10-Q
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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
 
10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
 
 
 
Magnachip Semiconductor Corporation
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
83-0406195
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
c/o MagnaChip Semiconductor S.A.
1, Allée Scheffer,
L-2520
Luxembourg, Grand Duchy of Luxembourg
(352)
45-62-62
(Address, zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock, par value $0.01 per share
 
MX
 
New York Stock Exchange
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.  ☒  
Yes
    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files).  ☒  
Yes
    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
       
Non-accelerated
filer
     Smaller reporting company  
       
         Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange
Act).  ☐  
Yes    ☒  No
As of October 29, 2021,
the registrant had 46,464,889 shares of common stock outstanding.
 
 
 

Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
  
Page No.
 
  
 
3
 
Item 1.
 
  
 
3
 
 
 
  
 
3
 
 
 
  
 
4
 
 
 
  
 
5
 
 
 
  
 
6
 
 
 
  
 
7
 
 
 
  
 
8
 
Item 2.
 
  
 
29
 
Item 3.
 
  
 
53
 
Item 4.
 
  
 
54
 
  
 
55
 
Item 1.
 
  
 
55
 
Item 1A.
 
  
 
55
 
Item 6.
 
  
 
57
 
  
 
58
 
 
2
 
PART I—FINANCIAL INFORMATION
 
Item 1.
Interim Consolidated Financial Statements (Unaudited)
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
    
September 30,
2021
   
December 31,
2020
 
    
(In thousands of U.S. dollars,
except share data)
 
Assets
                
Current assets
                
Cash and cash equivalents
   $ 276,301     $ 279,940  
Accounts receivable, net
     52,523       64,390  
Inventories, net
     38,773       39,039  
Other receivables
     8,971       4,338  
Prepaid expenses
     9,666       7,332  
Hedge collateral (Note 9)
     3,720       5,250  
Other current assets (Notes 10 and 19)
     1,919       9,321  
    
 
 
   
 
 
 
Total current assets
     391,873       409,610  
Property, plant and equipment, net
     103,352       96,383  
Operating lease
right-of-use
assets
     3,727       4,632  
Intangible assets, net
     2,405       2,727  
Long-term prepaid expenses
     9,451       4,058  
Deferred income taxes
     41,255       44,541  
Other
non-current
assets
     10,626       9,739  
    
 
 
   
 
 
 
Total assets
   $ 562,689     $ 571,690  
    
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
                
Current liabilities
                
Accounts payable
   $ 33,386     $ 52,164  
Other accounts payable
     18,671       2,531  
Accrued expenses (Note 8)
     13,168       16,241  
Accrued income taxes
     1,955       12,398  
Operating lease liabilities
     1,757       2,210  
Current portion of long-term borrowings, net
     —         83,479  
Other current liabilities (Note 10)
     7,800       4,595  
    
 
 
   
 
 
 
Total current liabilities
     76,737       173,618  
Accrued severance benefits, net
     37,741       40,462  
Non-current
operating lease liabilities
     1,970       2,422  
Other
non-current
liabilities (Note 10)
     12,944       9,588  
    
 
 
   
 
 
 
Total liabilities
     129,392       226,090  
    
 
 
   
 
 
 
Commitments and contingencies (Note 19)
                
Stockholders’ equity
                
Common stock, $0.01 par value, 150,000,000 shares authorized, 55,676,851 shares issued and 46,464,889 outstanding at September 30, 2021 and 44,943,854 shares issued and 35,783,347 outstanding at December 31, 2020
     557       450  
Additional
paid-in
capital
     256,619       163,010  
Retained earnings
     289,931       286,834  
Treasury stock, 9,211,962 shares at September 30, 2021 and 9,160,507 shares at December 31, 2020, respectively
     (109,407     (108,397
Accumulated other comprehensive income (loss)
     (4,403     3,703  
    
 
 
   
 
 
 
Total stockholders’ equity
     433,297       345,600  
    
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 562,689     $ 571,690  
    
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
3

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
    
Three Months Ended
   
Nine Months Ended
 
    
September 30,
2021
   
September 30,
2020
   
September 30,
2021
   
September 30,
2020
 
    
(In thousands of U.S. dollars, except share data)
 
Revenues:
        
Net sales – standard products business
   $ 117,415     $ 116,262     $ 333,589     $ 335,953  
Net sales – transitional Fab 3 foundry services
     9,585       8,551       30,306       28,161  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues
     127,000       124,813       363,895       364,114  
Cost of sales:
                                
Cost of sales – standard products business
     71,641       87,494       221,297       245,917  
Cost of sales – transitional Fab 3 foundry services
     8,772       8,731       27,659       28,341  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total cost of sales
     80,413       96,225       248,956       274,258  
    
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
     46,587       28,588       114,939       89,856  
Operating expenses:
                                
Selling, general and administrative expenses
     12,550       12,888       39,185       37,398  
Research and development expenses
     12,270       12,477       39,015       34,094  
Other charges
     1,766                17,202       554  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     26,586       25,365       95,402       72,046  
    
 
 
   
 
 
   
 
 
   
 
