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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
.
Commission File Number: 001-34791
 
 
MagnaChip Semiconductor Corporation
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
83-0406195
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
c/o MagnaChip Semiconductor S.A.
1, Allée Scheffer, L-2520
Luxembourg, Grand Duchy of Luxembourg
(352)
45-62-62
(Address, zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
Common Stock, par value $0.01 per share
  
MX
  
New York Stock Exchange
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 Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such 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, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
Non-accelerated
filer
     Smaller reporting company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    ☐  Yes      No
As of July 31, 2020, the registrant had 35,160,216 shares of common stock outstanding.
 
 
 

Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
  
Page No.
 
   
  
 
3
 
     
Item 1.
 
  
 
3
 
     
 
 
  
 
3
 
     
 
 
  
 
4
 
     
 
 
  
 
5
 
     
 
 
  
 
6
 
     
 
 
  
 
7
 
     
 
 
  
 
8
 
     
Item 2.
 
  
 
29
 
     
Item 3.
 
  
 
52
 
     
Item 4.
 
  
 
53
 
   
  
 
54
 
     
Item 1.
 
  
 
54
 
     
Item 1A.
 
  
 
54
 
     
Item 6.
 
  
 
55
 
   
  
 
56
 
 
2

Table of Contents
PART I—FINANCIAL INFORMATION
 
Item 1.
Interim Consolidated Financial Statements (Unaudited)
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
    
June 30,
2020
   
December 31,
2019
 
    
(In thousands of US dollars,
except share data)
 
Assets
    
Current assets
    
Cash and cash equivalents
   $ 192,824     $ 151,657  
Accounts receivable, net
     48,548       47,447  
Inventories, net
     45,511       41,404  
Other receivables
     10,406       10,200  
Prepaid expenses
     8,598       9,003  
Hedge collateral (Note 9)
     11,740       9,820  
Other current assets (Notes 10 and 18)
     7,405       10,013  
Current assets held for sale (Note 2)
     205,086       99,821  
  
 
 
   
 
 
 
Total current assets
     530,118       379,365  
  
 
 
   
 
 
 
Property, plant and equipment, net
     69,110       73,068  
Operating lease
right-of-use
assets
     1,182       1,876  
Intangible assets, net
     2,590       2,769  
Long-term prepaid expenses
     2,936       5,757  
Other
non-current
assets
     9,212       9,059  
Non-current
assets held for sale (Note 2)
     —         123,434  
  
 
 
   
 
 
 
Total assets
   $ 615,148     $ 595,328  
  
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
    
Current liabilities
    
Accounts payable
   $ 42,366     $ 40,376  
Other accounts payable
     4,049       6,410  
Accrued expenses
 
(Note 8)
     45,735       44,799  
Operating lease liabilities
     1,053       1,625  
Current portion of long-term borrowings, net
     82,706       —    
Other current liabilities (Note 10)
     5,481       3,583  
Current liabilities held for sale (Note 2)
     146,569       37,040  
  
 
 
   
 
 
 
Total current liabilities
     327,959       133,833  
  
 
 
   
 
 
 
Long-term borrowings, net
     223,242       304,743  
Accrued severance benefits, net
     49,927       51,181  
Other
non-current
liabilities
     7,845       9,671  
Non-current
liabilities held for sale (Note 2)
     —         110,881  
  
 
 
   
 
 
 
Total liabilities
     608,973       610,309  
  
 
 
   
 
 
 
Commitments and contingencies (Note 18)
Stockholders’ equity
    
Common stock, $0.01 par value, 150,000,000 shares authorized, 44,248,706 shares issued and 35,143,033 outstanding at June 30, 2020 and 43,851,991 shares issued and 34,800,312 outstanding at December 31, 2019
     443       439  
Additional
paid-in
capital
     155,591       152,404  
Accumulated deficit
     (52,709     (58,131
Treasury stock, 9,105,673 shares at June 30, 2020 and 9,051,679 shares at December 31, 2019, respectively
     (107,649     (107,033
Accumulated other comprehensive income (loss)
     10,499       (2,660
  
