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 March 31, 2021
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
.
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 | ||
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. ☒
☐ 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). ☒
☐ 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 | ☐ | ☒ | ||||
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 ☒ No
12b-2
of the Exchange Act). ☐ Yes As of April 30, 2021, the registrant had 46,333,946 shares of common stock outstanding.
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
2
PART I—FINANCIAL INFORMATION
Item 1. |
Interim Consolidated Financial Statements (Unaudited) |
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, 2021 |
December 31, 2020 |
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| (In thousands of US dollars, except share data) |
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| Assets |
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| Current assets |
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| Cash and cash equivalents |
$ | $ | ||||||
| Accounts receivable, net |
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| Inventories, net |
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| Other receivables |
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| Prepaid expenses |
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| Hedge collateral |
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| Other current assets (Notes 10 and 18) |
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| Total current assets |
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| Property, plant and equipment, net |
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| Operating lease right-of-use |
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| Intangible assets, net |
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| Long-term prepaid expenses |
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| Deferred income taxes |
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| Other non-current assets |
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| Total assets |
$ | $ | ||||||
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| Liabilities and Stockholders’ Equity |
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| Current liabilities |
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| Accounts payable |
$ | $ | ||||||
| Other accounts payable |
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| Accrued expenses |
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| Accrued income taxes |
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| Operating lease liabilities |
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| Current portion of long-term borrowings, net |
— | |||||||
| Other current liabilities (Note 10) |
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| Total current liabilities |
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| Accrued severance benefits, net |
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| Non-current operating lease liabilities |
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| Other non-current liabilities |
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| Total liabilities |
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| Commitments and contingencies (Note 18) |
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| Stockholders’ equity |
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| Common stock, $ |
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| Additional paid-in capital |
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| Retained earnings |
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| Treasury stock, |
( |
) | ( |
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| Accumulated other comprehensive income (loss) |
( |
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| Total stockholders’ equity |
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| Total liabilities and stockholders’ equity |
$ | $ | ||||||
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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 |
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March 31, 2021 |
March 31, 2020 |
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| (In thousands of US dollars, except share data) |
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| Revenues: |
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| Net sales – standard products business |
$ | $ | ||||||
| Net sales – transitional Fab 3 foundry services |
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| Total revenues |
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| Cost of sales: |
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| Cost of sales – standard products business |
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| Cost of sales – transitional Fab 3 foundry services |
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| Total cost of sales |
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| Gross profit |
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| Operating expenses: |
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| Selling, general and administrative expenses |
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| Research and development expenses |
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| Other charges |
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| Total operating expenses |
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| Operating income (loss) |
( |
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| Interest expense |
( |
) | ( |
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| Foreign currency loss, net |
( |
) | ( |
) | ||||
| Other income, net |
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| Loss from continuing operations before income tax expense |
( |
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| Income tax expense |
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| Loss from continuing operations |
( |
) | ( |
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| Income from discontinued operations, net of tax |
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| Net loss |
$ | ( |
) | $ | ( |
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| Basic and diluted loss per common share— |
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| Continuing operations |
$ | ( |
) | $ | ( |
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| Discontinued operations |
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| Total |
$ | ( |
) | $ | ( |
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| Weighted average number of shares – basic and diluted |
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The accompanying notes are an integral part of these consolidated financial statements.
4
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
Three Months Ended |
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March 31, 2021 |
March 31, 2020 |
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| (In thousands of US dollars) |
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| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Other comprehensive income (loss) |
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| Foreign currency translation adjustments |
( |
) | ||||||
| Derivative adjustments |
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| Fair valuation of derivatives |
( |
) | ( |
) | ||||
| Reclassification adjustment for loss (gain) on derivatives included in net loss |
( |
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| Total other comprehensive income (loss) |
( |
) | ||||||
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| Total comprehensive loss |
$ | ( |
) | $ | ( |
) | ||
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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)
Additional Paid-In Capital |
Accumulated Other Comprehensive Income (Loss) |
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Common Stock |
Retained Earnings (Deficit) |
Treasury Stock |
Total |
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| (In thousands of US dollars, except share data) |
Shares |
Amount |
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| Three Months Ended March 31, 2021: |
||||||||||||||||||||||||||||
| Balance at December 31, 2020 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
| Exchange of exchangeable senior notes |
— | — | — | |||||||||||||||||||||||||
| Exercise of stock options |
— | — | — | |||||||||||||||||||||||||
| Settlement of restricted stock units |
( |
) | — | — | — | — | ||||||||||||||||||||||
| Acquisition of treasury stock |
( |
) | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
| Other comprehensive loss, net |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
| Net loss |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
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| Balance at March 31, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
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| Three Months Ended March 31, 2020: |
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| Balance at December 31, 2019 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||
| Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
| Settlement of restricted stock units |
( |
) | — | — | — | — | ||||||||||||||||||||||
| Acquisition of treasury stock |
( |
) | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
| Other comprehensive income, net |
— | — | — | — | — | |||||||||||||||||||||||
| Net loss |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
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| Balance at March 31, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | ||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
6
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended |
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March 31, 2021 |
March 31, 2020 |
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| (In thousands of US dollars) |
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| Cash flows from operating activities |
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| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities |
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| Depreciation and amortization |
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| Provision for severance benefits |
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| Amortization of debt issuance costs and original issue discount |
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| Loss on foreign currency, net |
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| Restructuring and other charges |
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| Provision for inventory reserves |
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| Stock-based compensation |
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| Deferred income tax assets |
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| Others, net |
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| Changes in operating assets and liabilities |
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| Accounts receivable, net |
( |
) | ||||||
| Unbilled accounts receivable, net |
— | |||||||
| Inventories |
( |
) | ||||||
| Other receivables |
( |
) | ||||||
| Other current assets |
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| Accounts payable |
( |
) | ||||||
| Other accounts payable |
( |
) | ( |
) | ||||
| Accrued expenses |
( |
) | ( |
) | ||||
| Accrued income taxes |
( |
) | ( |
) | ||||
| Other current liabilities |
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| Other non-current liabilities |
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| Payment of severance benefits |
( |
) | ( |
) | ||||
| Others, net |
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| |
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| Net cash provided by operating activities |
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| Cash flows from investing activities |
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| Proceeds from settlement of hedge collateral |
— | |||||||
| Payment of hedge collateral |
— | ( |
) | |||||
| Purchase of property, plant and equipment |
( |
) | ( |
) | ||||
| Payment for intellectual property registration |
( |
) | ( |
) | ||||
| Payment of guarantee deposits |
( |
) | — | |||||
| Other s , net |
( |
) | ||||||
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| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities |
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| Proceeds from exercise of stock options |
— | |||||||
| Acquisition of treasury stock |
( |
) | ( |
) | ||||
| Repayment of financing related to water treatment facility arrangement |
( |
) | ( |
) | ||||
| Repayment of principal portion of finance lease liabilities |
( |
) | ( |
) | ||||
| |
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| Net cash provided by (used in) financing activities |
( |
) | ||||||
| Effect of exchange rates on cash and cash equivalents |
( |
) | ( |
) | ||||
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| Net increase in cash and cash equivalents |
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| Cash and cash equivalents |
||||||||
| Beginning of the period |
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|
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| End of the period |
$ | $ | ||||||
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| Supplemental cash flow information |
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| Cash paid for interest |
$ | $ | ||||||
| Cash paid for income taxes |
$ | $ | ||||||
| Non-cash investing activities |
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| Property, plant and equipment additions in other accounts payable |
$ | $ | ||||||
| Non-cash financing activities |
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| Exchange of exchangeable senior notes into common stock |
$ | $ | — | |||||
| Acquisition of treasury stock to satisfy the tax withholding obligations in connection with equity-based compensation |
$ | ( |
) | $ | — | |||
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 sale of the Company’s Foundry Services Group business and its fabrication facility located in Cheongju, Korea, known as “Fab 4” to Key Foundry Co., Ltd. (the “Buyer”), a Korean corporation, in exchange for a purchase price equal to approximately
$350.6 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 in cash, pursuant to the terms of a business transfer agreement (the “Business Transfer Agreement”) dated March 31, 2020 by and among the Company and Magnus Semiconductor, LLC, a Korean limited liability company (“Magnus”). The purchase price was paid in a combination of U.S. Dollars in the amount of
$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 was made in connection with the Company’s strategic shift of 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 the three months ended March 31, 2020. Accordingly, 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 from the Closing Date (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 months ended March 31, 2021 are not necessarily indicative of the results to be expected for a full year or for any other periods. The consolidated statement of cash flow for the three months ended March 31, 2020 has not been adjusted to separately disclose the cash flow related to discontinued operations, but the material items in the operating and investing activities of the cash flow relating to discontinued operations for the same period is disclosed in Note 3. Unless otherwise stated, information in these notes to consolidated financial statements relates to the Company’s continuing operations and excludes the discontinued operations.
The December 31, 2020 balance sheet data was derived from the Company’s audited financial statements, but does not include all disclosures required by U.S. GAAP. The interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2020. Recently Adopted Accounting Pronouncements
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. The Company adopted ASU 2019-12
as of January 1, 2021, and the adoption of ASU 2019-12
did not have a material impact on the Company’s consolidated financial statements.8
2. Merger Agreement
On March 25, 2021, the Company, South Dearborn Limited, an exempted company incorporated in the Cayman Islands with limited liability (“Parent”), formed by an affiliate of Wise Road Capital LTD, and Michigan Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, among other things, Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing its corporate existence under the General Corporation Law of the State of Delaware (the “DGCL”) as the surviving corporation and becoming a wholly owned subsidiary of Parent.
Pursuant to the Merger Agreement, each share of the Company’s common stock, par value
$per share (the “Common Stock”), issued and outstanding immediately before the effective time of the Merger (the “Effective Time”) (other than (a) shares of Common Stock owned by the Company or any of its wholly owned subsidiaries or by Parent or any of its subsidiaries immediately before the Effective Time (collectively, “Excluded Shares”) and (b) any shares of Common Stock for which the holder thereof (i) has not voted in favor of the Merger or consented to it in writing and (ii) has properly and validly exercised their statutory rights of appraisal in respect of such shares of Common Stock in accordance with Section 262 of the DGCL (collectively, “Dissenting Shares”)) will be cancelled and will cease to exist and will be automatically converted into the right to receive
in cash, without interest (the “Merger Consideration”), subject to applicable withholding taxes.
Consummation of the Merger is subject to certain customary closing conditions, including (i) approval of the Merger Agreement by our stockholders, (ii) the receipt of certain required or requested governmental approvals, (iii) the absence of any order or law issued, enacted or deemed applicable by certain governmental authorities specified in the Merger Agreement that makes consummation of the Merger illegal and that remains in effect (a “Prohibitive Order”), (iv) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement) and (v) other customary closing conditions, including the accuracy of each party’s representations and warranties, and each party’s compliance with its obligations under the Merger Agreement (subject in the case of this clause (v) to certain materiality qualifiers).
The Merger Agreement contains termination rights for each of the Company and Parent, including if (i) the consummation of the Merger does not occur by 11:59 p.m. (New York time) on September 25, 2021 (subject to extension to December 25, 2021 and again to March 25, 2022 at the option of either party if certain regulatory approvals have not been obtained by such date or certain governmental authorities specified in the Merger Agreement have issued, enacted or deemed applicable a Prohibitive Order), (ii) the Requisite Company Vote is not obtained, (iii) any of certain governmental authorities specified in the Merger Agreement issues, enacts or deems applicable after the date of the Merger Agreement a Prohibitive Order that has become final and
non-appealable,
or (iv) the other party has breached the Merger Agreement, which breach would give rise to a failure, or has materially contributed to the failure, of certain conditions to the non-breaching
party’s obligations to close (subject to a cure period). Additionally, each of the Company and Parent may terminate the Merger Agreement in certain other circumstances. The Merger is expected to close during the second half of 2021, subject to customary closing conditions as discussed above. For the three months ended March 31, 2021, the Company incurred
$9,831
thousand of professional fees and certain transaction related expenses incurred in connection with the Merger, which were recognized in other charges in the consolidated statements of operations.