 
 
Operating income
     20,001       3,223       19,537       17,810  
Interest expense
     (113     (5,485     (1,239     (16,522
Foreign currency gain (loss), net
     (7,579     8,864       (12,000     (13,638
Other income, net
     1,608       714       2,839       2,343  
    
 
 
   
 
 
   
 
 
   
 
 
 
Income (loss) from continuing operations before income tax expense
     13,917       7,316       9,137       (10,007
Income tax expense (benefit)
     3,149       (1,145     6,040       836  
    
 
 
   
 
 
   
 
 
   
 
 
 
Income (loss) from continuing operations
     10,768       8,461       3,097       (10,843
Income from discontinued operations, net of tax
     —         264,501      
 
 
      289,227  
    
 
 
   
 
 
   
 
 
   
 
 
 
Net income
   $ 10,768     $ 272,962     $ 3,097     $ 278,384  
    
 
 
   
 
 
   
 
 
   
 
 
 
Basic earnings (loss) per common share—
                                
Continuing operations
   $ 0.23     $ 0.24     $ 0.07     $ (0.31
Discontinued operations
     —         7.50                8.24  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total
   $ 0.23     $ 7.74     $ 0.07     $ 7.93  
    
 
 
   
 
 
   
 
 
   
 
 
 
Diluted earnings (loss) per common share—
                                
Continuing operations
   $ 0.23     $ 0.21     $ 0.07     $ (0.31
Discontinued operations
     —         5.68                8.24  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total
   $ 0.23     $ 5.89     $ 0.07     $ 7.93  
    
 
 
   
 
 
   
 
 
   
 
 
 
Weighted average number of shares—
                                
Basic
     46,449,234       35,280,864       44,377,250       35,089,479  
Diluted
     47,808,457       46,581,788       45,811,792       35,089,479  
The accompanying notes are an integral part of these consolidated financial statements.
 
4

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

2021
 
 
September 30,

2020
 
 
September 30,

2021
 
 
September 30,

2020
 
 
  
(In thousands of U.S. dollars)
 
Net income
   $ 10,768     $ 272,962     $ 3,097     $ 278,384  
    
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss)
                                
Foreign currency translation adjustments
     (860     (6,517     (2,809     9,191  
Derivative adjustments
                                
Fair valuation of derivatives
     (3,271     1,390       (4,964     (1,410
Reclassification adjustment for loss (gain) on derivatives included in net income
     653       41       (333     292  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total other comprehensive income (loss)
     (3,478     (5,086     (8,106     8,073  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive income (loss)
   $ 7,290     $ 267,876     $ (5,009   $ 286,457  
    
 
 
   
 
 
   
 
 
   
 
 
 
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)
 
(In thousands of U.S. dollars, except share data)
  
Common Stock
 
  
Additional

Paid-In

Capital
 
 
Retained

Earnings

(Deficit)
 
 
Treasury

Stock
 
 
Accumulated

Other

Comprehensive

Income (Loss)
 
 
Total
 
  
Shares
 
  
Amount
 
Three Months Ended September 30, 2021:
  
     
  
     
  
     
 
     
 
     
 
     
 
     
Balance at June 30, 2021
     46,350,945      $ 556      $ 253,244     $ 279,163     $ (109,407   $ (925   $ 422,631  
Stock-based compensation
     —          —          2,005       —         —         —         2,005  
Exercise of stock options
     112,944        1        1,370       —         —         —         1,371  
Settlement of restricted stock units
     1,000        0        (0     —         —         —         —    
Other comprehensive loss, net
     —          —          —         —         —         (3,478     (3,478
Net income
     —          —          —         10,768       —         —         10,768  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2021
     46,464,889      $ 557      $ 256,619     $ 289,931     $ (109,407   $ (4,403   $ 433,297  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Three Months Ended September 30, 2020:
                                                          
Balance at June 30, 2020
     35,143,033      $ 443      $ 155,591     $ (52,709   $ (107,649   $ 10,499     $ 6,175  
Stock-based compensation
     —          —          2,226       —         —         —         2,226  
Exercise of stock options
     287,292        3        2,024       —         —         —         2,027  
Settlement of restricted stock units
     59,395        1        (1     —         —         —         —    
Other comprehensive loss, net
     —          —          —         —         —         (5,086     (5,086
Net income
     —          —          —         272,962       —         —         272,962  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2020
     35,489,720      $ 447      $ 159,840     $ 220,253     $ (107,649   $ 5,413     $ 278,304  
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
(In thousands of U.S. dollars, except share data)
  
Common Stock
 
  
Additional

Paid-In

Capital
 
 
Retained

Earnings

(Deficit)
 
 
Treasury

Stock
 
 
Accumulated

Other

Comprehensive

Income (Loss)
 
 
Total
 
  
Shares
 
 
Amount
 
Nine Months Ended September 30, 2021:
  
     
 
     
  
     
 
     
 
     
 
     
 
