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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 September 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 October 30, 2020, the registrant had 35,538,475 shares of common stock outstanding.
 
 
 

Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
        
Page No.
 
     3  
Item 1.
       3  
  MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019      3  
  MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019      4  
  MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2020 and 2019      5  
  MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019      6  
  MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019      7  
  MagnaChip Semiconductor Corporation and Subsidiaries Notes to Consolidated Financial Statements      8  
Item 2.
       30  
Item 3.
       55  
Item 4.
       56  
     57  
Item 1.
       57  
Item 1A.
       57  
Item 6.
       59  
     60  
 
2

Table of Contents
PART I—FINANCIAL INFORMATION
 
Item 1.
Interim Consolidated Financial Statements (Unaudited)
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
    
September 30,

2020
   
December 31,

2019
 
    
(In thousands of 
U.S.
 dollars,
except share data)
 
Assets
    
Current assets
    
Cash and cash equivalents
   $ 542,111     $ 151,657  
Accounts receivable, net
     57,772       47,447  
Inventories, net
     33,631       41,404  
Other receivables
     4,551       10,200  
Prepaid expenses
     8,265       9,003  
Hedge collateral (Note 9)
     9,650       9,820  
Other current assets (Notes 10 and 18)
     8,338       10,013  
Current assets held for sale (Note 2)
     —         99,821  
  
 
 
   
 
 
 
Total current assets
     664,318       379,365  
  
 
 
   
 
 
 
Property, plant and equipment, net
     77,489       73,068  
Operating lease
right-of-use
assets
     2,032       1,876  
Intangible assets, net
     2,877       2,769  
Long-term prepaid expenses
     2,138       5,757  
Other
non-current
assets
     8,598       9,059  
Non-current
assets held for sale (Note 2)
     —         123,434  
  
 
 
   
 
 
 
Total assets
   $ 757,452     $ 595,328  
  
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
    
Current liabilities
    
Accounts payable
   $ 40,497     $ 40,376  
Other accounts payable
     7,639       6,410  
Accrued expenses (Note 8)
     41,630       44,799  
Accrued income taxes
     14,038       1,569  
Operating lease liabilities
     1,390       1,625  
Current portion of long-term borrowings, net
     306,567       —    
Other current liabilities (Note 10)
     7,652       2,014  
Current liabilities held for sale (Note 2)
     —         37,040  
  
 
 
   
 
 
 
Total current liabilities
     419,413       133,833  
  
 
 
   
 
 
 
Long-term borrowings, net
     —         304,743  
Accrued severance benefits, net
     51,953       51,181  
Other
non-current
liabilities
     7,782       9,671  
Non-current
liabilities held for sale (Note 2)
     —         110,881  
  
 
 
   
 
 
 
Total liabilities
     479,148       610,309  
  
 
 
   
 
 
 
Commitments and contingencies (Note 18)
Stockholders’ equity
    
Common stock, $0.01 par value, 150,000,000 shares authorized, 44,595,393 shares issued and 35,489,720 outstanding at September 30, 2020 and 43,851,991 shares issued and 34,800,312 outstanding at December 31, 2019
     447       439  
Additional
paid-in
capital
     159,840       152,404  
Retained earnings (deficit)
     220,253       (58,131
Treasury stock, 9,105,673 shares at September 30, 2020 and 9,051,679 shares at December 31, 2019, respectively
     (107,649     (107,033
Accumulated other comprehensive income (loss)
     5,413       (2,660
  
 
 
   
 
 
 
Total stockholders’ equity (deficit)
     278,304       (14,981
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 757,452     $ 595,328  
  
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
3

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
    
Three Months Ended
   
Nine Months Ended
 
    
September 30,

2020
   
September 30,

2019
   
September 30,

2020
   
September 30,

2019
 
    
(In thousands of 
U.S.
 dollars, except share data)
 
Revenues:
  
Net sales – standard products business
   $ 116,262     $ 139,273     $ 335,953     $ 371,543  
Net sales – transitional Fab 3 foundry services
     8,551       9,894       28,161       25,776  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues
     124,813       149,167       364,114       397,319  
Cost of sales:
            