The foregoing description of the Merger Agreement is not complete and is qualified in its entirety by reference to the Merger Agreement, which is included as Exhibit 2.1 to this Quarterly Report on Form 10-Q.
9
3. 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 13,624 thousand for the three months ended March 31, 2021.
thousand and all operations from the Foundry Services Group business and Fab 4 were classified as discontinued operations for the three months ended March 31, 2020. 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. For the periods prior to the Closing Date, 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 for comparative purposes. Cash inflows to the Company from the Buyer related to providing the Transitional Fab 3 Foundry Services was
$Three Months Ended |
||||
March 31, 2020 |
||||
| (In thousands of US dollars) |
||||
| Revenues: |
||||
| Net sales – Foundry Services Group |
$ | |||
| Net sales – transitional Fab 3 foundry services |
( |
) | ||
| |
|
|||
| Total revenues |
||||
| Cost of sales: |
||||
| Cost of sales – Foundry Services Group |
||||
| Cost of sales – transitional Fab 3 foundry services |
( |
) | ||
| |
|
|||
| Total cost of sales |
||||
| |
|
|||
| Gross profit |
||||
| Operating expenses: |
||||
| Selling, general and administrative expenses |
||||
| Research and development expenses |
||||
| Restructuring and other charges |
||||
| |
|
|||
| Total operating expenses |
||||
| |
|
|||
| Operating income from discontinued operations |
||||
| Foreign currency gain, net |
||||
| Other income |
||||
| |
|
|||
| Income from discontinued operations before income tax expense |
||||
| Income tax expense |
||||
| |
|
|||
| Income from discontinued operations, net of tax |
$ | |||
| |
|
|||
For the three months ended March 31, 2020, the Company recorded $2,115 thousand 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.
The following table provides supplemental cash flows information related to discontinued operations:
Three Months Ended |
||||
March 31, 2020 |
||||
| (In thousands of US dollars) |
||||
| Significant non-cash operating activities: |
||||
| Depreciation and amortization |
$ | |||
| Provision for severance benefits |
||||
| Stock-based compensation |
||||
| Investing activities: |
||||
| Capital expenditures |
$ | ( |
) | |
10
4. Inventories
Inventories as of March 31, 2021 and December 31, 2020 consist of the following (in thousands):
March 31, 2021 |
December 31, 2020 |
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| Finished goods |
$ | $ | ||||||
| Semi-finished goods and work-in-process |
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| Raw materials |
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| Materials in-transit |
||||||||
| Less: inventory reserve |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Inventories, net |
$ | $ | ||||||
| |
|
|
|
|||||
Changes in inventory reserve for the three months ended March 31, 2021 and 2020 are as follows (in thousands):
Three Months Ended |
||||||||
March 31, 2021 |
March 31, 2020 |
|||||||
| Beginning balance |
$ | ( |
) | $ | ( |
) | ||
| Change in reserve |
||||||||
| Inventory reserve charged to costs of sales |
( |
) | ( |
) | ||||
| Sale of previously reserved inventory |
||||||||
| |
|
|
|
|||||
| ( |
) | ( |
) | |||||
| Write off |
||||||||
| Translation adjustments |
||||||||
| Reclassified to assets held for sale |
— | |||||||
| |
|
|
|
|||||
| Ending balance |
$ | ( |
) | $ | ( |
) | ||
| |
|
|
|
|||||
Inventory reserve represents the Company’s best estimate in value lost due to excessive inventory level, physical deterioration, obsolescence, changes in price levels, or other causes based on individual facts and circumstances. Inventory reserve relates to inventory items including finished goods, semi-finished goods, and raw materials. Write off of this reserve is recognized only when the related inventory has been disposed or scrapped.
work-in-process
11
5. Property, Plant and Equipment
Property, plant and equipment
a
s of March 31, 2021 and December 31, 2020 are comprised of the following (in thousands): March 31, 2021 |
December 31, 2020 |
|||||||
| Buildings and related structures |
$ | $ | ||||||
| Machinery and equipment |
||||||||
| Finance lease right-of-use |
||||||||
| Others |
||||||||
| |
|
|
|
|||||
| Less: accumulated depreciation |
( |
) | ( |
) | ||||
| Land |
||||||||
| |
|
|
|
|||||
| Property, plant and equipment, net |
$ | $ | ||||||
| |
|
|
|
|||||
Aggregate depreciation expenses totaled $3,262 thousand and $2,409 thousand for the three months ended March 31, 2021 and 2020, respectively.
6. Intangible Assets
Intangible assets as of March 31, 2021 and December 31, 2020 are comprised of the following (in thousands):
March 31, 2021 |
||||||||||||
Gross amount |
Accumulated amortization |
Net amount |
||||||||||
| Intellectual property assets |
$ | $ | ( |
) | $ | |||||||
| |
|
|
|
|
|
|||||||
| Intangible assets |
$ | $ | ( |
) | $ | |||||||
| |
|
|
|
|
|
|||||||
December 31, 2020 |
||||||||||||
Gross amount |
Accumulated amortization |
Net amount |
||||||||||
| Intellectual property assets |
$ | $ | ( |
) | $ | |||||||
| |
|
|
|
|
|
|||||||
| Intangible assets |
$ | $ | ( |
) | $ | |||||||
| |
|
|
|
|
|
|||||||
Aggregate amortization expenses for intangible assets totaled $186 thousand and $161 thousand for the three months ended March 31, 2021 and 2020, respectively.
12
7. Leases
The Company has operating and finance leases for buildings and other assets such as vehicles and office equipment. The Company’s leases have remaining lease terms ranging from 1 year to 5 years.
The tables below present financial information related to the Company’s leases.
Supplemental balance sheets information related to leases as of March 31, 2021 and December 31, 2020 are as follows (in thousands):
| Leases |
Classification |
March 31, 2021 |
December 31, 2020 |
|||||||
| Assets |
||||||||||
| Operating lease |
Operating lease right-of-use assets |
$ | $ | |||||||
| Finance lease |
Property, plant and equipment, net | |||||||||
| |
|
|
|
|||||||
| Total lease assets |
$ | $ | ||||||||
| |
|
|
|
|||||||
| Liabilities |
||||||||||
| Current |
||||||||||
| Operating |
Operating lease liabilities | $ | $ | |||||||
| Finance |
Other current liabilities | |||||||||
| Non-current |
||||||||||
| Operating |
Non-current operating lease liabilities |
|||||||||
| Finance |
Other non-current liabilities |
|||||||||
| |
|
|
|
|||||||
| Total lease liabilities |
$ | $ | ||||||||
| |
|
|
|
|||||||
The following table presents the weighted average remaining lease term and discount rate:
March 31, 2021 |
December 31, 2020 |
|||||||
| Weighted average remaining lease term |
||||||||
| Operating leases |
||||||||
| Finance leases |
||||||||
| Weighted average discount rate |
||||||||
| Operating leases |
% | % | ||||||
| Finance leases |
% | % | ||||||
The components of lease cost included in the Company’s consolidated statements of operations, are as follows (in thousands):
Three Months Ended |
||||||||
March 31, 2021 |
March 31, 2020 |
|||||||
| Operating lease cost |
$ | $ | ||||||
| Finance lease cost |
||||||||
| Amortization of right-of-use |
||||||||
| Interest on lease liabilities |
||||||||
| |
|
|
|
|||||
| Total lease cost |
$ | $ | ||||||
| |
|
|
|
|||||
The above table does not include an immaterial cost of short-term leases for the three months ended March 31, 2021 and 2020.
13
Other lease information is as follows (in thousands):
Three Months Ended |
||||||||
March 31, 2021 |
March 31, 2020 |
|||||||
| Cash paid for amounts included in the measurement of lease liabilities |
||||||||
| Operating cash flows from operating leases |
$ | $ | ||||||
| Operating cash flows from finance leases |
||||||||
| Financing cash flows from finance leases |
||||||||
Operating Leases |
Finance Leases |
|||||||
| Remainder of 2021 |
$ | $ | ||||||
| 2022 |
||||||||
| 2023 |
||||||||
| 2024 |
||||||||
| 2025 |
||||||||
| |
|
|
|
|||||
| Total future lease payments |
||||||||
| Less: Imputed interest |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Present value of future payments |
$ | $ | ||||||
| |
|
|
|
|||||
8. Accrued Expenses
Accrued expenses as of March 31, 2021
a
nd December 31, 2020 are comprised of the following (in thousands): March 31, 2021 |
December 31, 2020 |
|||||||
| Payroll, benefits and related taxes, excluding severance benefits |
$ | $ | ||||||
| Withholding tax attributable to intercompany interest income |
||||||||
| Interest on senior notes |
— | |||||||
| Outside service fees |
||||||||
| Restructuring and others |
||||||||
| Others |
||||||||
| |
|
|
|
|||||
| Accrued expenses |
$ | $ | ||||||
| |
|
|
|
|||||
14
9. Derivative Financial Instruments
The Company’s Korean subsidiary from time to time has entered into zero cost collar contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues.
Details of the zero cost collar contracts as of March 31, 2021 are as follows (in thousands):
| Date of transaction |
Total |
Month of settlement | ||||
| |
$ | |||||
| |
$ | |||||
| |
$ | |||||
| |
$ | |||||
Details of the zero cost collar contracts as of December 31, 2020 are as follows (in thousands):
| Date of transaction |
Total |
Month of settlement | ||||
| |
$ | |||||
| |
$ | |||||
| |
$ | |||||
T
he zero cost collar contracts qualify as cash flow hedges under ASC 815, “Derivatives and Hedging,” since at both the inception of the contracts and on an ongoing basis, the hedging relationship was and is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the contracts.
The fair values of the Company’s outstanding zero cost collar contracts recorded as assets and liabilities as of March 31, 2021 and December 31, 2020 are as follows (in thousands):
| Derivatives designated as hedging instruments: |
March 31, 2021 |
December 31, 2020 |
||||||||||
| Asset Derivatives: |
||||||||||||
| Zero cost collars |
Other current assets | $ | $ | |||||||||
| Liability Derivatives: |
||||||||||||
| Zero cost collars |
Other current liabilities | $ | $ | |||||||||
Offsetting of derivative assets and liabilities as of March 31, 2021 is as follows (in thousands):
| As of March 31, 2021 |
Gross amounts of recognized assets/liabilities |
Gross amounts offset in the balance sheets |
Net amounts of assets/liabilities presented in the balance sheets |
Gross amounts not offset in the balance sheets |
Net amount |
|||||||||||||||||||
Financial instruments |
Cash collateral pledged |
|||||||||||||||||||||||
| Asset Derivatives: |
||||||||||||||||||||||||
| Zero cost collars |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Liability Derivatives: |
||||||||||||||||||||||||
| Zero cost collars |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Offsetting of derivative assets and liabilities as of December 31, 2020 is as follows (in thousands):
| As of December 31, 2020 |
Gross amounts of recognized assets/liabilities |
Gross amounts offset in the balance sheets |
Net amounts of assets/liabilities presented in the balance sheets |
Gross amounts not offset in the balance sheets |
Net amount |
|||||||||||||||||||
Financial instruments |
Cash collateral pledged |
|||||||||||||||||||||||
| Asset Derivatives: |
||||||||||||||||||||||||
| Zero cost collars |
|
$ | $ | $ | $ | $ | $ | |||||||||||||||||
| Liability Derivatives: |
|
|||||||||||||||||||||||
| Zero cost collars |
|
$ | $ | $ | $ | $ | $ | |||||||||||||||||
15
For derivative instruments that are designated and qualify as cash flow hedges, gains or losses on the derivative aside from components excluded from the assessment of effectiveness are reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing hedge components excluded from the assessment of effectiveness, are recognized in current earnings.
