1,581) 7,882 >(100)%
Loss on debt
retirement 491 179 312 >100% 919 8,535 (7,616) (89.2) %
Other (income)
expense, net (129) (496) 367 (74.0) % (678) (1,382) 704 (50.9) %
Total other expense,
net $ 18,819 $ 15,228 $ 3,591 23.6 % $ 51,028 $ 55,555 $ (4,527) (8.1) %
Interest expense decreased for the three and nine months ended September 30,
2020 compared to the three and nine months ended September 30, 2019 , primarily
due to the repayment of higher interest debt with the proceeds from our ¥28.5
billion ($260.6 million ) fixed rate term loan agreement in December 2019 and
January 2020 . Interest expense has also decreased due to overall decreases in
interest rates in 2020 for our variable interest rate loans.
The changes in foreign currency (gain) loss, net for the three and nine months
ended September 30, 2020 compared to the three and nine months ended September
30, 2019 were due to foreign currency exchange rate movements, mainly the Korean
Won, and the associated impact on our net monetary exposure at our foreign
subsidiaries.
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The loss on debt retirement for the nine months endedSeptember 30, 2019 was due to the early redemption inApril 2019 of the outstanding$525 million aggregate principal amount of our 6.375% Senior Notes due 2022. Income Tax Expense For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 Change 2020 2019 Change (In thousands) Income tax expense$ 15,753 $ 9,141 $ 6,612 $ 33,504 $ 36,418 $ (2,914) Income tax expense, which includes foreign withholding taxes and minimum taxes, reflects the applicable tax rates in effect in the various countries where our income is earned and is subject to volatility depending on the relative mix of earnings in each location. Income tax expense for the nine months endedSeptember 30, 2019 also includes an$11.8 million discrete tax expense primarily for the recognition of a valuation allowance for certain deferred tax assets. During the nine months endedSeptember 30, 2020 and 2019, our subsidiaries inKorea ,the Philippines andSingapore operated under various tax holidays. As these tax holidays expire, income earned in these jurisdictions will be subject to higher statutory income tax rates, which may cause our effective tax rate to increase.
Liquidity
We assess our liquidity based on our current expectations regarding sales and operating expenses, capital spending, dividend payments and stock repurchases, debt service requirements and other funding needs. Based on this assessment, we believe that our cash flow from operating activities, together with existing cash and cash equivalents, short-term investments and availability under our credit facilities, will be sufficient to fund our working capital, capital expenditure, dividend payments, debt service and other financial requirements for at least the next twelve months. Our liquidity is affected by, among other factors, volatility in the global economy and credit markets, the performance of our business, our capital expenditure levels, other uses of our cash including any dividends and purchases of stock under our stock repurchase program, any acquisitions or investments in joint ventures and our ability to either repay debt out of operating cash flow or refinance it at or prior to maturity with the proceeds of debt or equity offerings. There can be no assurance that we will generate the necessary net income or operating cash flows, or be able to borrow sufficient funds, to meet the funding needs of our business beyond the next twelve months due to a variety of factors, including the cyclical nature of the semiconductor industry and other factors discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q. Our primary source of cash and the source of funds for our operations are cash flows from operations, current cash and cash equivalents, short-term investments, borrowings under available credit facilities and proceeds from any additional debt or equity financings. We refer you to Note 7 and Note 11 to our Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q for additional information on our investments and borrowings, respectively. As ofSeptember 30, 2020 , we had cash and cash equivalents and short-term investments of$566.7 million and$356.2 million , respectively. Included in our cash and short-term investments balances as ofSeptember 30, 2020 , is$452.0 million and$263.3 million , respectively, held offshore by our foreign subsidiaries. We have the ability to access cash held offshore by our foreign subsidiaries primarily through the repayment of intercompany debt obligations. Due to the changes in theU.S. tax law under the Tax Cuts and Jobs Act ("Tax Act"), distributions of cash to theU.S. as dividends generally will not be subject toU.S. federal income tax. If we were to distribute this offshore cash to theU.S. as dividends from our foreign subsidiaries, we may be subject to foreign withholding and state income taxes. For certain accounts receivable, we use non-recourse factoring arrangements with third-party financial institutions to manage our working capital and cash flows. Under this program, we sell receivables to a financial institution for cash at a discount to the face amount. Available capacity under these programs is dependent on the level of our trade accounts receivable eligible to be sold, the financial institutions' willingness to purchase such receivables and the limits provided by the financial institutions. These factoring arrangements can be reduced or eliminated at any time due to market conditions and changes in the credit worthiness of customers. For the nine months endedSeptember 30, 2020 and 2019, we sold accounts receivable totaling$368.4 million and$480.2 million , net of discounts and fees of$2.2 million and$3.3 million , respectively. -24-