Cost of sales – standard products business
     87,494       104,018       245,917       285,643  
Cost of sales – transitional Fab 3 foundry services
     8,731       9,894       28,341       25,776  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total cost of sales
     96,225       113,912       274,258       311,419  
  
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
     28,588       35,255       89,856       85,900  
Operating expenses:
            
Selling, general and administrative expenses
     12,888       10,686       37,398       33,817  
Research and development expenses
     12,477       10,233       34,094       34,049  
Other charges
     —         —         554       —    
  
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     25,365       20,919       72,046       67,866  
  
 
 
   
 
 
   
 
 
   
 
 
 
Operating income
     3,223       14,336       17,810       18,034  
  
 
 
   
 
 
   
 
 
   
 
 
 
Interest expense
     (5,485     (5,539     (16,522     (16,615
Foreign currency gain (loss), net
     8,864       (21,985     (13,638     (44,166
Loss on early extinguishment of long-term borrowings, net
     —         —         —         (42
Other income, net
     714       678       2,343       1,816  
  
 
 
   
 
 
   
 
 
   
 
 
 
Income (loss) from continuing operations before income tax expense
     7,316       (12,510     (10,007     (40,973
Income tax expense (benefit)
     (1,145     1,734       836       3,316  
  
 
 
   
 
 
   
 
 
   
 
 
 
Income (loss) from continuing operations
     8,461       (14,244     (10,843     (44,289
Income (loss) from discontinued operations, net of tax
     264,501       12,637       289,227       (963
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income (loss)
   $ 272,962     $ (1,607   $ 278,384     $ (45,252
  
 
 
   
 
 
   
 
 
   
 
 
 
Basic earnings (loss) per common share—
        
Continuing operations
   $ 0.24     $ (0.41   $ (0.31   $ (1.29
Discontinued operations
     7.50       0.36       8.24       (0.03
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
   $ 7.74     $ (0.05   $ 7.93     $ (1.32
  
 
 
   
 
 
   
 
 
   
 
 
 
Diluted earnings (loss) per common share—
            
Continuing operations
   $ 0.21     $ (0.41   $ (0.31   $ (1.29
Discontinued operations
     5.68       0.36       8.24       (0.03
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
   $ 5.89     $ (0.05   $ 7.93     $ (1.32
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted average number of shares—
            
Basic
     35,280,864       34,357,745       35,089,479       34,266,513  
Diluted
     46,581,788       34,357,745       35,089,479       34,266,513  
The accompanying notes are an integral part of these consolidated financial statements.
 
4

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
 
    
Three Months Ended
   
Nine Months Ended
 
    
September 30,

2020
   
September 30,

2019
   
September 30,

2020
   
September 30,

2019
 
    
(In thousands of 
U.S.
 dollars)
 
Net income (loss)
   $  272,962     $  (1,607   $ 278,384     $  (45,252
  
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss)
        
Foreign currency translation adjustments
     (6,517     15,931       9,191       30,915  
Derivative adjustments
        
Fair valuation of derivatives
     1,390       (2,803     (1,410     (5,703
Reclassification adjustment for loss on derivatives included in net income (loss)
     41       1,600       292       3,553  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total other comprehensive income (loss)
     (5,086     14,728       8,073       28,765  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive income (loss)
   $ 267,876     $  13,121     $ 286,457     $  (16,487
  
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
5

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
 
 
  
Common Stock
 
  
Additional
Paid-In
 
 
Retained
Earnings
 
 
Treasury
 
 
Accumulated
Other
Comprehensive
 
 
 
 
(In thousands of U.S. dollars, except share data)
  
Shares
 
  
Amount
 
  
Capital
 
 
(Deficit)
 
 
Stock
 
 
Income (Loss)
 
 
Total
 
Three Months Ended September 30, 2020:
  
     
  
     
  
     
 
     
 
     
 
     
 