The following table summarizes the impact of derivative instruments on the consolidated statements of operations for the three months ended March 31, 2021 and 2020. Net sales of discontinued operations for the three months ended March 31, 2020 are included in the below table (in thousands):
Derivatives in ASC 815 Cash Flow Hedging Relationships |
Amount of Loss Recognized in AOCI on Derivatives |
Location/Amount of Gain (Loss) Reclassified from AOCI Into Statement of Operations |
Location/Amount of Gain (Loss) Recognized in Statement of Operations on Derivatives |
|||||||||||||||||||||||||||||
Three Months Ended March 31, |
Three Months Ended March 31, |
Three Months Ended March 31, |
||||||||||||||||||||||||||||||
2021 |
2020 |
2021 |
2020 |
2021 |
2020 |
|||||||||||||||||||||||||||
Zero cost collars |
$ | ( |
) | $ | ( |
) | Net sales | $ |
$ |
( |
) | Other income, net | $ |
( |
) | $ |
||||||||||||||||
$ |
( |
) | $ |
( |
) | $ |
$ |
( |
) | $ |
( |
) | $ |
|||||||||||||||||||
As of March 31, 2021, the amount expected to be reclassified from accumulated other comprehensive loss into loss within the next 1,002 thousand.
12
months is $The Company set aside cash deposits to the counterparties, Nomura Financial Investment (Korea) Co., Ltd. (“NFIK”), Deutsche Bank AG, Seoul Branch (“DB”) and Standard Chartered Bank Korea Limited (“SC”), as required for the zero cost collar contracts. These cash deposits are recorded as hedge collateral on the consolidated balance sheets. Cash deposits as of March 31, 2021 and December 31, 2020 are as follows (in thousands):
Counterparties |
March 31, 2021 |
December 31, 2020 |
||||||
NFIK |
$ | $ | ||||||
DB |
||||||||
SC |
||||||||
Total |
$ | $ | ||||||
The Company is required to deposit additional cash collateral with NFIK and DB for any exposure in excess of $500 thousand, and no such cash collateral was required as of March 31, 2021 and December 31, 2020.
These zero cost collar contracts may be terminated by the counterparties in a number of circumstances, including if the Company’s credit rating falls below
B-/B3
or if the Company’s total cash and cash equivalents is less than $
thousand at the end of a fiscal quarter, unless a waiver is obtained.
10. Fair Value Measurements
Fair Value of Financial Instruments
As of March 31, 2021, the following table represents the Company’s assets and liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):
Carrying Value March 31, 2021 |
Fair Value Measurement March 31, 2021 |
Quoted Prices in Active Markets for Identical Asset / Liability (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||||||
Assets: |
||||||||||||||||||||
Derivative assets (other current assets) |
$ | $ | — | $ | — | |||||||||||||||
Liabilities: |
||||||||||||||||||||
Derivative liabilities (other current liabilities) |
$ | $ | — | $ | — | |||||||||||||||
16
As of December 31, 2020, the following table represents the Company’s assets and liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):
Carrying Value December 31, 2020 |
Fair Value Measurement December 31, 2020 |
Quoted Prices in Active Markets for Identical Asset / Liability (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||||||
Assets: |
||||||||||||||||||||
Derivative assets (other current assets) |
$ | $ | — | $ | — | |||||||||||||||
Liabilities: |
||||||||||||||||||||
Derivative liabilities (other current liabilities) |
$ | $ | — | $ | — | |||||||||||||||
Items not reflected in the table above include cash equivalents, accounts receivable, other receivables, accounts payable, and other accounts payable, fair value of which approximate carrying values due to the short-term nature of these instruments. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs.
Fair Value of Borrowings
December 31, 2020 |
||||||||
Carrying Value |
Fair Value |
|||||||
(In thousands of U.S. dollars) |
||||||||
Borrowings: |
||||||||
| $ | $ | |||||||
On January 17, 2017, the Company’s wholly owned subsidiary, MagnaChip Semiconductor S.A., closed an offering (the “Exchangeable Notes
Offering”) of The Exchangeable Notes matured on March 1, 2021, unless they were earlier repurchased or converted. The Company estimated the fair value of the Exchangeable Notes using the market approach, which utilizes quoted market prices that fall under Level 2. For further description of the Exchangeable Notes, see Note 11, “Borrowings.”
Fair Values Measured on a
Non-recurring
Basis The Company’s no
non-financial
assets, such as property, plant and equipment, and intangible assets are recorded at fair value upon acquisition and are remeasured at fair value only if an impairment charge is recognized. As of March 31, 2021 and 2020 the Company did non-recurring
basis. 17
11. Borrowings
There were no borrowings outstanding as of March 31, 2021. As of December 31, 2020, the following table represents the Company’s borrowings (in thousands):
December 31, |
||||
2020 |
||||
5.0% Exchangeable Senior Notes due March 2021 |
$ | |||
Less: unamortized discount and debt issuance costs |
( |
) | ||
Total borrowings, net |
||||
Less: current portion of long-term borrowings, net |
||||
Long-term borrowings, net |
$ | |||
5.0% Exchangeable Senior Notes
On January 17, 2017, MagnaChip Semiconductor S.A. closed the Exchangeable Notes Offering of $86,250 thousand aggregate principal amount of 5.0 % Exchangeable Notes. Interest on the Exchangeable Notes accrues at a rate of 5.0 % per annum, payable semi-annually on March 1 and September 1 of each year, beginning on March 1, 2017. The Exchangeable Notes matured on March 1, 2021, unless they were earlier repurchased or converted. Holders had the right to convert their notes at their option at any time prior to the close of business on the business day immediately preceding the stated maturity date.
The Company incurred debt issuance costs of $5,902 thousand related to the issuance of the Exchangeable Notes. The debt issuance costs are recorded as a direct deduction from the long-term borrowings in the consolidated balance sheets and amortized to interest expense using the effective interest method over the term of the Exchangeable Notes. Interest expense related to the Exchangeable Notes for the three months ended March 31, 2021 and 2020 were $958 thousand and $1,416 thousand, respectively.
In February 2019, the Company repurchased a principal amount equal to $920 thousand of the Exchangeable Notes in the open market, resulting in a loss of $63 thousand, which was recorded as loss on early extinguishment of borrowings, net in the consolidated statements of operations for the year ended December 31, 2019. In December 2018, the Company repurchased a principal amount equal to $1,590 thousand of the Exchangeable Notes in the open market, resulting in a loss of $234 thousand, which was recorded as loss on early extinguishment of borrowings, net in the consolidated statements of operations for the year ended December 31, 2018.
Prior to the March 1, 2021 maturity of the Exchangeable Notes, holders elected to exchange all outstanding Exchangeable Notes for an aggregate of
shares of the Company’s common stock in satisfaction in full of the outstanding obligations under the Exchangeable Notes. Upon conversion, the Company delivered for each $1,000 principal amount of converted Exchangeable Notes a number of shares equal to the exchange rate of 121.1387 shares of common stock per $1,000 principal amount of Exchangeable Notes, which was equivalent to an exchange price of approximately $8.26 per share of common stock. In connection with the exchanges, the fractional shares were paid in cash. Following March 1, 2021, the Company does not have any Exchangeable Notes outstanding.
18
12. Accrued Severance Benefits
The majority of accrued severance benefits are for employees in the Company’s Korean subsidiary. Pursuant to the Employee Retirement Benefit Security Act of Korea, eligible employees and executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of March 31, 2021, 98 % of all employees of the Company were eligible for severance benefits.
Changes in accrued severance benefits are as follows (in thousands):
Three Months Ended |
||||||||
March 31, 2021 |
March 31, 2020 |
|||||||
Beginning balance |
$ | $ | ||||||
Provisions |
||||||||
Severance payments |
( |
) | ( |
) | ||||
Translation adjustments |
( |
) | ( |
) | ||||
Less: Cumulative contributions to severance insurance deposit accounts |
( |
) | ( |
) | ||||
The National Pension Fund |
( |
) | ( |
) | ||||
Group severance insurance plan |
( |
) | ( |
) | ||||
Accrued severance benefits, net |
$ | $ | ||||||
The severance benefits funded through the Company’s National Pension Fund and group severance insurance plan will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.
Beginning in July 2018, the Company contributes to certain severance insurance deposit accounts a certain percentage of severance benefits that are accrued for eligible employees for their services from January 1, 2018. These accounts consist of time deposits and other guaranteed principal and interest, and are maintained at insurance companies, banks or security companies for the benefit of employees. The Company deducts the contributions made to these severance insurance deposit accounts from its accrued severance benefits.
The Company is liable to pay the following future benefits to its
non-executive
employees upon their normal retirement age (in thousands): Severance benefit |
||||
Remainder of 2021 |
$ | |||
2022 |
||||
2023 |
||||
2024 |
||||
2025 |
||||
2026 |
||||
2027 – 2031 |
||||
The above amounts were determined based on the
non-executive
employees’ current salary rates and the number of service years that will be accumulated upon their retirement dates. These amounts do not include amounts that might be paid to non-executive
employees that will cease working with the Company before their normal retirement ages. Korea’s mandatory retirement age is 60 under the Employment Promotion for the Aged Act.
19
13. Foreign Currency Loss, Net
Net foreign currency gain or loss includes 381,800 thousand and $378,852 thousand, respectively. The Korean won to U.S. dollar exchange rates were 1,133.5 :1 and 1,088.0 :1 using the first base rate as of March 31, 2021 and December 31, 2020, respectively, as quoted by the KEB Hana Bank.
non-cash
translation gain or loss associated with intercompany balances. A substantial portion of the Company’s net foreign currency gain or loss is non-cash
translation gain or loss associated with intercompany long-term loans to the Company’s Korean subsidiary. The loans are denominated in U.S. dollars and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of March 31, 2021 and December 31, 2020, the outstanding intercompany loan balances including accrued interest between the Korean subsidiary and the Dutch subsidiary were $14
.
Income Taxes
The Company and its subsidiaries file income tax returns in Korea, Japan, Taiwan, the U.S. and in various other jurisdictions. The Company is subject to income or
non-income
tax examinations by tax authorities of these jurisdictions for all open tax years. The loss from continuing operations before income tax expense for the three months ended March 31, 2021 and 2020 w7,183 thousand and $29,775 thousand, respectively.
as
$For the three months ended March 31, 2021, the Company recorded an income tax expense of $290 thousand, primarily attributable to interest on intercompany loan balances, which was offset in part by the tax benefit recognized on the loss for the first quarter of 2021 from the Company’s Korean subsidiary. For the three months ended March 31, 2020, the Company recorded an income tax expense from the continuing operations of $1,303 thousand, primarily attributable to interest on intercompany loan balances. The income tax expense was recorded for the Company’s Korean subsidiary based on the estimated taxable income for the respective period, combined with its ability to utilize net operating loss carryforwards up to 60 % in 2020.
20
15. Geographic and Other Information
The following sets forth information relating to the single continuing operating segment (in thousands):
Three Months Ended |
||||||||
March 31, 2021 |
March 31, 2020 |
|||||||
| Revenues |
||||||||
| Standard products business |
||||||||
| Display Solutions |
$ | $ | ||||||
| Power Solutions |
||||||||
| |
|
|
|
|||||
| Total standard products business |
$ | $ | ||||||
| Transitional Fab 3 foundry services |
||||||||
| |
|
|
|
|||||
| Total revenues |
$ | $ | ||||||
| |
|
|
|
|||||
Three Months Ended |
||||||||
March 31, 2021 |
March 31, 2020 |
|||||||
| Gross Profit |
||||||||
| Standard products business |
$ | $ | ||||||
| Transitional Fab 3 foundry services |
— | |||||||
| |
|
|
|
|||||
| Total gross profit |
$ | $ | ||||||
| |
|
|
|
|||||
The following is a summary of net sales—standard products business (which does not include the Transitional Fab 3 Foundry Services) by geographic region, based on the location to which the products are billed (in thousands):
Three Months Ended |
||||||||
March 31, 2021 |
March 31, 2020 |
|||||||
| Korea |
$ | $ | ||||||
| Asia Pacific (other than Korea) |
||||||||
| United States |
||||||||
| Europe |
||||||||
| Others |
||||||||
| |
|
|
|
|||||
| Total |
$ | $ | ||||||
| |
|
|
|
|||||
For the three months ended March 31, 2021 and 2020, of the Company’s net sales – standard products business in Asia Pacific (other than Korea), net sales – standard products business in China and Hong Kong represented
%
respectively, and net sales—standard products business in Vietnam represented ,
Net sales from the Company’s top ten largest customers in the standard products business (which does not include the Transitional Fab 3 Foundry Services) accounted for 82 % and 90 % for the three months ended March 31, 2021 and 2020, respectively.
