OPERATING AND FINANCIAL REVIEW AND PROSPECTS FOR THE SIX MONTHS ENDED JUNE 30, 2021

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Exhibit includes statements that are, or may be deemed to be, "forward-looking statements" within the meaning of U.S. securities laws. The terms "anticipates," "expects," "may," "will," "could," "should" and other similar expressions identify forward-looking statements. All statements other than statements of historical facts are forward-looking statements. These statements are made under the "Safe Harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements appear in a number of places throughout this Exhibit and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industries in which we operate.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Exhibit. Important factors that could cause those differences include, but are not limited to: general local and global economic conditions; the political stability of our local region; outlook of the major and emerging end markets for our products, such as smartphones, high performance computing, internet of things, automotive electronics and digital consumer electronics; the volatility of the semiconductor and electronics industry; our ability to develop new technologies successfully and remain a technological leader; the increased competition from other companies and our ability to retain and increase our market share; overcapacity in the semiconductor industry; our reliance on certain major customers; the reliability of our information technology systems and resilience to any cyberattacks; our ability to maintain control over expansion and facility modifications; our ability to generate growth and profitability; our ability to hire and retain qualified personnel; our ability to acquire required equipment and supplies necessary to meet business needs; our ability to protect our technologies, intellectual property rights and third-party licenses; disruptive events, such as earthquakes or droughts; the COVID-19 pandemic; power and other utility shortages; construction issues as we expand our capacity; and fluctuations in foreign currency rates, in particular, any material appreciation of the NT dollar against the U.S. dollar, and our ability to manage such risks.

You should not place undue reliance on these forward-looking statements.

Forward-looking statements include, but are not limited to, statements regarding our strategy and future plans, future business condition and financial results, our capital expenditure plans, our capacity management plans, expectations as to the commercial production using 3-nanometer and more advanced technologies, technological upgrades, investment in research and development, future market demand, future regulatory or other developments in our industry, business expansion plans or new investments as well as business acquisitions and financing plans.

The forward-looking statements made in this Exhibit relate only to events or information as of the date on which the statements are made in this Exhibit. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this Exhibit completely in conjunction with our Annual Reports on Form 20-F and other documents filed with or furnished to the SEC and with the understanding that our actual future results may be materially different from what we expect.

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CERTAIN DEFINED TERMS AND CONVENTIONS

Unless the context otherwise requires, reference to:

"Obligor Group" are to TSMC Arizona Corporation and Taiwan Semiconductor Manufacturing Company Limited collectively;

"we," "us," "our," "Company," "Group" or "TSMC" in this report are to Taiwan Semiconductor Manufacturing Company Limited and its consolidated subsidiaries;

"R.O.C." and "Taiwan" are references to the Republic of China, and all references to the "Government" refer to the government of the R.O.C.;

"NT$" and "NT dollar" are to the lawful currency of the R.O.C; and

"U.S. dollar" or "US$" are to the lawful currency of the United States of America.

Unless otherwise noted, for the convenience of the reader, certain NT dollar amounts have been translated into U.S. dollars at the rate of NT$27.91 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on June 30, 2021.

SELECTED FINANCIAL INFORMATION AND OPERATING DATA

The selected consolidated statements of profit or loss and other comprehensive income data and other consolidated financial data for the six months ended June 30, 2020 and 2021, and the selected consolidated statements of financial position as of June 30, 2021, set forth below, are derived from our unaudited condensed consolidated interim financial statements included herein, and should be read in conjunction with, and are qualified in their entirety by reference to, these unaudited condensed consolidated interim financial statements, including the notes thereto, which have been prepared in accordance with International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), IFRIC Interpretations (IFRIC), and SIC Interpretations (SIC) issued by the International Accounting Standards Board (IASB) (collectively, "IFRSs") and reviewed by our independent auditors.

Six months ended June 30,
2020 2021
NT$ NT$ US$
(in millions, except for earnings per share
and per ADS)

Consolidated Statements of Profit or Loss and Other Comprehensive Income Data:

Net revenue

621,296 734,555 26,319

Cost of revenue

(295,819 ) (358,546 ) (12,847 )

Gross profit before realized (unrealized) gross profit on sales to associates

325,477 376,009 13,472

Realized (unrealized) gross profit on sales to associates

(77 ) 27 1

Gross profit

325,400 376,036 13,473

Operating expenses

(65,844 ) (79,695 ) (2,855 )

Other operating income and expenses, net

60 (136 ) (5 )

Income from operations

259,616 296,205 10,613

Non-operating income and expenses, net

8,959 8,235 295

Income before income tax

268,575 304,440 10,908

2

Six months ended June 30,
2020 2021
NT$ NT$ US$
(in millions, except for earnings per share
and per ADS)

Income tax expense

(31,208 ) (27,297 ) (978 )