 
 
   
 
 
 
Total stockholders’ equity (deficit)
     6,175       (14,981
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 615,148     $ 595,328  
  
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
3

Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
    
Three Months Ended
   
Six Months Ended
 
    
June 30,
2020
   
June 30,
2019
   
June 30,
2020
   
June 30,
2019
 
    
(In thousands of US dollars, except share data)
 
Revenues:
        
Net sales – standard products business
   $ 108,955     $ 132,006     $ 219,691     $ 232,270  
Net sales – transitional Fab 3 foundry services
     9,873       8,879       19,610       15,882  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues
     118,828       140,885       239,301       248,152  
Cost of sales:
        
Cost of sales – standard products business
     76,817       100,384       158,423       181,625  
Cost of sales – transitional Fab 3 foundry services
     9,873       8,879       19,610       15,882  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total cost of sales
     86,690       109,263       178,033       197,507  
  
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
     32,138       31,622       61,268       50,645  
Operating expenses:
        
Selling, general and administrative expenses
     12,408       11,095       24,510       23,131  
Research and development expenses
     11,108       11,772       21,617       23,816  
Other charges
     —         —         554       —    
  
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     23,516       22,867       46,681       46,947  
  
 
 
   
 
 
   
 
 
   
 
 
 
Operating income:
     8,622       8,755       14,587       3,698  
  
 
 
   
 
 
   
 
 
   
 
 
 
Interest expense
     (5,430     (5,439     (11,037     (11,076
Foreign currency gain (loss), net
     8,469       (11,571     (22,502     (22,181
Loss on early extinguishment of long-term borrowings, net
     —         —         —         (42
Other income, net
     791       551       1,629       1,138  
  
 
 
   
 
 
   
 
 
   
 
 
 
Income (loss) from continuing operations before income tax expense
     12,452       (7,704     (17,323     (28,463
Income tax expense
     678       786       1,981       1,582  
  
 
 
   
 
 
   
 
 
   
 
 
 
Income (loss) from continuing operations
     11,774       (8,490     (19,304     (30,045
Income (loss) from discontinued operations, net of tax
     17,397       (1,030     24,726       (13,600
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income (loss)
   $ 29,171     $ (9,520   $ 5,422     $ (43,645
  
 
 
   
 
 
   
 
 
   
 
 
 
Basic earnings (loss) per common share—  
        
Continuing operations
   $ 0.34     $ (0.25   $ (0.55   $ (0.88
Discontinued operations
     0.50       (0.03     0.71       (0.40
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
   $ 0.84     $ (0.28   $ 0.16     $ (1.28
  
 
 
   
 
 
   
 
 
   
 
 
 
Diluted earnings (loss) per common share—  
        
Continuing operations
   $ 0.28     $ (0.25   $ (0.55   $ (0.88
Discontinued operations
     0.37       (0.03     0.71       (0.40
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
   $ 0.65     $ (0.28   $ 0.16     $ (1.28
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted average number of shares—  
        
Basic
     35,092,312       34,245,127       34,992,734       34,220,141  
Diluted
     46,474,237       34,245,127       34,992,734       34,220,141  
The accompanying notes are an integral part of these consolidated financial statements.
 
4

Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
 
    
Three Months Ended
   
Six Months Ended
 
    
June 30,
2020
   
June 30,
2019
   
June 30,
2020
   
June 30,
2019
 
    
(In thousands of US dollars)
 
Net income (loss)
   $ 29,171     $ (9,520   $ 5,422     $ (43,645
  
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss)
        
Foreign currency translation adjustments
     (6,543     7,680       15,708       14,984  
Derivative adjustments
        
Fair valuation of derivatives
     2,204       (2,499     (2,800     (2,900
Reclassification adjustment for loss on derivatives
included in net income (loss)
     193       1,864       251       1,953  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total other comprehensive income (loss)
     (4,146     7,045       13,159       14,037  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive
income
(loss)
   $ 25,025     $ (2,475   $ 18,581     $ (29,608
  