For the three months ended March 31, 2021, the Company had two customers that represented 48.8 % and 10.0 % of its net sales – standard products business. For the three months ended March 31, 2020, the Company had two customers that represented 52.8 % and 15.8 % of its net sales – standard products business.
As of March 31, 2021 and December 31, 2020, one customer accounted for 33.1 % and 45.1 % of accounts receivable, respectively.
21
16. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists
o
f the following as of March 31, 2021 and December 31, 2020, respectively (in thousands): March 31, 2021 |
December 31, 2020 |
|||||||
Foreign currency translation adjustments |
$ | $ | ||||||
Derivative adjustments |
( |
) | ||||||
Total |
$ | ( |
) | $ | ||||
Changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2021 and 2020 are as follows (in thousands):
Three Months Ended March 31, 2021 |
Foreign currency translation adjustments |
Derivative adjustments |
Total |
|||||||||
Beginning balance |
$ | $ | $ | |||||||||
Other comprehensive loss before reclassifications |
( |
) | ( |
) | ( |
) | ||||||
Amounts reclassified from accumulated other comprehensive income |
— | ( |
) | ( |
) | |||||||
Net current-period other comprehensive loss |
( |
) |
( |
) | ( |
) | ||||||
Ending balance |
$ | $ | ( |
) | $ | ( |
) | |||||
Three Months Ended March 31, 2020 |
Foreign currency translation adjustments |
Derivative adjustments |
Total |
|||||||||
Beginning balance |
$ | ( |
) | $ | $ | ( |
) | |||||
Other comprehensive income (loss) before reclassifications |
( |
) | ||||||||||
Amounts reclassified from accumulated other comprehensive loss |
— | |||||||||||
Net current-period other comprehensive income (loss) |
( |
) | ||||||||||
Ending balance |
$ | $ | ( |
) | $ | |||||||
22
17. Loss Per Share
The following table illustrates the computation of basic and diluted loss per common share for the three months ended March 31, 2021 and 2020:
Three Months Ended |
||||||||
March 31, 2021 |
March 31, 2020 |
|||||||
(In thousands of US dollars, except share data) |
||||||||
Basic and diluted loss per share |
||||||||
Loss from continuing operations |
$ | ( |
) | $ | ( |
) | ||
Income from discontinued operations, net of tax |
||||||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Weighted average number of shares – basic and diluted |
||||||||
Basic and diluted loss per common share |
||||||||
Continuing operations |
$ | ( |
) | $ | ( |
) | ||
Discontinued operations |
||||||||
Total |
$ | ( |
) | $ | ( |
) | ||
The following outstanding instruments were excluded from the computation of diluted loss per share, as they have an anti-dilutive effect on the calculation:
Three Months Ended |
||||||||
March 31, 2021 |
March 31, 2020 |
|||||||
Options |
||||||||
Restricted Stock Units |
||||||||
For the three months ended March 31, 2021 and 2020, 5,783,919 shares and 10,144,155
shares, respectively, of potential common stock from the assumed conversion of Exchangeable Notes were also excluded from the computation of diluted loss per share as the effect were anti-dilutive for the period.
23
18. Commitments and Contingencies
Advances to Suppliers
The Company, from time to time, may make advances in form of prepayments or deposits to suppliers to procure materials to meet its planned production. The Company recorded advances of $1,150 thousand and $5,500 thousand as other current assets as of March 31, 2021 and December 31, 2020, respectively.
COVID-19
Pandemic In December 2019, a strain of coronavirus causing a disease known as orders, and business restrictions and shutdowns, resulting in rapidly changing market and economic conditions. Although some of these restrictions and other containment measures have since been lifted or scaled back, ongoing surges of
COVID-19
surfaced in Wuhan, China, resulting in significant disruptions among Chinese manufacturing and other facilities and travel throughout China. In March 2020, the World Health Organization declared the COVID-19
outbreak a pandemic. Governmental authorities throughout the world have implemented numerous containment measures, including travel bans and restrictions, quarantines, shelter-in-place
COVID-19
have in some cases resulted in the re-imposition
of certain restrictions and containment measures, and may continue to lead to other restrictions being re-implemented
in the foreseeable future in response to efforts to reduce the rapid spread of COVID-19.
The Company experienced some minor disruption in its Power Solutions business from assembly and test subcontractors located in China in the first quarter of 2020 as a result of the
COVID-19
pandemic. To date, its external Display Solutions business contractors and sub-contractors
have not been materially impacted by the COVID-19
pandemic. The Company is, however, unable to accurately predict the full impact that the COVID-19
pandemic will have on its future results of operations due to numerous uncertainties, including the severity and duration of the outbreak, the efficacy of ongoing global vaccination efforts, potential future recurrences of the outbreak, the spread of disease variants that may be resistant to the existing vaccines, further containment actions that may be taken by governmental authorities, the impact to the businesses of its customers and suppliers, and other factors. The Company continues to closely monitor and evaluate the nature and scope of the impact of the
COVID-19
pandemic to its business, consolidated results of operations, and financial condition, and may take further a
ctions altering its business operations and managing its costs and liquidity that the Company deems necessary or appropriate to respond to this fast moving and uncertain global health crisis and the resulting global economic consequences.Merger-related Complaints
Since April 22, 2021, nine complaints have been filed seeking to enjoin the Merger, or, if the Merger is consummated, rescind the Merger or recover damages, as well as an award of each plaintiff’s fees and litigation expenses. The lawsuits, each filed as an individual action by a purported stockholder of the Company, are captioned as , Case No. (S.D.N.Y.) (the “Schulthess Complaint”), , Case No. (E.D.N.Y.), , Case No. (S.D.N.Y.), , Case No. (S.D.N.Y.) (the “Castelli Complaint”), , Case No. (S.D.N.Y.), , Case No. (S.D.N.Y.), , Case No. (S.D.N.Y.), ., Case No. 1:21-cv-00657 (D. Del.), and , Case No. 2:21-cv-02110 (E.D. Pa.). Each complaint alleges that the preliminary proxy statement filed by the Company with the Securities and Exchange Commission (“SEC”) on April 19, 2021 is false and/or misleading and asserts claims for violations of Section 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and SEC Rule
Schulthess v. Magnachip Semiconductor Corporation, et al.
1:21-cv-03587
Pittman v. Magnachip Semiconductor Corporation, et al.
1:21-cv-02306
Flanagan v. Magnachip Semiconductor Corporation, et al.
1:21-cv-03743
Castelli v. Magnachip Semiconductor Corporation, et al.
1:21-cv-03769
Doolittle v. Magnachip Semiconductor Corporation, et al.
1:21-cv-03801
Thomas v. Magnachip Semiconductor Corporation, et al.
1:21-cv-03860
Finger v. Magnachip Semiconductor Corporation, et al.
1:21-cv-03927
Kent v. Magnachip Semiconductor Corporation, et al
Kennedy v. Magnachip Semiconductor Corporation, et al.
14a-9
against the Company and certain current or former members of the Company’s Board of Directors. The Schulthess and Castelli Complaints also allege breaches of fiduciary duties by certain current or former members of the Company’s Board of Directors. The Schulthess Complaint further alleges that the Company aided and abetted purported breaches of fiduciary duties by certain current or former members of the Company’s Board of Directors. The Company believes the disclosures in the preliminary proxy statement comply fully with all applicable law and that the lawsuits are entirely without merit. Additional lawsuits arising out of or relating to the Merger Agreement or the Merger may be filed in the future. At this time, the Company is unable to reasonably estimate any possible loss, or range of reasonable possible losses, with respect to the complaints described above. 24
FORWARD LOOKING STATEMENTS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All statements other than statements of historical facts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements.
These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in this section, in “Part II: Item 1A. Risk Factors” herein and in “Part I: Item 1A. Risk Factors” in our Annual Report on Form
10-K
filed on March 9, 2021 (“2020 Form 10-K”)
(including that the impact of the COVID-19
pandemic may also exacerbate the risks discussed therein). All forward-looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information or future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Statements made in this Quarterly Report on Form
10-Q
(this “Report”), unless the context otherwise requires, that include the use of the terms “we,” “us,” “our” and “Magnachip” refer to Magnachip Semiconductor Corporation and its consolidated subsidiaries. The term “Korea” refers to the Republic of Korea or South Korea. 25
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the related notes included elsewhere in this Report.
Overview
We are a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, IoT applications, consumer, computing, industrial and automotive applications. We provide technology platforms for analog, mixed-signal, power, high voltage,
non-volatile
memory, and radio frequency applications. We have a proven record with more than 40 years of operating history, a portfolio of approximately 1,200 registered patents and pending applications and extensive engineering and manufacturing process expertise. Our standard products business includes our Display Solutions and Power Solutions business lines.
Our Display Solutions products provides flat panel display solutions to major suppliers of large and small flat panel displays. These products include source and gate drivers and timing controllers that cover a wide range of flat panel displays used in mobile communications, automotives, entertainment devices, notebook PCs, monitors and liquid crystal display (LCD), organic light emitting diodes (OLED) and Micro light emitting diode (LED) televisions. Our Display Solutions products support the industry’s most advanced display technologies, such as OLEDs, low temperature polysilicons thin film transistors (LTPS TFTs) and amorphous silicon thin film transistors
(a-Si
TFTs). Since 2007, we have designed and manufactured OLED display driver integrated circuit (IC) products. Our current portfolio of OLED solutions address a wide range of resolutions ranging from HD to Wide Quad High Definition (WQHD) for applications including smartphones, TVs, and other mobile devices. We believe we have a unique intellectual property portfolio and mixed-signal design and manufacturing expertise in the OLED industry. Our Power Solutions business line produces power management semiconductor products including discrete and integrated circuit solutions for power management in consumer, communications, computing, industrial and automotive applications. These products include metal oxide semiconductor field effect transistors (MOSFETs), insulated-gate bipolar transistors (IGBTs),
AC-DC
converters, DC-DC
converters, LED drivers, switching regulators, linear regulators, interface ICs and power management ICs (PMICs) for a range of devices, including televisions, smartphones, desktop PCs, notebooks, tablets, servers, telecommunication power, home appliances, industrial applications such as uninterruptible power supplies (UPSs), LED lighting, personal mobility, motor drives, battery management systems (BMS) and automotive electronics. Our wide variety of analog and mixed-signal semiconductor products combined with our mature technology platform allow us to address multiple high-growth end markets and rapidly develop and introduce new products and services in response to market demands. Our design center and substantial manufacturing operations in Korea place us at the core of the global electronics device supply chain. We believe this enables us to quickly and efficiently respond to our customers’ needs, and allows us to better serve and capture additional demand from existing and new customers.
To maintain and increase our profitability, we must accurately forecast trends in demand for electronics devices that incorporate semiconductor products we produce. We must understand our customers’ needs as well as the likely end market trends and demand in the markets they serve. We must also invest in relevant research and development activities and purchase necessary materials on a timely basis to meet our customers’ demand while maintaining our target margins and cash flow.
The semiconductor markets in which we participate are highly competitive. The prices of our products tend to decrease regularly over their useful lives, and such price decreases can be significant as new generations of products are introduced by us or our competitors. We strive to offset the impact of declining selling prices for existing products through cost reductions and the introduction of new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to mitigate the risk of losses from product obsolescence.
Demand for our products and services is driven by overall demand for communications, IoT, consumer, industrial and automotive products and can be adversely affected by periods of weak consumer and enterprise spending or by market share losses by our customers. In order to mitigate the impact of market volatility on our business, we are diversifying our portfolio of products, customers, and target applications. We also expect that new competitors will emerge in these markets that may place increased pressure on the pricing for our products and services. While we believe we are well positioned competitively to compete in these markets and against these new competitors as a result of our long operating history, existing manufacturing capacity and our worldwide customer base, if we are not effective in competing in these markets, our operating results may be adversely affected.