Net income

237,367 277,143 9,930

Other comprehensive loss for the period, net of income tax

(9,235 ) (4,235 ) (152 )

Total comprehensive income for the period

228,132 272,908 9,778

Net income attributable to shareholders of the parent

237,225 276,980 9,924

Net income attributable to non-controlling interests

142 163 6

Total comprehensive income attributable to shareholders of the parent

227,988 272,746 9,772

Total comprehensive income attributable to non-controlling interests

144 162 6

Basic/Diluted earnings per share

9.15 10.68 0.38

Basic/Diluted earnings per ADS equivalent

45.74 53.41 1.91

Basic/Diluted weighted average shares outstanding

25,930 25,930 25,930
As of June 30, 2021
NT$ US$
(in millions, except for cash
dividend per common share)

Consolidated Statements of Financial Position Data:

Current assets

1,241,104 44,468

Property, plant and equipment

1,722,679 61,723

Right-of-use assets

32,619 1,169

Intangible assets

26,535 951

Deferred income tax assets

36,181 1,296

Total assets

3,092,689 110,809

Current liabilities

659,558 23,632

Lease liabilities

21,031 753

Long-term bonds payable

410,465 14,707

Total liabilities

1,110,654 39,794

Capital stock

259,304 9,291

Equity attributable to shareholders of the parent

1,979,871 70,938

Non-controlling interests

2,164 77

Cash dividend paid per common share

5.0 0.2

3

Six months ended June 30,
2020 2021
NT$ NT$ US$
(in millions, except for percentages and
operating data)

Other Consolidated Financial Data:

Gross margin

52.4% 51.2% 51.2%

Operating margin

41.8% 40.3% 40.3%

Net margin

38.2% 37.7% 37.7%

Capital expenditures

319,258 415,000 14,869

Depreciation and amortization

139,430 204,705 7,334

Cash generated by operating activities

373,364 415,255 14,878

Cash used in investing activities

(318,743 ) (414,003 ) (14,833 )

Cash generated by (used in) financing activities

(34,845 ) 89,649 3,212

Effect of exchange rate changes

(7,561 ) (3,090 ) (111 )

Net increase in cash

12,215 87,811 3,146

Operating Data:

Wafer (12-inch equivalent) shipment(1)

5,911 6,808 6,808
(1)

In thousands.

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RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain financial data from our consolidated statements of profit or loss and other comprehensive income, expressed in each case as a percentage of net revenue:

For the six months
ended June 30,
2020 2021

Net revenue

100.0% 100.0%

Cost of revenue

(47.6)% (48.8)%

Gross profit

52.4% 51.2%

Operating expenses

Research and development

(8.0)% (8.4)%

General and administrative

(2.1)% (2.0)%

Marketing

(0.5)% (0.5)%

Total operating expenses

(10.6)% (10.9)%

Other operating income and expenses, net

0.0% 0.0%

Income from operations

41.8% 40.3%

Income before income tax

43.2% 41.4%

Income tax expense

(5.0)% (3.7)%

Net income

38.2% 37.7%

Other comprehensive loss for the period, net of income tax

(1.5)% (0.5)%

Total comprehensive income for the period

36.7% 37.2%

Net income attributable to shareholders of the parent

38.2% 37.7%

Net income attributable to non-controlling interests

0.0% 0.0%

Net Revenue and Gross Margin

For the six months ended June 30,
2020 2021 % Change in
NT$ from 2020
NT$ NT$ US$
(in millions, except percentages)

Net revenue

621,296 734,555 26,319 18.2%

Cost of revenue

(295,819 ) (358,546 ) (12,847 ) 21.2%

Gross profit before realized (unrealized) gross profit on sales to associates

325,477 376,009 13,472 15.5%

Realized (unrealized) gross profit on sales to associates

(77 ) 27 1 -

Gross profit

325,400 376,036 13,473 15.6%

Gross margin percentage

52.4% 51.2% 51.2% -

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Net Revenue

Our net revenue increased by 18.2% in the six months ended June 30, 2021, compared to the same period in 2020, which was mainly attributed to a 15.2% increase in wafer shipments and an 11.7% increase in average selling price due to higher advanced technology (7-nanometer and below) revenue weighting, partially offset by a 7.1% appreciation of the NT dollar against the U.S. dollar.

Gross Margin

Our gross margin fluctuates with the level of capacity utilization, price change, cost improvement, product mix and exchange rates, among other factors. Furthermore, our gross margin would be negatively impacted in the period when a new technology is introduced.

In the six months ended June 30, 2021, our gross margin decreased to 51.2% of net revenue from 52.4% in the same period in 2020, mainly ascribed to an unfavorable impact of the NT dollar's appreciation against the U.S. dollar, partially offset by higher capacity utilization.