     
Balance at June 30, 2020
     35,143,033      $ 443      $ 155,591     $ (52,709   $ (107,649   $ 10,499     $ 6,175  
Stock-based compensation
     —          —          2,226       —         —         —         2,226  
Exercise of stock options
     287,292        3        2,024       —         —         —         2,027  
Settlement of restricted stock units
     59,395        1        (1     —         —         —         —    
Other comprehensive loss, net
     —          —          —         —         —         (5,086     (5,086
Net income
     —          —          —         272,962       —         —         272,962  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2020
     35,489,720      $ 447      $ 159,840     $ 220,253     $ (107,649   $ 5,413     $ 278,304  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Three Months Ended September 30, 2019:
                
Balance at June 30, 2019
     34,240,181      $ 433      $ 144,188     $ (79,950   $ (106,514   $ (6,073   $ (47,916
Stock-based compensation
     —          —          479       —         —         —         479  
Exercise of stock options
     129,409        1        888       —         —         —         889  
Settlement of restricted stock units
     1,099        0        (0     —         —         —         —    
Other comprehensive income, net
     —          —          —         —         —         14,728       14,728  
Net loss
     —          —          —         (1,607     —         —         (1,607
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2019
     34,370,689      $ 434      $ 145,555     $ (81,557   $ (106,514   $ 8,655     $ (33,427
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
 
  
Common Stock
 
  
Additional
Paid-In
 
 
Retained
Earnings
 
 
Treasury
 
 
Accumulated
Other
Comprehensive
 
 
Total
 
(In thousands of U.S. dollars, except share data)
  
Shares
 
 
Amount
 
  
Capital
 
 
(Deficit)
 
 
Stock
 
 
Income (Loss)
 
Nine Months Ended September 30, 2020:
  
     
 
     
  
     
 
     
 
     
 
     
 
     
Balance at December 31, 2019
  
 
34,800,312
 
 
$
439
 
  
$
152,404
 
 
$
(58,131
 
$
(107,033
 
$
(2,660
 
$
(14,981
Stock-based compensation
  
 
—  
 
 
 
—  
 
  
 
4,754
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
4,754
 
Exercise of stock options
  
 
375,643
 
 
 
4
 
  
 
2,686
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
2,690
 
Settlement of restricted stock units
  
 
367,759
 
 
 
4
 
  
 
(4
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
Acquisition of treasury stock
  
 
(53,994
 
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
(616
 
 
—  
 
 
 
(616
Other comprehensive income, net
  
 
—  
 
 
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
8,073
 
 
 
8,073
 
Net income
  
 
—  
 
 
 
—  
 
  
 
—  
 
 
 
278,384
 
 
 
—  
 
 
 
—  
 
 
 
278,384
 
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2020
  
 
35,489,720
 
 
$
 447
 
  
$
159,840
 
 
$
220,253
 
 
$
(107,649
 
$
5,413
 
 
$
278,304
 
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Nine Months Ended September 30, 2019:
               
Balance at December 31, 2018
  
 
34,441,232
 
 
$
431
 
  
$
142,600
 
 
$
(36,305
 
$
(103,926
 
$
(20,110
 
$
(17,310
Stock-based compensation
  
 
—  
 
 
 
—  
 
  
 
1,920
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
1,920
 
Exercise of stock options
  
 
153,967
 
 
 
1
 
  
 
1,037
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
1,038
 
Settlement of restricted stock units
  
 
169,592
 
 
 
2
 
  
 
(2
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
Acquisition of treasury stock
  
 
(394,102
 
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
(2,588
 
 
—  
 
 
 
(2,588
Other comprehensive income, net
  
 
—  
 
 
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
28,765
 
 
 
28,765
 
Net loss
  
 
—  
 
 
 
—  
 
  
 
—  
 
 
 
(45,252
 
 
—  
 
 
 
—  
 
 
 
(45,252
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2019
  
 
34,370,689
 
 
$
434
 
  
$
145,555
 
 
$
(81,557
 
$
(106,514
 
$
8,655
 
 
$
(33,427
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
                                                                                                                      
The accompanying notes are an integral part of these consolidated financial statements.
 