26
Net sales for our standard products business are driven by design wins in which we are selected by an electronics original equipment manufacturer (OEM) or other potential customer to supply its demand for a particular product. A customer will often have more than one supplier designed into multi-source components for a particular product line. Once we have design wins and the products enter into mass production, we often specify the pricing of a particular product for a set period of time, with periodic discussions and renegotiations of pricing with our customers. In any given period, our net sales depend heavily upon the
end-market
demand for the goods in which our products are used, the inventory levels maintained by our customers and, in some cases, allocation of demand for components for a particular product among selected qualified suppliers. In contrast to completely fabless semiconductor companies, our internal manufacturing capacity provides us with greater control over manufacturing costs and the ability to implement process and production improvements for our internally manufactured products, which can favorably impact gross profit margins. Our internal manufacturing capacity also allows for better control over delivery schedules, improved consistency over product quality and reliability and improved ability to protect intellectual property from misappropriation on these products. However, having internal manufacturing capacity exposes us to the risk of under-utilization of manufacturing capacity that results in lower gross profit margins, particularly during downturns in the semiconductor industry.
Our standard products business requires investments in capital equipment. Analog and mixed-signal manufacturing facilities and processes are typically distinguished by the design and process implementation expertise rather than the use of the most advanced equipment. Many of these processes also tend to migrate more slowly to smaller geometries due to technological barriers and increased costs. For example, some of our products use high-voltage technology that requires larger geometries and that may not migrate to smaller geometries for several years, if at all. As a result, our manufacturing base and strategy do not require substantial investment in leading edge process equipment for those products, allowing us to utilize our facilities and equipment over an extended period of time with moderate required capital investments. In addition, we are less likely to experience significant industry overcapacity, which can cause product prices to decline significantly. In general, we seek to invest in manufacturing capacity that can be used for multiple high-value applications over an extended period of time. In addition, we outsource manufacturing of those products which do require advanced technology and
12-inch
wafer capacity, such as organic light emitting diodes (OLED). We believe this balanced capital investment strategy enables us to optimize our capital investments and facilitates more diversified product and service offerings. Since 2007, we had designed and manufactured OLED display driver ICs in our internal manufacturing facilities. As we expanded our design capabilities to products that require lower geometries unavailable at our existing manufacturing facilities, we began outsourcing manufacturing of certain OLED display driver ICs to an external
12-inch
foundry starting in the second half of 2015. This additional source of manufacturing is an increasingly important part of our supply chain management. By outsourcing manufacturing of advanced OLED products to external 12-inch
foundries, we are able to dynamically adapt to the changing customer requirements and address growing markets without substantial capital investments by us. At the external 12-inch
foundries, we apply our unique OLED process patents as well as other intellectual property, proprietary process design kits and custom design-flow methodologies. Our success going forward will depend upon our ability to adapt to future challenges such as the emergence of new competitors for our products and services or the consolidation of current competitors. Additionally, we must innovate to remain ahead of, or at least rapidly adapt to, technological breakthroughs that may lead to a significant change in the technology necessary to deliver our products and services. We believe that our established relationships and close collaboration with leading customers enhance our awareness of new product opportunities, market and technology trends and improve our ability to adapt and grow successfully.
27
Recent Developments
The Merger
On March 25, 2021, we entered into the Merger Agreement with Parent and Merger Sub, pursuant to which, among other things, Merger Sub will be merged with and into the Company, with the Company continuing its corporate existence as the surviving corporation in the Merger and becoming a wholly owned subsidiary of Parent.
Under the terms of the Merger Agreement, each share of our common stock issued and outstanding immediately before the Effective Time (other than Excluded Shares and Dissenting Shares) will be cancelled and will cease to exist and will be automatically converted into the right to receive $29.00 in cash, without interest, and subject to applicable withholding taxes. The
all-cash
transaction has an equity value of approximately $1.4 billion. The Merger is fully backed by equity commitments and not contingent on any financing conditions. For more information on the Merger Agreement and the Merger, see “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 2. Merger Agreement” in this Report.
Conversion of 5.0% Exchangeable Senior Notes due 2021 (the “Exchangeable Notes”)
Prior to the March 1, 2021 maturity of our Exchangeable Notes, holders thereof elected to exchange the Exchangeable Notes for an aggregate of 10,144,131 shares of our common stock in satisfaction in full of the outstanding obligations under the Exchangeable Notes. On March 1, 2021, we paid the final interest payment on the Exchangeable Notes of $2.1 million and no longer have any Exchangeable Notes obligations outstanding as of such date.
COVID-19
Pandemic In December 2019, a strain of coronavirus causing a disease known as orders, and business restrictions and shutdowns, resulting in rapidly changing market and economic conditions. Although some of these restrictions and other containment measures have since been lifted or scaled back, ongoing surges of
COVID-19
surfaced in Wuhan, China, resulting in significant disruptions among Chinese manufacturing and other facilities and travel throughout China. In March 2020, the World Health Organization declared the COVID-19
outbreak a pandemic. Governmental authorities throughout the world have implemented numerous containment measures, including travel bans and restrictions, quarantines, shelter-in-place
COVID-19
have, in some cases, resulted in the re-imposition
of certain restrictions and containment measures, and may continue to lead to other restrictions being re-implemented
in the foreseeable future in response to efforts to reduce the rapid spread of COVID-19.
We experienced some minor disruption in our Power Solutions business from assembly and test subcontractors located in China in the first quarter of 2020 as a result of the
COVID-19
pandemic. To date, our external Display Solutions business contractors and sub-contractors
have not been materially impacted by the COVID-19
pandemic. We are, however, unable to accurately predict the full impact that the COVID-19
pandemic will have on our future results of operations due to numerous uncertainties, including the severity and the duration of the outbreak, the efficacy of ongoing global vaccination efforts, potential future recurrences of the outbreak, the spread of disease variants that may be resistant to the existing vaccines, further containment actions that may be taken by governmental authorities, the impact to the businesses of our customers and suppliers, and other factors. We continue to closely monitor and evaluate the nature and scope of the impact of the
COVID-19
pandemic to our business, consolidated results of operations, and financial condition, and may take further actions altering our business operations and managing our costs and liquidity that we deem necessary or appropriate to respond to this fast moving and uncertain global health crisis and the resulting global economic consequences. 28
Explanation and Reconciliation of
Non-U.S. GAAP
Measures Adjusted EBITDA, Adjusted Operating Income and Adjusted Net Income
We use the terms Adjusted EBITDA, Adjusted Operating Income and Adjusted Net Income (including on a per share basis) in this Report. Adjusted EBITDA, as we define it, is a
non-U.S.
GAAP measure. We define Adjusted EBITDA for the periods indicated as EBITDA (as defined below), adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss, net, (iii) derivative valuation loss (gain), net and (iv) other charges. EBITDA for the periods indicated is defined as loss from continuing operations before interest expense, net, income tax expense, and depreciation and amortization. See the footnotes to the table below for further information regarding these items. We present Adjusted EBITDA as a supplemental measure of our performance because:
| • | we believe that Adjusted EBITDA, by eliminating the impact of a number of items that we do not consider to be indicative of our core ongoing operating performance, provides a more comparable measure of our operating performance from period-to-period |
| • | we believe that Adjusted EBITDA is commonly requested and used by securities analysts, investors and other interested parties in the evaluation of the Company as an enterprise level performance measure that eliminates the effects of financing, income taxes and the accounting effects of capital spending, as well as other one time or recurring items described above; and |
| • | we believe that Adjusted EBITDA is useful for investors, among other reasons, to assess the Company’s period-to-period |
We use Adjusted EBITDA in a number of ways, including:
| • | for planning purposes, including the preparation of our annual operating budget; |
| • | to evaluate the effectiveness of our enterprise level business strategies; |
| • | in communications with our Board of Directors concerning our consolidated financial performance; and |
| • | in certain of our compensation plans as a performance measure for determining incentive compensation payments. |
We encourage you to evaluate each adjustment and the reasons we consider them appropriate. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Adjusted EBITDA is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to income from continuing operations, cash flows from operating activities or net income, as determined in accordance with U.S. GAAP. A reconciliation of loss from continuing operations to Adjusted EBITDA from continuing operations is as follows:
Three Months Ended March 31, 2021 |
Three Months Ended March 31, 2020 |
|||||||
(In millions) |
||||||||
Loss from continuing operations |
$ | (7.5 | ) | $ | (31.1 | ) | ||
Interest expense, net |
0.4 | 4.9 | ||||||
Income tax expense |
0.3 | 1.3 | ||||||
Depreciation and amortization |
3.4 | 2.6 | ||||||
EBITDA |
3.3 | (22.3 | ) | |||||
Adjustments: |
||||||||
Equity-based compensation expense(a) |
1.6 | 0.8 | ||||||
Foreign currency loss, net(b) |
4.7 | 31.0 | ||||||
Derivative valuation loss (gain), net(c) |
0.1 | (0.1 | ) | |||||
Other charges(d) |
10.4 | 0.6 | ||||||
Adjusted EBITDA |
$ | 13.5 | $ | 9.9 | ||||
29
| (a) | This adjustment eliminates the impact of non-cash equity-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses as supplemental information. |
| (b) | This adjustment mainly eliminates the impact of non-cash foreign currency translation associated with intercompany debt obligations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily non-cash gains or losses, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results. |
| (c) | This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in U.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance. |
| (d) | For the three months ended March 31, 2021, this adjustment eliminates $10.4 million, of which $9.8 million related to non-recurring professional fees and certain transaction related expenses incurred in connection with the Merger. For the three months ended March 31, 2020, this adjustment eliminates non-recurring professional service fees and expenses incurred in connection with certain treasury and finance initiatives. As these expenses meaningfully impacted our operating results and are not expected to represent an ongoing operating expense to us, we believe our operating performance results are more usefully compared if these expenses are excluded. |
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
| • | Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
| • | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| • | Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; |
| • | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often need to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| • | Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees; |
| • | Adjusted EBITDA does not reflect the costs of holding certain assets and liabilities in foreign currencies; and |
| • | other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.
30
We present Adjusted Operating Income as supplemental measures of our performance. We prepare Adjusted Operating Income by adjusting operating income (loss) to eliminate the impact of equity-based compensation expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted Operating Income is useful to investors to provide a supplemental way to understand our underlying operating performance and allows investors to monitor and understand changes in our ability to generate income from ongoing business operations.
Adjusted Operating Income is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to operating income, income from continuing operations, cash flows from operating activities or net income, as determined in accordance with U.S. GAAP. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Operating Income differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Operating Income, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Operating Income for the periods indicated as operating income adjusted to exclude (i) equity-based compensation expense and (ii) other charges.