Operating Expenses

For the six months ended June 30,
2020 2021 % Change in
NT$ from 2020
NT$ NT$ US$
(in millions, except percentages)

Research and development

49,862 61,630 2,208 23.6%

General and administrative

12,798 14,351 514 12.1%

Marketing

3,184 3,714 133 16.6%

Total operating expenses

65,844 79,695 2,855 21.0%

Percentage of net revenue

10.6% 10.9% 10.9% -

Other operating income and expenses, net

60 (136 ) (5 ) (326.7)%

Income from operations

259,616 296,205 10,613 14.1%

Operating margin

41.8% 40.3% 40.3% -

Operating expenses increased by NT$13,851 million in the six months ended June 30, 2021, or 21.0%, compared to the same period in 2020.

Research and Development Expenses

We remain strongly committed to being the leader in advanced process technologies development. We believe that continuing investment in process technologies is essential for us to remain competitive in the markets we serve.

Research and development expenses increased by NT$11,768 million in the six months ended June 30, 2021, or 23.6%, from the same period in 2020. The increases were mainly attributed to a higher level of research activities for 2-nanometer,3-nanometer and 4-nanometer process technologies, as we continued to advance to smaller processing nodes, partially offset by a lower level of research activities for 5-nanometer and 7-nanometer. We plan to continue our investment in technology research and development in 2021.

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General and Administrative and Marketing Expenses

General and administrative and marketing expenses in the six months ended June 30, 2021, increased by NT$2,083 million, or 13.0%, compared to the same period in 2020, mainly reflecting a structural pay raise and higher employee profit sharing expenses due to higher net income.

Other Operating Income and Expenses

We recorded a net loss of NT$136 million from other operating income and expenses in the six months ended June 30, 2021, compared to a net gain of NT$60 million in the same period in 2020, primarily attributed to an impairment loss on property, plant and equipment of NT$274 million and higher depreciation of assets subject to operating leases of NT$123 million, partially offset by higher rental income of NT$247 million.

Non-Operating Income and Expenses

For the six months ended June 30,
2020 2021 % Change
in NT$
from 2020
NT$ NT$ US$
(in millions, except percentages)

Share of profits of associates

1,434 2,424 87 69.0%

Interest income

5,468 2,890 103 (47.1)%

Other income

344 657 24 91.0%

Foreign exchange gain, net

3,155 6,124 219 94.1%

Finance costs

(940 ) (1,907 ) (68 ) 102.9%

Other gains and losses, net

(502 ) (1,953 ) (70 ) 289.0%

Net non-operating income

8,959 8,235 295 (8.1)%

Net non-operating income in the six months ended June 30, 2021, decreased by NT$724 million, or 8.1%, from NT$8,959 million in the same period in 2020, mainly due to lower interest income of NT$2,578 million and higher finance costs of NT$967 million compared to the same period in 2020. The decrease was partially offset by higher foreign exchange gain of NT$2,969 million compared to the same period in 2020.

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Income Tax Expense

For the six months ended June 30,
2020 2021 %
Change
in NT$
from
2020
NT$ NT$ US$
(in millions, except percentages)

Income tax expense

(31,208 ) (27,297 ) (978 ) (12.5)%

Net income

237,367 277,143 9,930 16.8%

Net income attributable to shareholders of the parent

237,225 276,980 9,924 16.8%

Net margin attributable to shareholders of the parent

38.2% 37.7% 37.7% -

Income tax expenses decreased by NT$3,911 million in the six months ended June 30, 2021, or 12.5%, from the same period in 2020. The decrease was mainly due to the adjustment of surtax imposed on prior year's unappropriated earnings in 2021, attributed to the deduction of capital expenditures from the unappropriated earnings.

Summary Financial Information of the Obligor Group

Basis of preparation

The following summarized financial information is presented for the Obligor Group on a combined basis after elimination of intercompany transactions between entities in the combined group and amounts related to investments in any subsidiary that is a non-guarantor.

This information is not intended to present the financial position or results of operations of the combined group of companies in accordance with U.S. GAAP.

Translations for financial data as of and for the year ended December 31, 2020 in this subsection, were made at the rate of NT$28.08 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2020.