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
5

Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
 
    
Common Stock
    
Additional
Paid-In
   
Accumulated
   
Treasury
   
Accumulated
Other
Comprehensive
       
(In thousands of US dollars, except share data)
  
Shares
   
Amount
    
Capital
   
Deficit
   
Stock
   
Income (Loss)
   
Total
 
Three Months Ended June 30, 2020:
               
Balance at March 31, 2020
     35,054,682     $ 442      $ 153,286     $ (81,880   $ (107,649   $ 14,645     $ (21,156
Stock-based compensation
     —         —          1,643       —         —         —         1,643  
Exercise of stock options
     88,351       1        662       —         —         —         663  
Other comprehensive loss, net
     —         —          —         —         —         (4,146     (4,146
Net income
     —         —          —         29,171       —         —         29,171  
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2020
     35,143,033     $ 443      $ 155,591     $ (52,709   $ (107,649   $ 10,499     $ 6,175  
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Three Months Ended June 30, 2019:
               
Balance at March 31, 2019
     34,223,502     $ 433      $ 143,315     $ (70,430   $ (106,511   $ (13,118   $ (46,311
Stock-based compensation
     —         —          772       —         —         —         772  
Exercise of stock options
     15,934       0        101       —         —         —         101  
Settlement of restricted stock units
     1,040       0        (0     —         —         —         —    
Acquisition of treasury stock
     (295     —          —         —         (3     —         (3
Other comprehensive income, net
     —         —          —         —         —         7,045       7,045  
Net loss
     —         —          —         (9,520     —         —         (9,520
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2019
     34,240,181     $ 433      $ 144,188     $ (79,950   $ (106,514   $ (6,073   $ (47,916
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Common Stock
    
Additional
Paid-In
   
Accumulated
   
Treasury
   
Accumulated
Other
Comprehensive
       
(In thousands of US dollars, except share data)
  
Shares
   
Amount
    
Capital
   
Deficit
   
Stock
   
Income (Loss)
   
Total
 
Six Months Ended June 30, 2020:
               
Balance at December 31, 2019
     34,800,312     $ 439      $ 152,404     $ (58,131   $ (107,033   $ (2,660   $ (14,981
Stock-based compensation
     —         —          2,528       —         —         —         2,528  
Exercise of stock options
     88,351       1        662       —         —         —         663  
Settlement of restricted stock units
     308,364       3        (3     —         —         —         —    
Acquisition of treasury stock
     (53,994     —          —         —         (616     —         (616
Other comprehensive income, net
     —         —          —         —         —         13,159       13,159  
Net income
     —         —          —         5,422       —         —         5,422  
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2020
     35,143,033     $ 443      $ 155,591     $ (52,709   $ (107,649   $ 10,499     $ 6,175  
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Six Months Ended June 30, 2019:
               
Balance at December 31, 2018
     34,441,232     $ 431      $ 142,600     $ (36,305   $ (103,926   $ (20,110   $ (17,310
Stock-based compensation
     —         —          1,441       —         —         —         1,441  
Exercise of stock options
     24,558       0        149       —         —         —         149  
Settlement of restricted stock units
     168,493       2        (2     —         —         —         —    
Acquisition of treasury stock
     (394,102     —          —         —         (2,588     —         (2,588
Other comprehensive income, net
     —         —          —         —         —         14,037       14,037  
Net loss
     —         —          —         (43,645     —         —         (43,645
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2019
     34,240,181     $ 433      $ 144,188     $ (79,950   $ (106,514   $ (6,073   $ (47,916
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
6

Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
    
Six Months Ended
 
    
June 30,
2020
   
June 30,
2019
 
    
(In thousands of US dollars)
 
Cash flows from operating activities
    
Net income (loss)
   $ 5,422     $ (43,645
Adjustments to reconcile net income (loss) to net cash provided by operating activities
    