The following table summarizes the adjustments to operating income that we make in order to calculate Adjusted Operating Income from continuing operations for the periods indicated:
Three Months Ended March 31, 2021 |
Three Months Ended March 31, 2020 |
|||||||
(In millions) |
||||||||
Operating income (loss) |
$ | (2.1 | ) | $ | 6.0 | |||
Adjustments: |
||||||||
Equity-based compensation expense(a) |
1.6 | 0.8 | ||||||
Other charges(b) |
10.4 | 0.6 | ||||||
Adjusted Operating Income |
$ | 10.0 | $ | 7.3 | ||||
| (a) | This adjustment eliminates the impact of non-cash equity-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses as supplemental information. |
| (b) | For the three months ended March 31, 2021, this adjustment eliminates $10.4 million, of which $9.8 million related to non-recurring professional fees and certain transaction related expenses incurred in connection with the Merger. For the three months ended March 31, 2020, this adjustment eliminates non-recurring professional service fees and expenses incurred in connection with certain treasury and finance initiatives. As these expenses meaningfully impacted our operating results and are not expected to represent an ongoing operating expense to us, we believe our operating performance results are more usefully compared if these expenses are excluded. |
31
We present Adjusted Net Income (including on a per share basis) as a further supplemental measure of our performance. We prepare Adjusted Net Income (including on a per share basis) by adjusting loss from continuing operations to eliminate the impact of a number of
non-cash
expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted Net Income (including on a per share basis) is particularly useful because it reflects the impact of our asset base and capital structure on our operating performance. We present Adjusted Net Income (including on a per share basis) for a number of reasons, including: | • | we use Adjusted Net Income (including on a per share basis) in communications with our Board of Directors concerning our consolidated financial performance without the impact of non-cash expenses and the other items as we discussed below since we believe that it is a more consistent measure of our core operating results from period to period; and |
| • | we believe that reporting Adjusted Net Income (including on a per share basis) is useful to readers in evaluating our core operating results because it eliminates the effects of non-cash expenses as well as the other items we discuss below, such as foreign currency gains and losses, which are out of our control and can vary significantly from period to period. |
Adjusted Net Income (including on a per share basis) is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to income from continuing operations, cash flows from operating activities or net income, as determined in accordance with U.S. GAAP. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Net Income (including on a per share basis) differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Net Income (including on a per share basis), you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Net Income (including on a per share basis); for the periods indicated as loss from continuing operations, adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss, net, (iii) derivative valuation loss (gain), net, (iv) other charges and (v) income tax effect on
non-GAAP
adjustments. The following table summarizes the adjustments to loss from continuing operations that we make in order to calculate Adjusted Net Income (including on a per share basis) from continuing operations for the periods indicated:
Three Months Ended March 31, 2021 |
Three Months Ended March 31, 2020 |
|||||||
(In millions, except per share data) |
||||||||
Loss from continuing operations |
$ | (7.5 | ) | $ | (31.1 | ) | ||
Adjustments: |
||||||||
Equity-based compensation expense(a) |
1.6 | 0.8 | ||||||
Foreign currency loss, net(b) |
4.7 | 31.0 | ||||||
Derivative valuation loss (gain), net(c) |
0.1 | (0.1 | ) | |||||
Other charges(d) |
10.4 | 0.6 | ||||||
Income tax effect on non-GAAP adjustments(e) |
— | — | ||||||
Adjusted Net Income |
$ | 9.3 | $ | 1.1 | ||||
Reported loss per share—basic |
$ | (0.19 | ) | $ | (0.89 | ) | ||
Reported loss per share—diluted |
$ | (0.19 | ) | $ | (0.89 | ) | ||
Weighted average number of shares—basic |
40,292,838 | 34,893,157 | ||||||
Weighted average number of shares—diluted |
40,292,838 | 34,893,157 | ||||||
Adjusted earnings per share—basic |
$ | 0.23 | $ | 0.03 | ||||
Adjusted earnings per share—diluted |
$ | 0.22 | $ | 0.03 | ||||
Weighted average number of shares—basic |
40,292,838 | 34,893,157 | ||||||
Weighted average number of shares—diluted |
47,470,416 | 35,883,200 | ||||||
| (a) | This adjustment eliminates the impact of non-cash equity-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses as supplemental information. |
| (b) | This adjustment mainly eliminates the impact of non-cash foreign currency translation associated with intercompany debt obligations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily non-cash gains or losses, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results. |
32
| (c) | This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in U.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance. |
| (d) | For the three months ended March 31, 2021, this adjustment eliminates $10.4 million, of which $9.8 million related to non-recurring professional fees and certain transaction related expenses incurred in connection with the Merger. For the three months ended March 31, 2020, this adjustment eliminates non-recurring professional service fees and expenses incurred in connection with certain treasury and finance initiatives. As these expenses meaningfully impacted our operating results and are not expected to represent an ongoing operating expense to us, we believe our operating performance results are more usefully compared if these expenses are excluded. |
| (e) | For the three months ended March 31, 2021 and 2020, there was no tax impact from the adjustments to net income to calculate our Adjusted Net Income due to net operating loss carry-forwards available at the parent entity of the Company in the U.S., based on the nature and origination of the adjustments, to offset related taxable income and full allowance for such deferred tax assets. |
We believe that all adjustments to loss from continuing operations used to calculate Adjusted Net Income was applied consistently to the periods presented.
Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
| • | Adjusted Net Income does not reflect changes in, or cash requirements for, our working capital needs; |
| • | Adjusted Net Income does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees; |
| • | Adjusted Net Income does not reflect the costs of holding certain assets and liabilities in foreign currencies; and |
| • | other companies in our industry may calculate Adjusted Net Income differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted Net Income should not be considered as a measure of profitability of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted Net Income only as a supplement.
33
Factors Affecting Our Results of Operations
Net
Sales.
12-inch
foundries. Our product inventory is primarily located in Korea and is available for drop shipment globally. Outside of Korea, we maintain limited product inventory, and our sales representatives generally relay orders to our factories in Korea for fulfillment. We have strategically located our sales and technical support offices near concentrations of major customers. Our sales offices are located in Korea, Japan and Greater China. Our network of authorized agents and distributors is in the United States, Europe and the Asia Pacific region. We recognize revenue when a customer obtains control of the product, which is generally upon product shipment, delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement. For the three months ended March 31, 2021 and 2020, we sold products to 145 and 135 customers, respectively, and our net sales to our ten largest customers represented 82% and 90% of our net sales—standard products business, respectively.
We will provide the Transitional Fab 3 Foundry Services up to September 1, 2023 at an agreed upon cost plus a
mark-up.
For the periods prior to the closing of the sale of the Foundry Services Group business and Fab 4 as of September 1, 2020 (which are accounted for as discontinued operations beginning in the first quarter of 2020), revenue derived from the Transitional Fab 3 Foundry Services is recorded at cost in both our continuing and discontinued operations. Gross Profit.
Average
Selling
Prices.
Material Costs.
Labor
Costs.
Depreciation Expense.
30-40
years on buildings to 5 to 12 years for certain equipment and assets. Our evaluation of carrying values is based on various analyses including cash flow and profitability projections. If our projections indicate that future undiscounted cash flows are not sufficient to recover the carrying values of the related long-lived assets, the carrying value of the assets is impaired and will be reduced, with the reduction charged to expense so that the carrying value is equal to fair value.Selling
Expenses.
General
and
Administrative
Expenses.
34
Research
and
Development.
non-recurring
engineering charges related to product design. Additionally, we develop base line process technology through experimentation and through the design and use of characterization wafers that help achieve commercially feasible yields for new products. The majority of research and development expenses of our display business are material and design-related costs for OLED display driver IC product development involving 40-nanometer
or finer processes. The majority of research and development expenses of our power business are certain equipment, material and design-related costs for power discrete products and material and design-related costs for power IC products. Power IC uses standard BCD process technologies which can be sourced from multiple foundries, including Fab 4. Interest Expense.
Impact of Foreign Currency Exchange Rates on Reported Results of Operations.
non-U.S.
currencies, principally the Korean won, and we expect that this will remain true in the future. Because we report our results of operations in U.S. dollars converted from our non-U.S.
revenues and expenses based on monthly average exchange rates, changes in the exchange rate between the Korean won and the U.S. dollar could materially impact our reported results of operations and distort period to period comparisons. In particular, because of the difference in the amount of our consolidated revenues and expenses that are in U.S. dollars relative to Korean won, depreciation in the U.S. dollar relative to the Korean won could result in a material increase in reported costs relative to revenues, and therefore could cause our profit margins and operating income to appear to decline materially, particularly relative to prior periods. The converse is true if the U.S. dollar were to appreciate relative to the Korean won. Moreover, our foreign currency gain or loss would be affected by changes in the exchange rate between the Korean won and the U.S. dollar as a substantial portion of non-cash
translation gain or loss is associated with the intercompany long-term loans to our Korean subsidiary, which is denominated in U.S. dollars. As of March 31, 2021, the outstanding intercompany loan balance including accrued interest between our Korean subsidiary and our Dutch subsidiary was $381.8 million. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our stock could be adversely affected. From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. Our Korean subsidiary enters into foreign currency zero cost collar contracts in order to mitigate a portion of the impact of U.S. dollar-Korean won exchange rate fluctuations on our operating results. Obligations under these foreign currency zero cost collar contracts must be cash collateralized if our exposure exceeds certain specified thresholds. These zero cost collar contracts may be terminated by a counterparty in a number of circumstances, including if our credit rating falls below
B-/B3
or if our total cash and cash equivalents is less than $30.0 million at the end of a fiscal quarter unless a waiver is obtained from the counterparty. We cannot assure that any hedging technique we implement will be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on our results of operations. Foreign Currency Gain or Loss.
non-cash
translation gain or loss related to the principal balance of intercompany balances at our Korean subsidiary that are denominated in U.S. dollars. This gain or loss results from fluctuations in the exchange rate between the Korean won and U.S. dollar. Income Taxes.
period-end
will be realized in future periods. In such assessment, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent results of operations. In the event we were to determine that we would be able to realize the deferred income tax assets in the future in excess of their net recorded amount, we would adjust the valuation allowance, which would reduce the provision for income taxes. We are subject to income- or
non-income-based
tax examinations by tax authorities of the U.S., Korea and multiple other foreign jurisdictions for all open tax years. Significant estimates and judgments are required in determining our worldwide provision for income- or non-income
based taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result. 35
Discontinued Operations.
Capital
Expenditures.
Inventories.
36
Results of Operations – Comparison of Three Months Ended March 31, 2021 and 2020
The following table sets forth consolidated results of operations for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, 2021 |
Three Months Ended March 31, 2020 |
|
||||||||||||||||||
Amount |
% of Total revenues |
Amount |
% of Total revenues |
Change Amount |
||||||||||||||||
(In millions) |
||||||||||||||||||||
| Revenues |
||||||||||||||||||||
| Net sales – standard products business |
$ | 112.9 | 91.8 | % | $ | 110.7 | 91.9 | % | $ | 2.2 | ||||||||||
| Net sales – transitional Fab 3 foundry services |
10.1 | 8.2 | 9.7 | 8.1 | 0.4 | |||||||||||||||
| |
|
|
|
|
|
|||||||||||||||
| Total revenues |
123.0 | 100.0 | 120.5 | 100.0 | 2.5 | |||||||||||||||
| Cost of sales |
||||||||||||||||||||
| Cost of sales – standard products business |
79.2 | 64.4 | 81.6 | 67.7 | (2.4 | ) | ||||||||||||||
| Cost of sales – transitional Fab 3 foundry services |
9.4 | 7.6 | 9.7 | 8.1 | (0.3 | ) | ||||||||||||||
| |
|
|
|
|
|
|||||||||||||||
| Total cost of sales |
88.6 | 72.1 | 91.3 | 75.8 | (2.7 | ) | ||||||||||||||
| |
|
|
|
|
|
|||||||||||||||
| Gross profit |
34.4 | 27.9 | 29.1 | 24.2 | 5.3 | |||||||||||||||
| |
|
|
|
|
|
|||||||||||||||
| Selling, general and administrative expenses |
12.6 | 10.3 | 12.1 | 10.0 | 0.5 | |||||||||||||||
| Research and development expenses |
13.4 | 10.9 | 10.5 | 8.7 | 2.9 | |||||||||||||||
| Other charges |
10.4 | 8.5 | 0.6 | 0.5 | 9.9 | |||||||||||||||
| |
|
|
|
|
|
|||||||||||||||
| Operating income (loss) |
(2.1 | ) | (1.7 | ) | 6.0 | 5.0 | (8.1 | ) | ||||||||||||
| |
|
|
|
|
|
|||||||||||||||
| Interest expense |
(1.0 | ) | (0.8 | ) | (5.6 | ) | (4.7 | ) | 4.6 | |||||||||||
| Foreign currency loss, net |
(4.7 | ) | (3.8 | ) | (31.0 | ) | (25.7 | ) | 26.3 | |||||||||||
| Others, net |
0.6 | 0.5 | 0.8 | 0.7 | (0.2 | ) | ||||||||||||||
| |
|
|
|
|
|
|||||||||||||||
| (5.1 | ) | (4.1 | ) | (35.7 | ) | (29.7 | ) | 30.6 | ||||||||||||
| |
|
|
|
|
|
|||||||||||||||
| Loss from continuing operations before income tax expense |
(7.2 | ) | (5.8 | ) | (29.8 | ) | (24.7 | ) | 22.6 | |||||||||||
| Income tax expense |
0.3 | 0.2 | 1.3 | 1.1 | (1.0 | ) | ||||||||||||||
| |
|
|
|
|
|
|||||||||||||||
| Loss from continuing operations |
(7.5 | ) | (6.1 | ) | (31.1 | ) | (25.8 | ) | 23.6 | |||||||||||
| Income from discontinued operations, net of tax |
— | — | 7.3 | 6.1 | (7.3 | ) | ||||||||||||||
| |
|
|
|
|
|
|||||||||||||||
| Net loss |
$ | (7.5 | ) | (6.1 | ) | $ | (23.7 | ) | (19.7 | ) | $ | 16.3 | ||||||||
| |
|
|
|
|
|
|||||||||||||||
37
The following sets forth information relating to our continuing operations:
Three Months Ended March 31, 2021 |
Three Months Ended March 31, 2020 |
|||||||||||||||||||
Amount |
% of Total Revenues |
Amount |
% of Total Revenues |
Change Amount |
||||||||||||||||
(In millions) |
||||||||||||||||||||
| Revenues |
||||||||||||||||||||
| Net sales – standard products business |
||||||||||||||||||||
| Display Solutions |
$ |
58.9 |
47.9 |
% |
$ |
77.6 |
64.4 |
% |
$ |
(18.7 |
) | |||||||||
| Power Solutions |
54.0 |
43.9 |
33.1 |
27.5 |
20.9 |
|||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total standard products business |
112.9 |
91.8 |
110.7 |
91.9 |
2.2 |
|||||||||||||||
| Net sales – transitional Fab 3 foundry services |
10.1 |
8.2 |
9.7 |
8.1 |
0.4 |
|||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total revenues |
$ |
123.0 |
100.0 |
% |
$ |
120.5 |
100.0 |
% |
$ |
2.5 |
||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
Three Months Ended March 31, 2021 |
Three Months Ended March 31, 2020 |
|||||||||||||||||||
Amount |
% of Net sales |
Amount |
% of Net sales |
Change Amount |
||||||||||||||||
(In millions) |
||||||||||||||||||||
| Gross Profit |
||||||||||||||||||||
| Gross profit – standard products business |
$ |
33.7 |
29.8 |
% |
$ |
29.1 |
26.3 |
% |
$ |
4.5 |
||||||||||
| Gross profit – transitional Fab 3 foundry services |
0.7 |
7.1 |
— |
— |
0.7 |
|||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total gross profit |
$ |
34.4 |
27.9 |
% |
$ |
29.1 |
24.2 |
% |
$ |
5.3 |
||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
Revenues
Total revenues were $123.0 million for the three months ended March 31, 2021, a $2.5 million, or 2.1%, increase compared to $120.5 million for the three months ended March 31, 2020. This increase was primarily due to an increase in revenue related to our standard products business as described below.