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Statement of Income for Obligor Group

For the year ended
December 31, 2020
For the six months ended
June 30, 2021
NT$ US$ NT$ US$
(in millions)

Net sales - external

490,354 17,463 246,790 8,843

Net sales - to subsidiaries outside of the Obligor Group

824,439 29,360 482,744 17,296

Total net sales

1,314,793 46,823 729,534 26,139

Gross profit

682,004 24,288 361,889 12,966

Income from continuing operations

543,465 19,354 285,046 10,213

Net income

510,744 18,189 276,989 9,924

Net income attributable to Obligor Group

510,744 18,189 276,989 9,924

Balance Sheet for Obligor Group

As of December 31, 2020 As of June 30, 2021
NT$ US$ NT$ US$
(in millions)

Assets

Current assets - external

477,878 17,019 520,070 18,634

Current assets - due from subsidiaries outside of the Obligor Group

103,193 3,675 124,287 4,453

Total current assets

581,071 20,694 644,357 23,087

Non-current assets - external

1,607,298 57,240 1,787,537 64,047

Non-current assets - due from subsidiaries outside of the Obligor Group

545,009 19,409 552,826 19,807

Total non-current assets

2,152,307 76,649 2,340,363 83,854

Total assets

2,733,378 97,343 2,984,720 106,941

Liabilities

Current liabilities - external

602,920 21,471 632,598 22,666

Current liabilities - due from subsidiaries outside the Obligor Group

92,329 3,288 108,574 3,890

Total current liabilities

695,249 24,759 741,172 26,556

Non-current liabilities - external

203,318 7,241 263,677 9,447

Non-current liabilities - due from subsidiaries outside of the Obligor Group

- - - -

Total non-current liabilities

203,318 7,241 263,677 9,447

Total liabilities

898,567 32,000 1,004,849 36,003

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Liquidity and Capital Resources

Our sources of liquidity include cash flow from operations, cash and cash equivalents, current portion of marketable financial assets and issuances of corporate bonds.

Our primary source of liquidity is cash flow from operations. Cash flow from operations for the six months ended June 30, 2021, was NT$415,255 million (US$14,878 million), reflecting an increase of NT$41,891 million compared to the same period in 2020.

Our cash, cash equivalents and current portion of marketable financial assets increased to NT$870,835 million (US$31,202 million) as of June 30, 2021, compared to NT$605,016 million as of June 30, 2020. The current portion of marketable financial assets primarily consisted of fixed income securities. During the six months ended June 30, 2021, we issued NT dollar-denominated corporate bonds totaling NT$60,000 million (US$2,150 million) and U.S. dollar denominated corporate bonds of US$3,500 million.

We believe that our cash generated from operations, cash and cash equivalents, current portion of marketable financial assets, and ability to access capital markets will be sufficient to fund our working capital needs, capital expenditures, debt repayments, dividend payments and other business requirements associated with existing operations over the next 12 months.

For the six months ended June 30,
2020 2021
NT$ NT$ US$
(in millions)

Net cash generated by operating activities

373,364 415,255 14,878

Net cash used in investing activities

(318,743 ) (414,003 ) (14,833 )

Net cash generated by (used in) financing activities

(34,845 ) 89,649 3,212

Effect of exchange rate changes on cash and cash equivalents

(7,561 ) (3,090 ) (111 )

Net increase in cash and cash equivalents

12,215 87,811 3,146

Cash and cash equivalents increased by NT$87,811 million in the six months ended June 30, 2021.

Operating Activities

In the six months ended June 30, 2021, we generated NT$415,255 million (US$14,878 million) net cash from operating activities, as compared to NT$373,364 million in the same period in 2020. The net cash generated from operating activities was primarily from NT$304,440 million in income before tax and NT$204,705 million in non-cash depreciation and amortization expenses, partially offset by income tax payments, changes in working capital and others of NT$93,890 million. The increase in depreciation and amortization expenses in the six months ended June 30, 2021 was mainly attributed to continuing investment in production capacity for advanced technologies. In the six months ended June 30, 2020, net cash generated from operating activities was primarily from NT$268,575 million in income before income tax and NT$139,430 million in non-cash depreciation and amortization expenses, partially offset by income tax payments, changes in working capital and others of NT$34,641 million.

10

Investing Activities

In the six months ended June 30, 2021, net cash used in investing activities was NT$414,003 million (US$14,833 million), as compared to NT$318,743 million in the same period in 2020. The primary use of cash in investing activities in the six months ended June 30, 2021 was for capital expenditures of NT$415,000 million.

In the six months ended June 30, 2020, net cash used in investing activities was primarily for capital expenditures of NT$319,258 million.

Financing Activities

In the six months ended June 30, 2021, net cash generated in financing activities was NT$89,649 million (US$3,212 million), as compared to net cash used in financing activities of NT$34,845 million in the same period in 2020. The net cash generated in financing activities in the six months ended June 30, 2021 was mainly from proceeds from issuance of corporate bonds and increases in short-term loans, partially offset by cash dividend payments.

In the six months ended June 30, 2020, net cash used in financing activities was primarily for cash dividend payments and repayments of corporate bonds, partially offset by proceeds from issuance of corporate bonds and increases in short-term loans.

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TSMC - Taiwan Semiconductor Manufacturing Company Ltd. published this content on 18 October 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 18 October 2021 20:11:03 UTC.