Depreciation and amortization
     10,479       16,505  
Provision for severance benefits
     10,179       6,406  
Amortization of debt issuance costs and original issue discount
     1,205       1,134  
Loss on foreign currency, net
     26,397       24,609  
Restructuring and other charges
     141       732  
Provision for inventory reserves
     2,033       8,940  
Stock-based compensation
     2,528       1,441  
Loss on early extinguishment of long-term borrowings, net
     —         42  
Other
     (111     (494
Changes in operating assets and liabilities
    
Accounts receivable, net
     (438     (20,974
Unbilled accounts receivable, net
     10,933       6,201  
Inventories
     (14,060     (7,351
Other receivables
     67       (2,969
Other current assets
     4,747       5,929  
Accounts payable
     4,947       32,137  
Other accounts payable
     (5,898     (3,960
Accrued expenses
     161       2,880  
Other current liabilities
     1,220       (7,491
Other
non-current
liabilities
     1,238       1,716  
Payment of severance benefits
     (4,272     (4,579
Other
     147       (54
  
 
 
   
 
 
 
Net cash provided by operating activities
     57,065       17,155  
  
 
 
   
 
 
 
Cash flows from investing activities
    
Proceeds from settlement of hedge collateral
     5,855       4,627  
Payment of hedge collateral
     (7,841     (8,395
Purchase of property, plant and equipment
     (8,842     (15,000
Payment for intellectual property registration
     (473     (642
Collection of guarantee deposits
     47       388  
Payment of guarantee deposits
     (571     (1,330
Other
     21       193  
  
 
 
   
 
 
 
Net cash used in investing activities
     (11,804     (20,159
  
 
 
   
 
 
 
Cash flows from financing activities
    
Repurchase of long-term borrowings
     —         (1,175
Proceeds from exercise of stock options
     663       149  
Acquisition of treasury stock
     (1,021     (2,588
Repayment of financing related to water treatment facility arrangement
     (267     (281
Repayment of principal portion of finance lease liabilities
     (119     (118
  
 
 
   
 
 
 
Net cash used in financing activities
     (744     (4,013
  
 
 
   
 
 
 
Effect of exchange rates on cash and cash equivalents
     (3,350     (1,668
  
 
 
   
 
 
 
Net increase (decrease) in cash and cash equivalents
     41,167       (8,685
  
 
 
   
 
 
 
Cash and cash equivalents
    
Beginning of the period
     151,657       132,438  
  
 
 
   
 
 
 
End of the period
   $ 192,824     $ 123,753  
  
 
 
   
 
 
 
Supplemental cash flow information
    
Cash paid for interest
   $ 9,522     $ 9,549  
  
 
 
   
 
 
 
Cash paid for income taxes
   $ 1,889     $ 1,881  
  
 
 
   
 
 
 
Non-cash
investing activities
    
Property, plant and equipment additions in other accounts payable
   $ 602     $ 687  
  