The standard products business.
high-end
MOSFETs, primarily for TVs and e-bikes,
whereas the revenue for power products in the first quarter of 2020 was impacted by COVID-19-related
non-auto
LCD business. The transitional Fab 3 foundry services.
Gross Profit
Total gross profit was $34.4 million for the three months ended March 31, 2021 compared to $29.1 million for the three months ended March 31, 2020, a $5.3 million, or 18.0%, increase. Gross profit as a percentage of net sales for the three months ended March 31, 2021 increased to 27.9% compared to 24.2% for the three months ended March 31, 2020. The increase in gross profit and gross profit as a percentage of net sales was primarily due to our standard products business as further described below.
The standard products business.
38
Net Sales – Standard Products Business by Geographic Region
We report net sales – standard products business by geographic region based on the location to which the products are billed. The following table sets forth our net sales—standard products business by geographic region and the percentage of total net sales—standard products business represented by each geographic region for the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, 2021 |
Three Months Ended March 31, 2020 |
|||||||||||||||||||
Amount |
% of Net Sales – standard products business |
Amount |
% of Net Sales – standard products business |
Change Amount |
||||||||||||||||
(In millions) |
||||||||||||||||||||
| Korea |
$ | 26.4 | 23.4 | % | $ | 30.8 | 27.8 | % | $ | (4.4 | ) | |||||||||
| Asia Pacific (other than Korea) |
83.7 | 74.2 | 77.5 | 70.0 | 6.2 | |||||||||||||||
| United States |
1.3 | 1.1 | 0.7 | 0.6 | 0.6 | |||||||||||||||
| Europe |
1.2 | 1.1 | 1.0 | 0.9 | 0.3 | |||||||||||||||
| Others |
0.2 | 0.2 | 0.7 | 0.6 | (0.5 | ) | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 112.9 | 100.0 | % | $ | 110.7 | 100.0 | % | $ | 2.2 | |||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
Net sales – standard products business in Korea for the three months ended March 31, 2021 decreased from $30.8 million to $26.4 million compared to the three months ended March 31, 2020, or by $4.4 million, or 14.2%, primarily due to a decrease in revenue related to our mobile OLED display driver ICs as a result of the U.S. Government’s export restrictions on Huawei, which was a downstream customer of some of our direct customers, since the third quarter of 2020 that impacted the shipment of certain mobile OLED display driver ICs to certain of our customers, and a strategic reduction of our lower margin
non-auto
LCD business. This decrease was offset in part by a higher demand for power products such as MOSFETs, including high-end
MOSFETs, primarily for TVs. Net sales – standard products business in Asia Pacific (other than Korea) for the three months ended March 31, 2021 increased to $83.7 million from $77.5 million in the three months ended March 31, 2020, or by $6.2 million, or 8.0%, primarily due to a higher demand for power products such as MOSFETs, including
high-end
MOSFETs, primarily for TVs and e-bikes.
Operating Expenses
Selling,
General
and
Administrative
Expenses.
Research
and
Development
Expenses.
28-nanometer
OLED display driver ICs. Other Charges.
Operating Income (Loss)
As a result of the foregoing, operating loss of $2.1 million was recorded for the three months ended March 31, 2021 compared to operating income of $6.0 million the three months ended March 31, 2020. As discussed above, the decrease in operating income of $8.1 million resulted primarily from a $9.9 million increase in other charges, $2.9 million increase in research and development expenses, and a $0.5 million increase in selling, general and administrative expenses. This increase was offset in part by a $5.3 million increase in gross profit.
39
Other Income (Expense)
Interest
Expense.
Foreign
Currency
Loss,
Net.
A substantial portion of our net foreign currency gain or loss is
non-cash
translation gain or loss associated with intercompany long-term loans to our Korean subsidiary, which are denominated in U.S. dollars, and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of March 31, 2021 and March 31, 2020, the outstanding intercompany loan balances, including accrued interest between our Korean subsidiary and our Dutch subsidiary, were $382 million and $684 million, respectively. Foreign currency translation gain or loss from intercompany balances were included in determining our consolidated net income since the intercompany balances were not considered long-term investments in nature because management intended to settle these intercompany balances at their respective maturity dates. Others,
Net.
Income Tax Expense
Income tax expense was $0.3 million for the three months ended March 31, 2021, which was primarily attributable to interest on intercompany loan balances, and offset in part by the tax benefit recognized on the loss for the first quarter of 2021 from our Korean subsidiary. Income tax expense from the continuing operations for the three months ended March 31, 2020 was $1.3 million, which was primarily attributable to interest on intercompany loan balances. The income tax expense was recorded for our Korean subsidiary based on the estimated taxable income for the respective period, combined with our ability to utilize net operating loss carryforwards up to 60% in 2020.
Loss from Continuing Operations
Loss from continuing operations for the three months ended March 31, 2021 was $7.5 million compared to loss from continuing operations of $31.1 million for the three months ended March 31, 2020. The $23.6 million improvement in results from continuing operations was primarily attributable to a $26.3 million improvement in net foreign currency loss and a $4.6 million decrease in interest expense, which were offset in part by an $8.1 million decrease in operating income.
Income from Discontinued Operations, Net of Tax
On March 30, 2020, we entered into the Business Transfer Agreement for the sale of our Foundry Services Group business and Fab 4. As a result, the results of the Foundry Services Group business were classified as discontinued operations in our consolidated statements of operations and excluded from our continuing operations for all periods presented. Income from discontinued operations, net of tax was $7.3 million for the three months ended March 31, 2020. On September 1, 2020, we completed the sale of our Foundry Services Group business and Fab 4 for a purchase price equal to approximately $350.6 million in cash. We have not incurred a gain or loss from discontinued operations in 2021 as the sale of the Foundry Service Group business and Fab 4 was completed in 2020.
Net Loss
As a result of the foregoing, a net loss of $7.5 million was recorded for the three months ended March 31, 2021 compared to a net loss of $23.7 million for the three months ended March 31, 2020. As discussed above, the improvement in net loss of $16.3 million primarily resulted from a $23.6 million improvement in loss from continuing operations, which was offset by a $7.3 million decrease in income from discontinued operation, net of tax.
40
Liquidity and Capital Resources
Our principal capital requirements are to fund sales and marketing, invest in research and development and capital equipment, to make debt service payments and to fund working capital needs. We calculate working capital as current assets less current liabilities.
Our principal sources of liquidity are our cash, cash equivalents, cash flows from operations and financing activities. Our ability to manage cash and cash equivalents may be limited, as our primary cash flows are dictated by the terms of our sales and supply agreements, contractual obligations, debt instruments and legal and regulatory requirements. From time to time, we may sell accounts receivable to third parties under factoring agreements or engage in accounts receivable discounting to facilitate the collection of cash. In addition, from time to time, we may make payments to our vendors on extended terms with their consent. As of March 31, 2021, we do not have any accounts payable on extended terms or payment deferment with our vendors.
On September 1, 2020, we completed the sale of our Foundry Services Group business and Fab 4 to Key Foundry Co., Ltd. in exchange for a purchase price equal to approximately $350.6 million in cash. 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.
On October 2, 2020, we redeemed of all of our outstanding 2021 Notes. We paid approximately $227.4 million to fully redeem all of the outstanding $224.25 million aggregate principal amount of the 2021 Notes at a redemption price equal to the sum of 100% of the principal amount plus accrued and unpaid interest thereon.
On January 17, 2017, we issued an aggregate of $86.3 million in principal amount of our Exchangeable Notes. Prior to the March 1, 2021 maturity of our Exchangeable Notes, holders elected to exchange for an aggregate of 10,144,131 shares of our common stock in satisfaction in full of the remaining outstanding obligations under the Exchangeable Notes.
We currently believe that we will have sufficient cash reserves from cash on hand and expected cash from operations to fund our operations as well as capital expenditures for the next 12 months and the foreseeable future.
Working Capital
Our working capital balance as of March 31, 2021 was $315.3 million compared to $236.0 million as of December 31, 2020. The $79.3 million increase was primarily attributable to the exchange of our Exchangeable Notes for common stock prior to their maturity date of March 1, 2021.
Cash Flows
The consolidated statements of cash flows have not been adjusted to separately disclose cash flows related to discontinued operations for the three months ended March 31, 2020, but the material items in the operating and investing activities of cash flows relating to discontinued operations in the referred period are disclosed in “Item 1. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 3 – Discontinued Operations and Assets Held for Sale” included elsewhere in this Report.
Cash Flows from Operating Activities
Cash inflow provided by operating activities totaled $21.2 million for the three months ended March 31, 2021, compared to $21.1 million of cash inflow provided by operating activities for the three months ended March 31, 2020. The net operating cash inflow for the three months ended March 31, 2021 reflects our net loss of $7.5 million, as adjusted favorably by $33.2 million, which mainly consisted of depreciation and amortization, provision for severance benefits, restructuring and other charges, and net foreign currency loss, and net unfavorable impact of $4.5 million from changes of operating assets and liabilities.
Cash Flows from Investing Activities
Cash outflow used in investing activities totaled $1.4 million for the three months ended March 31, 2021, compared to $7.1 million of cash outflow used in investing activities for the three months ended March 31, 2020. The $5.8 million decrease was primarily attributable to a $3.6 million net decrease in hedge collateral and a $2.3 million decrease in purchase of plant, property and equipment.
41
Cash Flows from Financing Activities
Cash inflow provided by financing activities totaled $0.8 million for the three months ended March 31, 2021, compared to $1.2 million of cash outflow used in financing activities for the three months ended March 31, 2020. The financing cash inflow for the three months ended March 31, 2021 was primarily attributable to $2.5 million of proceeds received from the issuance of common stock in connection with the exercise of stock options, which was offset in part by a payment of $1.5 million for the repurchase of our common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock units. The financing cash outflow for the three months ended March 31, 2020 was primarily attributable to a payment of $1.0 million for the repurchase of our common stock to satisfy tax withholding obligation in connection with the vesting of restricted stock units.