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We operate in a capital-intensive industry. Servicing our current and future customers may require that we incur significant operating expenses and make significant investments in equipment and facilities, which are generally made in advance of the related revenues and without firm customer commitments. The borrowing base under our$250.0 million first lien senior secured revolving credit facility entered into by our subsidiary,Amkor Technology Singapore Holding Pte, Ltd. (the "Singapore Revolver"), is limited to the amount of eligible accounts receivable. As ofSeptember 30, 2020 , we had availability of$250.0 million and no outstanding standby letters of credit. As ofSeptember 30, 2020 , our foreign subsidiaries had$346.0 million available to be drawn under revolving credit facilities, including the Singapore Revolver, and$56.0 million available to be borrowed under term loan credit facilities for working capital purposes and capital expenditures. As ofSeptember 30, 2020 , we had$1,319.1 million of debt. Our scheduled principal repayments on debt include$40.9 million due over the remainder of 2020,$125.3 million due in 2021,$266.6 million due in 2022,$252.1 million due in 2023,$66.9 million due in 2024, and$576.4 million due thereafter. We were in compliance with all debt covenants atSeptember 30, 2020 , and we expect to remain in compliance with these covenants for at least the next twelve months. Certain of our debt agreements have restrictions on dividend payments and the repurchase of stock and subordinated securities. These restrictions are determined in part by calculations based upon cumulative net income or, in the case of our Singapore Revolver, borrowing availability. Dividend payments and stock repurchases are not currently restricted under our debt agreements. The debt ofAmkor Technology, Inc. is structurally subordinated in right of payment to all existing and future debt and other liabilities of our subsidiaries. From time to time,Amkor Technology, Inc. andAmkor Technology Singapore Holding Pte, Ltd. also guarantee certain debt of our subsidiaries. In order to reduce our debt and future cash interest payments, we may from time to time repurchase or redeem our outstanding notes for cash or exchange shares of our common stock for our outstanding notes. Any such transaction may be made in the open market, through privately negotiated transactions or otherwise, and would be subject to the terms of our indentures and other debt agreements, market conditions and other factors. Our subsidiary inKorea maintains an unfunded severance plan that covers certain employees that were employed prior toAugust 1, 2015 . As ofSeptember 30, 2020 , the severance liability was$119.1 million . Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date. For service periods subsequent toAugust 1, 2015 , employees participate in either a defined benefit pension plan or a defined contribution pension plan. From time to time, we may offer additional employees the option to convert from the severance plan to the defined contribution plan which would require the company to fund the converted portion of the liability. We refer you to Note 12 to our Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q for additional information. InOctober 2020 , our Board of Directors approved the initiation of a regular quarterly cash dividend on our common stock. The initial quarterly dividend is$0.04 per share and is payable to stockholders of record onDecember 18, 2020 . The initial quarterly dividend payment is expected to be approximately$9.7 million in the aggregate and will be paid onJanuary 7, 2021 . We currently anticipate that we will continue to pay quarterly cash dividends in the future. However, the payment, amount and timing of future dividends remain within the discretion of our Board of Directors and will depend upon our results of operations, financial condition, cash requirements, debt restrictions and other factors. Our Board of Directors previously authorized the repurchase of up to$300.0 million of our common stock, exclusive of any fees, commissions or other expenses. AtSeptember 30, 2020 , approximately$91.6 million was available to repurchase common stock pursuant to the stock repurchase program. The purchase of stock may be made in the open market or through privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, the cash needs and investment opportunities for the business, the current market price of our stock, applicable legal requirements and other factors. We have not purchased any stock under the program since 2012. -25-
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Capital Resources We make significant capital expenditures in order to service the demand of our customers, which are primarily focused on investments in advanced packaging and test equipment. We expect 2020 capital expenditures to be approximately$550 million . During the nine months endedSeptember 30, 2020 , our capital expenditures totaled$275.5 million . Ultimately, the amount of our 2020 capital expenditures will depend on several factors including, among others, the timing and implementation of any capital projects under review, the performance of our business, economic and market conditions, the cash needs and investment opportunities for the business, the need for additional capacity to service anticipated customer demand and the availability of cash flows from operations or financing. In addition, we are subject to risks associated with our capital expenditures, including those discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q under the caption "Capital Expenditures - We Make Substantial Investments in Equipment and Facilities to Support the Demand of Our Customers, Which May Adversely Affect Our Business if the Demand of Our Customers Does Not Develop as We Expect or Is Adversely Affected." Cash Flows Net cash provided by (used in) operating, investing and financing activities for the nine months endedSeptember 30, 2020 and 2019, was as follows: For the Nine Months Ended September 30, 2020 2019 (In thousands) Operating activities $ 434,048$ 283,332 Investing activities (611,337) (318,817) Financing activities (153,162) (49,734) Operating activities: Our cash flow provided by operating activities for the nine months endedSeptember 30, 2020 increased by$150.7 million compared to the nine months endedSeptember 30, 2019 , primarily due to higher