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
7

Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. Business, Basis of Presentation and Significant Accounting Policies
Business
MagnaChip Semiconductor Corporation (together with its subsidiaries, the “Company”) is a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, Internet of Things (“IoT”) applications, consumer, industrial and automotive applications. The Company provides technology platforms for analog, mixed signal, power, high voltage,
non-volatile
memory and Radio Frequency (“RF”) applications.
On March 30, 2020, the Company entered into a definitive Business Transfer Agreement (the “BTA”) for the sale of its Foundry Services Group business and its fabrication facility located in Cheongju (“Fab 4”), the larger of the Company’s two
8-inch
manufacturing facilities, to Magnus Semiconductor, LLC, a Korean limited liability company, or one of its wholly owned subsidiaries (the “Buyer”) for a purchase price equal to the KRW equivalent of $344.7 million in cash, subject to working capital adjustments set forth in the BTA. The Buyer is a special purpose company formed by Alchemist Capital Partners Korea Co., Ltd. and Credian Partners, Inc. This planned divestiture of the Foundry Services Group business and Fab 4 will allow the Company to strategically shift its operational focus to its standard products business. The Foundry Services Group was historically a reportable segment. As a result of the entry into the BTA, the results of the Foundry Services Group were classified as discontinued operations in the Company’s consolidated statements of operations and excluded from both continuing operations and segment results for all periods presented. Accordingly, commencing with the first quarter of 2020, the Company has one reportable segment: its standard products business, together with transitional foundry services associated with its fabrication facility located in Gumi, Korea, known as “Fab 3,” that it expects to perform for the Buyer for a period of up to three years (the “Transitional Fab 3 Foundry Services”). The Company’s standard products business includes its Display Solutions and Power Solutions business lines. The Company’s Display Solutions products provide panel display solutions to major suppliers of large and small rigid and flexible panel displays, and mobile, automotive applications and home appliances. The Company’s Power Solutions products include discrete and integrated circuit solutions for power management in communications, consumer and industrial applications.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). These interim consolidated financial statements include normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair statement of the Company’s financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with Accounting Standards Codification 270, “Interim Reporting” and, accordingly, do not include all of the information and note disclosures required by US GAAP for complete financial statements, except for the changes below. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for a full year or for any other periods.
The Company has reclassified certain prior year amounts to conform to the current year’s presentation for discontinued operations to reflect the anticipated divestiture of its Foundry Services Group business and Fab 4. The assets to be acquired and liabilities to be transferred to the Buyer, as specified in the BTA, have been classified as assets and liabilities held for sale in the Company’s consolidated balance sheets, subject to adjustments set forth in the BTA. See Note 2 “Discontinued Operations and Assets Held for Sale” for additional information. The consolidated statements of cash flows have not been adjusted to separately disclose cash flows related to discontinued operations, but the material items in the operating and investing activities of cash flows relating to discontinued operations are disclosed in Note 2. Unless otherwise stated, information in these notes to consolidated financial statements relates to the Company’s continuing operations and excludes the discontinued operations.
There have been no material changes to the Company’s significant accounting policies as of and for the three and six months ended June 30, 2020, except for those related to discontinued operations and assets held for sale as described below, as compared to the significant accounting policies described in the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2019.
 
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Table of Contents
Discontinued Operations and Assets Held for Sale
The Company reports the results of operations of a business as discontinued operations if a disposal represents a strategic shift that has or will have a major effect on the Company’s operations and financial results when the business is sold and classified as held for sale, in accordance with the criteria of Accounting Standard Codification (“ASC”) 205, “Presentation of Financial Statements” (“ASC 205”) and ASC 360, “Property, Plant and Equipment” (“ASC 360”). Assets and liabilities of a business classified as held for sale are recorded at the lower of its carrying amount or estimated fair value less costs to sell
,
and depreciation
 and amortization
 
ceases on the date that the held for sale criteria are met. If the carrying amount of the business exceeds its estimated fair value less costs to sell, a loss is recognized. Assets and liabilities related to discontinued operations classified as held for sale are segregated in the current and prior balance sheets in the period in which the business is classified as held for sale. The results of discontinued operations are reported in “Income (loss) from discontinued operations, net of tax” in the accompanying consolidated statements of operations for the current and prior periods commencing in the period in which the business meets the criteria.
Recent Accounting Pronouncements Not Yet Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
No. 2019-12,
“Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU
2019-12”).
ASU
2019-12
removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU
2019-12
is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company does not expect the adoption of ASU
2019-12
to have a material effect on the Company’s consolidated financial statements.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update
No. 2016-13,
“Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU
2016-13”).
ASU
2016-13
amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. In April 2019, the FASB issued Accounting Standards Update
No. 2019-04,
“Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU
2019-04”),
and in November 2019, the FASB issued Accounting Standards Update
No. 2019-11,
“Codification Improvements to Topic 326, Financial Instruments—Credit Losses” (“ASU
2019-11”)
to clarify and address certain items related to the amendments in ASU
2016-13.
In February 2020, the FASB issued Accounting Standards Update
No. 2020-02,
“Financial Instruments—Credit Losses (Topic 326)” (“ASU
2020-02”),
which incorporates SEC SAB 119 (updated from SAB 102) into the ASC by aligning SEC recommended policies and procedures with ASC 326.The Company adopted ASU
2016-13,
ASU
2019-04,
ASU
2019-11
and ASU
2020-02
as of January 1, 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements.
 