6

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
    
Nine Months Ended
 
    
September 30,

2020
   
September 30,

2019
 
    
(In thousands of 
U.S.
 dollars)
 
Cash flows from operating activities
    
Net income (loss)
   $ 278,384     $  (45,252
Adjustments to reconcile net income (loss) to net cash provided by operating activities
    
Depreciation and amortization
     13,333       24,661  
Provision for severance benefits
     14,150       10,491  
Amortization of debt issuance costs and original issue discount
     1,824       1,712  
Loss on foreign currency, net
     6,609       50,512  
Restructuring and other charges
     490       470  
Provision for inventory reserves
     4,079       9,255  
Stock-based compensation
     4,754       1,920  
Loss on early extinguishment of long-term borrowings, net
     —         42  
Gain on sale of discontinued operations
     (287,117     —    
Others, net
     85       61  
Changes in operating assets and liabilities
    
Accounts receivable, net
     (16,583     (32,812
Unbilled accounts receivable, net
     14,260       14,208  
Inventories
     1,390       (15,576
Other receivables
     6,111       (4,814
Other current assets
     9,143       6,356  
Accounts payable
     (5,156     27,585  
Other accounts payable
     (8,034     (10,074
Accrued expenses
     1,991       3,831  
Accrued income taxes
     12,546       (583
Other current liabilities
     2,243       (5,766
Other
non-current
liabilities
     2,868       808  
Payment of severance benefits
     (5,888     (6,195
Others, net
     59       (821
  
 
 
   
 
 
 
Net cash provided by operating activities
     51,541       30,019  
  
 
 
   
 
 
 
Cash flows from investing activities
    
Proceeds from settlement of hedge collateral
     8,029       12,625  
Payment of hedge collateral
     (7,841     (17,024
Purchase of property, plant and equipment
     (16,353     (16,693
Payment for intellectual property registration
     (664     (907
Collection of guarantee deposits
     891       539  
Payment of guarantee deposits
     (611     (1,330
Proceeds from sale of discontinued operations
     350,553       —    
Others, net
     26       225  
  
 
 
   
 
 
 
Net cash provided by (used in) investing activities
     334,030       (22,565
  
 
 
   
 
 
 
Cash flows from financing activities
    
Repurchase of long-term borrowings
     —         (1,175
Proceeds from exercise of stock options
     2,690       1,038  
Acquisition of treasury stock
     (1,021     (2,588
Repayment of financing related to water treatment facility arrangement
     (402     (415
Repayment of principal portion of finance lease liabilities
     (165     (174
  
 
 
   
 
 
 
Net cash provided by (used in) financing activities
     1,102       (3,314
  
 
 
   
 
 
 
Effect of exchange rates on cash and cash equivalents
     3,781       (5,237
  
 
 
   
 
 
 
Net increase (decrease) in cash and cash equivalents
     390,454       (1,097
  
 
 
   
 
 
 
Cash and cash equivalents
    
Beginning of the period
     151,657       132,438  
  
 
 
   
 
 
 
End of the period
   $ 542,111     $  131,341  
  
 
 
   
 
 
 
Supplemental cash flow information
    
Cash paid for interest
   $ 19,044     $ 19,071  
  
 
 
   
 
 
 
Cash paid for income taxes
   $ 2,573     $ 1,904  
  
 
 
   
 
 
 
Non-cash
investing activities
    
Property, plant and equipment additions in other accounts payable
   $ 3,865     $ 496  
  