Capital Expenditures
We routinely make capital expenditures for fabrication facility maintenance, enhancement of our existing facilities and reinforcement of our global research and development capability. For the three months ended March 31, 2021, capital expenditures for plant, property and equipment were $1.1 million, a $2.3 million, or 67.7%, decrease from $3.4 million for the three months ended March 31, 2020. The decrease was mainly due to the timing of our equipment deployment. The capital expenditures for the three months ended March 31, 2021 and 2020 were related to meeting our customer demand and supporting technology and facility improvement at our fabrication facilities.
42
Contractual Obligations
The following summarizes our contractual obligations as of March 31, 2021:
Payments Due by Period |
||||||||||||||||||||||||||||
Total |
Remainder of 2021 |
2022 |
2023 |
2024 |
2025 |
Thereafter |
||||||||||||||||||||||
(In millions) |
||||||||||||||||||||||||||||
| Operating leases(1) |
$ | 4.9 | $ | 2.0 | $ | 1.3 | $ | 0.7 | $ | 0.5 | $ | 0.4 | $ | — | ||||||||||||||
| Finance leases(1) |
0.2 | 0.1 | 0.1 | 0.1 | — | — | — | |||||||||||||||||||||
| Water Treatment Services(1)(2) |
28.2 | 3.1 | 4.1 | 4.0 | 3.9 | 3.8 | 9.3 | |||||||||||||||||||||
| Others(3) |
11.0 | 3.3 | 4.5 | 3.1 | 0.1 | 0.1 | — | |||||||||||||||||||||
| (1) | Assumes constant currency exchange rate for Korean won to US dollars of 1,133.5:1, the exchange rate as of March 31, 2021. |
| (2) | Includes future payments for water treatment services for our fabrication facility in Gumi, Korea based on the contractual terms. |
| (3) | Includes license agreements and other contractual obligations. |
We lease land, office space and equipment under various operating lease agreements that expire through 2025.
We are a party to an arrangement for the water treatment facility in Gumi, Korea, which includes a
10-year
service agreement beginning July 1, 2018. Beginning in July 2018, we have contributed a certain percentage of severance benefits, accrued for eligible employees for their services beginning January 1, 2018, to certain severance insurance deposit accounts. These accounts consist of time deposits and other guaranteed principal and interest, and are maintained at insurance companies, banks or security companies for the benefit of employees. We deduct the contributions made to these severance insurance deposit accounts from our accrued severance benefits. As of March 31, 2021, our accrued severance benefits, net, totaled $39.1 million and cumulative contributions to these severance insurance deposit accounts amounted to $13.2 million.
We follow U.S. GAAP guidance on uncertain tax positions. Our unrecognized tax benefits totaled $0.3 million as of March 31, 2021. These unrecognized tax benefits have been excluded from the above table because we cannot estimate the period of cash settlement with the respective taxing authorities.
Off-Balance
Sheet Arrangements As of March 31, 2021, we did not have any
off-balance
sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
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Critical Accounting Policies and Estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in our consolidated financial statements and accompanying notes.
We believe that our significant accounting policies, which are described further in Note 1 to our consolidated financial statements in our Annual Report on Form
10-K
for our fiscal year ended December 31, 2020, or our 2020 Form 10-K,
are critical due to the fact that they involve a high degree of judgment and estimates about the effects of matters that are inherently uncertain. We base these estimates and judgments on historical experience, knowledge of current conditions and other assumptions and information that we believe to be reasonable. Estimates and assumptions about future events and their effects cannot be determined with certainty. Accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the business environment in which we operate changes. A description of our critical accounting policies that involve significant management judgement appears in our 2020 Form
10-K,
under “Management’s Discussion and Analysis of Financial Conditions and Reports of Operations—Critical Accounting Policies and Estimates.” There have been no other material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates included in our 2020 Form 10-K.
Recent
Accounting
Pronouncements
For a full description of new accounting pronouncements and recently adopted accounting pronouncements, please see “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 1. Business, Basis of Presentation and Significant Accounting Policies” in this Report.
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to the market risk that the value of a financial instrument will fluctuate due to changes in market conditions, primarily from changes in foreign currency exchange rates and interest rates. In the normal course of our business, we are subject to market risks associated with interest rate movements and currency movements on our assets and liabilities.
Foreign Currency Exposures
We have exposure to foreign currency exchange rate fluctuations on net income from our subsidiaries denominated in currencies other than U.S. dollars, as our foreign subsidiaries in Korea, Taiwan, China, Japan and Hong Kong use local currency as their functional currency. From time to time these subsidiaries have cash and financial instruments in local currency. The amounts held in Japan, Taiwan, Hong Kong and China are not material in regards to foreign currency movements. However, based on the cash and financial instruments balance at March 31, 2021 for our Korean subsidiary, a 10% devaluation of the Korean won against the U.S. dollar would have resulted in a decrease of $3.2 million in our U.S. dollar financial instruments and cash balances.
See “Note 9. Derivative Financial Instruments” to our consolidated financial statements under “Item 1. Interim Consolidated Financial Statements” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Impact of Foreign Currency Exchange Rates on Reported Results of Operations” for additional information regarding our foreign exchange hedging activities.
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Item 4. |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In connection with the preparation of this Report, we carried out an evaluation under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, as of March 31, 2021, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules
13a-15(e)
and 15d-15(e)
under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2021. Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. |
Legal Proceedings |
For a discussion of legal proceedings, see “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 18. Commitments and Contingencies” in this Report and “Part I: Item 3. Legal Proceedings” of our 2020
Form 10-K.
See also “Item 1A. Risk Factors” in this Report and “Part I: Item 1A. Risk Factors” of our 2020
Form 10-K
for additional information. Item 1A. |
Risk Factors |
The Company is subject to risks and uncertainties, any of which could have a significant or material adverse effect on our business, financial condition, liquidity or consolidated financial statements. You should carefully consider the risk factors disclosed in Part I, Item 1A of our 2020 Form
10-K
(including that the impact of the COVID-19
pandemic may also exacerbate the risks discussed therein), herein and other reports we have filed with the SEC. The risks described herein and therein are not the only ones we face. This information should be considered carefully together with the other information contained in this Report and the other reports and materials the Company files with the SEC. Risks Related to the Merger
There are risks and uncertainties associated with the Merger.
On March 25, 2021, we entered into the Merger Agreement with Parent and Merger Sub, pursuant to which, among other things, Merger Sub will be merged with and into the Company, with the Company continuing its corporate existence as the surviving corporation in the Merger and becoming a wholly owned subsidiary of Parent. The consummation of the Merger is conditioned on the receipt of the approval of our stockholders, as well as the satisfaction of other customary closing conditions, including (i) the receipt of certain required or requested governmental approvals, (ii) the absence of any order or law issued, enacted or deemed applicable by certain governmental authorities specified in the Merger Agreement that makes consummation of the Merger illegal and that remains in effect, (iii) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement) and (iv) other customary closing conditions, including the accuracy of each party’s representations and warranties, and each party’s compliance with its obligations under the Merger Agreement (subject in the case of this clause (iv) to certain materiality qualifiers). There is no assurance that the conditions to the Merger will be satisfied in a timely manner or at all. Additionally, if the Merger is not completed, we may suffer a number of consequences that could adversely affect our business, results of operations, and stock price. There are numerous other risks related to the Merger as well, including the following:
| • | the possibility that any or all of the conditions precedent to the consummation of the proposed Merger, including the receipt of stockholder and regulatory approvals, may not be satisfied or waived; |
| • | unanticipated difficulties or expenditures relating to the proposed Merger; |
| • | the failure to consummate the proposed Merger may result in negative publicity and a negative impression of us in the investment community; |
47
| • | required regulatory approvals from governmental entities may delay the proposed Merger or result in the imposition of conditions that could cause Parent to abandon the Merger; |
| • | the occurrence of any event, change or circumstance that could give rise to the termination of the Merger Agreement; |
| • | the effects that any termination of the Merger Agreement may have on the Company or our business, including the risks that (a) the price of our common stock may decline significantly if the Merger is not completed, (b) the Merger Agreement may be terminated in circumstances requiring the Company to pay Parent a termination fee, or (c) the circumstances of the termination, including the possible imposition of a 12-month tail period during which the termination fee could be payable upon certain subsequent transactions, may have a chilling effect on alternatives to the Merger; |
| • | the diversion of and attention of management of Magnachip on transaction-related issues; |
| • | legal proceedings, judgments or settlements, including those that have been and may in the future be instituted against Magnachip, our Board of Directors and executive officers and others following the announcement of the proposed Merger; |
| • | disruptions of current plans and operations caused by the announcement and pendency of the proposed Merger; |
| • | potential difficulties in employee retention (including executive and other key officers) due to the announcement and pendency of the proposed Merger; |
| • | the response of customers, suppliers, business partners and regulators to the announcement of the proposed Merger; |
| • | the effect of limitations that the Merger Agreement places on our ability to operate our business or engage in alternative transactions; |
| • | the Merger may be completed even though certain events occur prior to consummation of the Merger that materially and adversely affect us; and |
| • | other risks and uncertainties and the factors identified under “Forward-Looking Information” in our Proxy Statement on Schedule 14A filed on May 7, 2021 and under “Risk Factors” in Part I, Item 1A of Magnachip’s Annual Report on Form 10-K for the year ended December 31, 2020, and updated in subsequent reports filed by Magnachip with the SEC. |
In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, and these fees and costs are payable by us regardless of whether the Merger is consummated.
Lawsuits have been filed, and other lawsuits may be filed, against the Company and current or former members of our Board of Directors in connection with the Merger, and an adverse ruling in any such lawsuit may delay or prevent the completion of the Merger or result in an award of damages against the Company.
See “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—18. Commitments and Contingencies” in this Report for a description of the Merger-related lawsuits.
Additional lawsuits arising out of or relating to the Merger Agreement or the Merger may be filed in the future. The results of complex legal proceedings are difficult to predict and could delay or prevent the completion of the Merger. The existence of litigation relating to the Merger could impact the likelihood of obtaining stockholder approval of the Merger. Moreover, the pending litigation is, and any future additional litigation could be, time consuming and expensive and could divert management’s attention away from its regular business.
48
Item 6. |
Exhibits. |
Footnotes:
# |
Filed herewith |
| † | Furnished herewith |
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MAGNACHIP SEMICONDUCTOR CORPORATION (Registrant) | ||||||
| Dated: May 10, 2021 | By: | /s/ Young-Joon Kim | ||||
| Young-Joon Kim | ||||||
| Chief Executive Officer (Principal Executive Officer) | ||||||
| Dated: May 10, 2021 | By: | /s/ Young Soo Woo | ||||
| Young Soo Woo | ||||||
| Chief Financial Officer (Principal Financial Officer) | ||||||
50
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Young-Joon Kim, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Magnachip Semiconductor Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Dated: May 10, 2021 |
| /s/ Young-Joon Kim |
| Young-Joon Kim |
| Chief Executive Officer |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Young Soo Woo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Magnachip Semiconductor Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Dated: May 10, 2021 |
| /s/ Young Soo Woo |
| Young Soo Woo |
| Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Magnachip Semiconductor Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
| Dated: May 10, 2021 | /s/ Young-Joon Kim | |||||
| Young-Joon Kim | ||||||
| Chief Executive Officer | ||||||
| (Principal Executive Officer) |
The foregoing certification is being furnished solely pursuant to 18 U.S.C § 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference in any registration statement of the Company filed under the Securities Act of 1933, as amended.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Magnachip Semiconductor Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
| Dated: May 10, 2021 | /s/ Young Soo Woo | |||||
| Young Soo Woo | ||||||
| Chief Financial Officer (Principal Financial Officer) |
The foregoing certification is being furnished solely pursuant to 18 U.S.C § 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference in any registration statement of the Company filed under the Securities Act of 1933, as amended.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.