In August 2018, the FASB issued Accounting Standards Update
No. 2018-13
“Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU
2018-13”).
ASU
2018-13
amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. The Company adopted ASU
2018-13
as of January 1, 2020, and the adoption of ASU
2018-13
did not impact the Company’s consolidated financial statements.
 
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Table of Contents
2. Discontinued Operations and Assets Held for Sale
On March 30, 2020, the Company entered into the BTA for the sale of its Foundry Services Group business and Fab 4. Following the consummation of the sale, and for up to three years, the Company is expected to provide the Transitional Fab 3 Foundry Services. For the periods prior to the closing of the sale, revenue from providing the Transitional Fab 3 Foundry Services to the Foundry Services Group is recorded at cost on both of the continuing and discontinued businesses. The sale is expected to close
in the third quarter of
2020, subject to customary closing conditions.
The following table summarizes the results from discontinued operations, net of tax, for the three and six months ended June 30, 2020 and 2019.
 
    
Three Months Ended
    
Six Months Ended
 
    
June 30,
2020
    
June 30,
2019
    
June 30,
2020
    
June 30,
2019
 
    
(In thousands of US dollars, except share data)
 
Revenues:
           
Net sales – Foundry Services Group
   $ 95,779      $ 73,139      $ 182,058      $ 130,255  
Net sales – transitional Fab 3 foundry services
     (9,873      (8,879      (19,610      (15,882
  
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues
     85,906        64,260        162,448        114,373  
Cost of sales:
           
Cost of sales – Foundry Services Group
     64,869        60,921        130,452        114,359  
Cost of sales – transitional Fab 3 foundry services
     (9,873      (8,879      (19,610      (15,882
  
 
 
    
 
 
    
 
 
    
 
 
 
Total cost of sales
     54,996        52,042        110,842        98,477  
  
 
 
    
 
 
    
 
 
    
 
 
 
Gross profit
     30,910        12,218        51,606        15,896  
Operating expenses:
           
Selling, general and administrative expenses
     4,992        5,880        10,636        11,914  
Research and development expenses
     6,915        7,217        14,318        15,191  
Restructuring and other charges
     589        1,130        2,704        4,024  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total operating expenses
     12,496        14,227        27,658        31,129  
  
 
 
    
 
 
    
 
 
    
 
 
 
Operating income (loss) from discontinued operations
     18,414        (2,009      23,948        (15,233
  
 
 
    
 
 
    
 
 
    
 
 
 
Foreign currency gain (loss), net
     (23      1,140        2,074        1,753  
Others, net
     (59      (135      48        (49
  
 
 
    
 
 
    
 
 
    
 
 
 
Income (loss) from discontinued operations before income tax expense
     18,332        (1,004      26,070        (13,529
Income tax expense
     935        26        1,344        71  
  
 
 
    
 
 
    
 
 
    
 
 
 
Income (loss) from discontinued operations, net of tax
     17,397        (1,030      24,726        (13,600
  
 
 
    
 
 
    
 
 
    
 
 
 
For the three months ended June 30, 2020 and 2019, the Company recorded $589 thousand and $1,130 thousand
, respectively,
and for the six months ended June 30, 2020 and 2019, the Company recorded $2,704 thousand and $1,873 thousand, respectively, in professional fees incurred in connection with the Foundry Services Group business and Fab 4, and recorded such costs as restructuring and other charges in the above. For the six months ended June 30, 2019, the Company also recorded in the same line a $2,151 thousand restructuring-related charge to its fab employees.
 