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
7

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 September 1, 2020 (the “Closing Date”), the Company completed the previously announced sale of the Company’s Foundry Services Group business and
its
fabrication facility located in Cheongju known as “Fab 4” to Key Foundry Co., Ltd. (the “Buyer”), a Korean limited liability company and wholly owned subsidiary of Magnus Semiconductor, LLC, a Korean limited liability company (“Magnus”), in exchange for a purchase price equal to approximately $350.6 million, which included a positive working capital
a
djustment of approximately $5.9 million, pursuant to the terms of a business transfer agreement dated March 31, 2020 by and among the Company and Magnus (the “Business Transfer Agreement”). The purchase price was paid in a combination of U.S. Dollars in the amount of $46.5 million and Korean Won in the amount of approximately KRW 360.6 billion. In addition to the purchase price, the Buyer assumed all severance liabilities relating to the transferred employees, which had a value of approximately $100 million. The Buyer is a wholly owned subsidiary of Magnus, which was established by Alchemist Capital Partners Korea Co., Ltd. and Credian Partners, Inc. On April 20, 2020, Magnus assigned, and the Buyer assumed, all rights and obligations of Magnus under the Business Transfer Agreement. This divestiture of the Foundry Services Group business and Fab 4 allows the Company to strategically shift its operational focus to its standard products business. The Foundry Services Group was historically a reportable segment. The Foundry Services Group business was 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 (“
U.S.
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
(“ASC”) 270,
“Interim Reporting” and, accordingly, do not include all of the information and note disclosures required by
U.S.
 GAAP for complete financial statements, except for the changes below. The results of operations for the three and nine months ended September 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 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 Business Transfer Agreement, have been classified as assets and liabilities held for sale in the Company’s consolidated balance sheets, subject to adjustments set forth in the Business Transfer Agreement. 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 nine months ended September 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.
 
8

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
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 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 (“ASU”)
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 ASU
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.
 
9

2. Discontinued Operations and Assets Held for Sale
On September 1, 2020, the Company completed the sale of the Company’s Foundry Services Group business and Fab 4. As a result of the sale of the Foundry Services Group business and Fab 4, the Company recorded a gain of $287,117 thousand and all operations from the Foundry Services Group business and Fab 4 were classified as discontinued operations for all periods presented. Following the consummation of the sale, and for up to three years, the Company is expected to provide 
the Transitional Fab 3 Foundry Services at an agreed upon cost plus mark-up. Accounts receivable related to providing the Transitional Fab 3 Foundry Services to the Buyer was
$2,484 
thousand as of September 30, 2020 and there was no related cash inflow for the three and nine months ended September 30, 2020.
The following table summarizes the results from discontinued operations, net of tax, for the three and nine months ended September 30, 2020 and 2019.
 
    
Three Months Ended
    
Nine Months Ended
 
    
September 30,

2020
    
September 30,

2019
    
September 30,

2020
    
September 30,

2019
 
    
(In thousands of 
U.S.
 dollars, except share data)
 
Revenues:
           
Net sales – Foundry Services Group
   $ 72,674      $  90,404      $  254,732      $  220,659  
Net sales – transitional Fab 3 foundry services
     (6,277      (9,894      (25,887      (25,776
  
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues
     66,397        80,510        228,845        194,883  
Cost of sales:
           
Cost of sales – Foundry Services Group
     52,420        64,793        182,872        179,152  
Cost of sales – transitional Fab 3 foundry services
     (6,277      (9,894      (25,887      (25,776
  
 
 
    
 
 
    
 
 
    
 
 
 
Total cost of sales
     46,143        54,899        156,985        153,376  
  
 
 
    
 
 
    
 
 
    
 
 
 
Gross profit
     20,254        25,611        71,860        41,507  
Operating expenses:
           
Selling, general and administrative expenses
     4,068        6,126        14,704        18,040  
Research and development expenses
     5,166        7,135        19,484        22,326  
Restructuring and other charges
     7,870        763        10,574        4,787  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total operating expenses
     17,104        14,024        44,762        45,153  
  
 
 
    
 
 
    
 
 
    
 
 
 
Operating income (loss) from discontinued operations
     3,150        11,587        27,098        (3,646
  
 
 
    
 
 
    
 
 
    
 
 
 
Foreign currency gain (loss), net
     (797      780        1,277        2,533  
Others, net
     18        (10      66        (59
  
 
 
    
 
 
    
 
 
    
 
 
 
Income (loss) from discontinued operations before income tax expense
     2,371        12,357        28,441        (1,172
Income tax expense (benefit)
     14,173        (280      15,517        (209
Gain on sale of discontinued operations
     287,117        —          287,117        —    
  