net sales and higher operating profit, partially offset by changes in our working capital. Investing activities: Our cash flows used in investing activities for the nine months endedSeptember 30, 2020 increased by$292.5 million compared to the nine months endedSeptember 30, 2019 , primarily due to purchases of short-term investments. This increase was partially offset by proceeds from sales and maturities of short-term investments and a decrease in payments related to purchases of property, plant and equipment. Payments for property, plant and equipment can fluctuate based on timing of purchase, receipt and acceptance of equipment. Financing activities: The net cash used in financing activities for the nine months endedSeptember 30, 2020 was primarily due to the net debt repayments inJapan ,Korea andTaiwan . The net cash used in financing activities for the nine months endedSeptember 30, 2019 was primarily due to the redemption of our 6.375% Senior Notes due 2022 as well as repayments of debt inJapan andKorea , partially offset by our issuance of the 2027 Notes and net borrowings under our Singapore Revolver. We provide the following supplemental data to assist our investors and analysts in understanding our liquidity and capital resources. We define free cash flow as net cash provided by operating activities less payments for property, plant and equipment, plus proceeds from the sale of and insurance recovery for property, plant and equipment, if applicable. Free cash flow is not defined byU.S. GAAP. We believe free cash flow to be relevant and useful information to our investors because it provides them with additional information in assessing our liquidity, capital resources and financial operating results. Our management uses free cash flow in evaluating our liquidity, our ability to service debt and our ability to fund capital expenditures. However, free cash flow has certain limitations, including that it does not represent the residual cash flow available for discretionary expenditures since other, non-discretionary expenditures, such as mandatory debt service, are not deducted from the measure. The amount of mandatory versus discretionary expenditures can vary significantly between periods. This measure should be considered in addition to, and not as a substitute for, or superior to, other measures of liquidity or financial performance prepared in accordance withU.S. GAAP, such as net cash provided by operating activities. Furthermore, our definition of free cash flow may not be comparable to similarly titled measures reported by other companies. -26-
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For the Nine Months Ended September
30,
2020 2019
(In thousands)
Net cash provided by operating activities $ 434,048 $ 283,332
Payments for property, plant and equipment (275,531) (328,497)
Proceeds from sale of and insurance recovery for property, plant
and equipment 2,710 10,033
Free cash flow $ 161,227 $ (35,132)
Contractual Obligations
The following table summarizes our contractual obligations at September 30, 2020
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods.
Payments Due for Year Ending December 31,
2020 -
Total Remaining 2021 2022 2023 2024 Thereafter
(In thousands)
Total debt $ 1,328,191 $ 40,930 $ 125,274 $ 266,606 $ 252,056 $ 66,896 $ 576,429
Scheduled interest payment
obligations (1) 289,551 4,309 50,168 47,137 40,908 37,811 109,218
Purchase obligations (2) 105,413 87,392 5,884 4,815 3,896 1,290 2,136
Operating lease obligations (3) 149,293 13,234 50,547 32,874 17,563 10,124
24,951
Finance lease obligations (3) 22,176 2,707 10,437 3,403 1,693 997 2,939 Severance obligations (4) 119,090 2,925 10,324 9,419 8,577 7,797 80,048
Total contractual obligations
(1)Represents interest payment obligations calculated using stated coupon rates for fixed rate debt and interest rates applicable atSeptember 30, 2020 , for variable rate debt. (2)Represents off-balance sheet purchase obligations for capital expenditures, long-term supply contracts and other contractual commitments outstanding atSeptember 30, 2020 . (3)Represents future minimum lease payments including interest payments. (4)Represents estimated benefit payments for our Korean subsidiary severance plan atSeptember 30, 2020 . InOctober 2020 , some employees accepted our offer to convert their Korean severance plan participation to a defined contribution plan, which will reduce our liability under the severance plan and require us to fund the converted portion of the liability. The conversion is not reflected in the table above and we expect to fund the converted amount during the fourth quarter of 2020. We refer you to Note 12 to our Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q for additional information. In addition to the obligations identified in the table above, other non-current liabilities recorded in our Consolidated Balance Sheet atSeptember 30, 2020 include: •$68.3 million of foreign pension plan obligations, for which the timing and actual amount of impact on our future cash flow is uncertain. •$30.4 million net liability associated with unrecognized tax benefits. Due to the uncertainty regarding the amount and the timing of any future cash outflows associated with our unrecognized tax benefits, we are unable to reasonably estimate the amount and period of ultimate settlement, if any, with the various taxing authorities. Off-Balance Sheet Arrangements As ofSeptember 30, 2020 , we had no off-balance sheet guarantees or other off-balance sheet arrangements as defined in Item 303(a)(4)(ii) ofSEC Regulation S-K. -27-
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Contingencies, Indemnifications and Guarantees We refer you to Note 14 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of our contingencies related to litigation and other legal matters. Critical Accounting Policies Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . During the nine months endedSeptember 30, 2020 , there were no significant changes in our critical accounting policies as reported in our 2019 Annual Report on Form 10-K.
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