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Table of Contents
The following table provides a reconciliation of the aggregate carrying amounts of major classes of assets and liabilities relating to the Foundry Services Group business and Fab 4, which are included in assets and liabilities held for sale in the accompanying consolidated balance sheets for each of the periods presented:
 
    
June 30,
2020
    
December 31,
2019
 
    
(In thousands of US dollars)
 
Assets
     
Current assets
     
Accounts receivable, net
   $ 42,789      $ 48,194  
Unbilled accounts receivable
     5,936        16,463  
Inventories, net
     36,602        31,863  
Other current assets
     2,933        3,301  
Other assets of the disposal group classified as held for sale
     683        —    
  
 
 
    
 
 
 
Total current assets held for sale
   $ 88,943      $ 99,821  
  
 
 
    
 
 
 
Property, plant and equipment, net
     103,887        109,506  
Intangible assets, net
     1,350        1,245  
Other
non-current
assets
     10,906        12,683  
  
 
 
    
 
 
 
Total assets held for sale
   $ 205,086      $ 223,255  
  
 
 
    
 
 
 
Liabilities
     
Current liabilities
     
Accounts payable
   $ 21,530      $ 20,503  
Other current liabilities
     14,266        16,537  
  
 
 
    
 
 
 
Total current liabilities held for sale
   $ 35,796      $ 37,040  
  
 
 
    
 
 
 
Accrued severance benefits, net
     97,485        95,547  
Other
non-current
liabilities
     13,288        15,334  
  
 
 
    
 
 
 
Total liabilities held for sale
   $ 146,569      $ 147,921  
  
 
 
    
 
 
 
As of June 30, 2020, all assets and liabilities held for sale are classified as current on the consolidated balance sheets based on the anticipated date of disposal of the Foundry Services Group business and Fab 4.
The following table provides supplemental cash flows information related to discontinued operations:
 
    
Six Months Ended
 
    
June 30,
2020
    
June 30,
2019
 
    
(In thousands of US dollars)
 
Significant
non-cash
operating activities:
     
Depreciation and amortization
   $ 5,365      $ 11,403  
Provision for severance benefits
     6,405        3,763  
Stock-based compensation
     263        210  
Investing activities:
     
Capital expenditures
   $ (4,415    $ (8,262
 
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Table of Contents
3. Sales of Accounts Receivable and Receivable Discount Program
The Company has entered into an agreement to sell selected trade accounts receivable to a financial institution from time to time since March 2012. After the sale, the Company does not retain any interest in the receivables and the applicable financial institution collects these accounts receivable directly from the customer. There was no sale of these accounts receivable for the six months ended June 30, 2020. For the six months ended June 30, 2019, the proceeds from the sales of these accounts receivable totaled $13,637 thousand and these sales resulted in
pre-tax
losses of $42 thousand, which are included in selling, general and administrative expenses in the consolidated statements of operations. Net proceeds of this accounts receivable sale program are recognized in the consolidated statements of cash flows as part of operating cash flows.
The Company uses receivable discount programs with certain customers. These discount arrangements allow the Company to accelerate collection of customers’ receivables.
4. Inventories
Inventories as of June 30, 2020 and December 31, 2019 consist of the following (in thousands):
 
    
June 30,
2020
    
December 31,
2019
 
Finished goods
   $ 11,252      $ 10,087  
Semi-finished goods and
work-in-process
     32,196        28,815  
Raw materials
     6,627        8,449  
Materials
in-transit
     743        —    
Less: inventory reserve
     (5,307      (5,947
  
 
 
    
 
 
 
Inventories, net
   $ 45,511      $ 41,404  
  
 
 
    
 
 
 
Changes in inventory reserve for the three and six months ended June 30, 2020 and 2019 are as follows (in thousands):
 
    
Three Months
Ended
    
Six Months
Ended
    
Three Months
Ended
    
Six Months
Ended
 
    
June 30, 2020
    
June 30, 2019
 
Beginning balance
   $ (4,807    $ (5,947    $ (8,690    $ (4,845
Change in reserve
           
Inventory reserve charged to costs of sales
     (1,794      (3,069      (4,374      (9,447
Sale of previously reserved inventory
     747        1,653        490        966  
  
 
 
    
 
 
    
 
 
    
 
 
 
     (1,047      (1,416      (3,884      (8,481
Write off
     642        1,141        624        1,216  
Translation adjustments
     (95      221        168