 
 
    
 
 
    
 
 
    
 
 
 
Transaction costs
 
 
(10,814
)
 
 
 
 
 
 
 
(10,814
)
 
 
— 
 
 
Income (loss) from discontinued operations, net of tax
     264,501        12,637        289,227        (963
  
 
 
    
 
 
    
 
 
    
 
 
 
For the three months ended September 30, 2020 and 2019, the Company recorded $7,870 thousand and $763 thousand, respectively, and for the nine months ended September 30, 2020 and 2019, the Company recorded $10,574 thousand and $2,636 thousand, respectively, in professional fees and transaction related expenses incurred in connection with the sale of the Foundry Services Group business and Fab 4, and recorded such costs as restructuring and other charges in the above. For the nine months ended September 30, 2019, the Company also recorded in the same line a $2,151 thousand restructuring-related charge to its fab employees.
 
10

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, w
h
ich are included in assets and liabilities held for sale as of December 31, 2019 in the accompanying consolidated balance sheet:
 
    
December 31,

2019
 
    
(In thousands of 
U.S.
 dollars)
 
Assets
  
Current assets
  
Accounts receivable, net
   $ 48,194  
Unbilled accounts receivable
     16,463  
Inventories, net
     31,863  
Other current assets
     3,301  
  
 
 
 
Total current assets held for sal
e
   $ 99,821  
  
 
 
 
Property, plant and equipment, net
     109,506  
Intangible assets, net
     1,245  
Other
non-current
assets
     12,683  
  
 
 
 
Total assets held for sale
   $ 223,255  
  
 
 
 
Liabilities
  
Current liabilities
  
Accounts payable
   $ 20,503  
Other current liabilities
     16,537  
  
 
 
 
Total current liabilities held for sale
   $ 37,040  
  
 
 
 
Accrued severance benefits, net
     95,547  
Other
non-current
liabilities
     15,334  
  
 
 
 
Total liabilities held for sale
   $ 147,921  
  
 
 
 
The following table provides supplemental cash flows information related to discontinued operations:
 
    
Nine Months Ended
 
    
September 30,

2020
    
September 30,

2019
 
    
(In thousands of 
U.S.
 dollars)
 
Significant
non-cash
operating activities:
     
Depreciation and amortization
   $ 5,365      $ 16,958  
Provision for severance benefits
     8,209        5,997  
Stock-based compensation
     388        259  
Investing activities:
     
Capital expenditures
   $ (5,838    $ (9,174
 
11

3. Sales of Accounts Receivable and Receivable Discount Program
The Company
is party to
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 accounts
receivable
for the nine months ended September 30, 2020. For the nine months ended September 30, 2019, the proceeds from the sales of these accounts
receivable
totaled $14,474 thousand and these sales resulted in
pre-tax
losses of $45 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 September 30, 2020 and December 31, 2019 consist of the following (in thousands):
 
    
September 30,

2020
    
December 31,

2019
 
Finished goods
   $ 5,030      $ 10,087  
Semi-finished goods and
work-in-process
     28,919        28,815  
Raw materials
     5,743        8,449  
Materials
in-transit
     444        —    
Less: inventory reserve
     (6,505      (5,947
  
 
 
    
 
 
 
Inventories, net
   $ 33,631      $ 41,404  
  
 
 
    
 
 
 
Changes in inventory reserve for the three and nine months ended September 30, 2020 and 2019 are as follows (in thousands):
 
    
Three Months

Ended
    
Nine Months

Ended
    
Three Months

Ended
    
Nine Months

Ended
 
    
September 30, 2020
    
September 30, 2019
 
Beginning balance
   $ (5,307    $ (5,947    $ (11,782    $ (4,845
Change in reserve
           
Inventory reserve charged to costs of sales
     (3,472      (6,541      (1,298      (10,745
Sale of previously reserved inventory
     1,578        3,231        914        1,880  
  
 
 
    
 
 
    
 
 
    
 
 
 
     (1,894      (3,310      (384      (