     
Balance at December 31, 2020
     35,783,347     $ 450      $ 163,010     $ 286,834     $ (108,397   $ 3,703     $ 345,600  
Stock-based compensation
     —         —          6,056       —         —         —         6,056  
Exchange of exchangeable senior note
     10,144,131       101        83,639       —         —         —         83,740  
Exercise of stock options
     289,704       3        3,917       —         —         —         3,920  
Settlement of restricted stock units
     299,162       3        (3     —         —         —         —    
Acquisition of treasury stock
     (51,455     —          —         —         (1,010     —         (1,010
Other comprehensive loss, net
     —         —          —         —         —         (8,106     (8,106
Net income
     —         —          —         3,097       —         —         3,097  
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2021
     46,464,889     $ 557      $ 256,619     $ 289,931     $ (109,407   $ (4,403   $ 433,297  
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Nine Months Ended September 30, 2020:
                                                         
Balance at December 31, 2019
     34,800,312     $ 439      $ 152,404     $ (58,131   $ (107,033   $ (2,660   $ (14,981
Stock-based compensation
     —         —          4,754       —         —         —         4,754  
Exercise of stock options
     375,643       4        2,686       —         —         —         2,690  
Settlement of restricted stock units
     367,759       4        (4     —         —         —         —    
Acquisition of treasury stock
     (53,994     —          —         —         (616     —         (616
Other comprehensive income, net
     —         —          —         —         —         8,073       8,073  
Net income
     —         —          —         278,384       —         —         278,384  
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2020
     35,489,720     $ 447      $ 159,840     $ 220,253     $ (107,649   $ 5,413     $ 278,304  
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
6

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
    
Nine Months Ended
 
    
September 30,
2021
   
September 30,
2020
 
              
    
(In thousands of U.S. dollars)
 
Cash flows from operating activities
                
Net income
   $ 3,097     $ 278,384  
Adjustments to reconcile net income to net cash provided by operating activities
                
Depreciation and amortization
     10,576       13,333  
Provision for severance benefits
     5,514       14,150  
Amortization of debt issuance costs and original issue discount
     261       1,824  
Loss on foreign currency, net
     32,607       6,609  
Restructuring and other charges
     750       490  
Provision for inventory reserves
     1,484       4,079  
Stock-based compensation
     6,056       4,754  
Gain on sale of discontinued operations
     —         (287,117
Other, net
     442       85  
Changes in operating assets and liabilities
                
Accounts receivable, net
     6,696       (16,583
Unbilled accounts receivable, net
     —         14,260  
Inventories
     (4,561     1,390  
Other receivables
     (5,287     6,111  
Other current assets
     7,933       9,143  
Accounts payable
     (16,192     (5,156
Other accounts payable
     (3,729     (8,034
Accrued expenses
     (2,391     1,991  
Accrued income taxes
     (8,308     12,546  
Other current liabilities
     555       2,243  
Other
non-current
liabilities
     (666     2,868  
Payment of severance benefits
     (4,772     (5,888
Other, net
     (49     59  
    
 
 
   
 
 
 
Net cash provided by operating activities
     30,016       51,541  
Cash flows from investing activities
                
Proceeds from settlement of hedge collateral
     3,995       8,029  
Payment of hedge collateral
     (2,744     (7,841
Purchase of property, plant and equipment
     (13,368     (16,353
Payment for intellectual property registration
     (455     (664
Collection of guarantee deposits
     3,192       891  
Payment of guarantee deposits
     (4,960     (611
Proceeds from sale of discontinued operations
     —         350,553  
Other, net
     (103     26  
    
 
 
   
 
 
 
Net cash provided by (used in) investing activities
     (14,443     334,030  
Cash flows from financing activities
                
Proceeds from exercise of stock options
     3,920       2,690  
Acquisition of treasury stock
     (1,653     (1,021
Repayment of financing related to water treatment facility arrangement
     (427     (402
Repayment of principal portion of finance lease liabilities
     (49     (165
    
 
 
   
 
 
 
Net cash provided by financing activities
     1,791       1,102  
Effect of exchange rates on cash and cash equivalents
     (21,003     3,781  
    
 
 
   
 
 
 
Net increase (decrease) in cash and cash equivalents
     (3,639     390,454  
Cash and cash equivalents
                
Beginning of the period
     279,940       151,657  
    
 
 
   
 
 
 
End of the period
   $ 276,301     $ 542,111  
    
 
 
   
 
 
 
Supplemental cash flow information
                
Cash paid for interest
   $ 2,094     $ 19,044  
Cash paid for income taxes
   $ 12,609     $ 2,573  
Non-cash
investing activities
                
Property, plant and equipment additions in other accounts payable
   $ 11,513     $ 3,865  
Non-cash
financing activities
                
Exchange of exchangeable senior notes into common stock
   $ 83,740     $ —    
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 and industrial 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 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 $46.5 million and Korean Won in the amount of approximately KRW 360.6 billion. In addition to the purchase price, the Buyer assumed all severance liabilities relating to the transferred employees, which had a value of approximately $100 million. The Buyer is a wholly owned subsidiary of Magnus, which was established by Alchemist Capital Partners Korea Co., Ltd. and Credian Partners, Inc. On April 20, 2020, Magnus assigned, and the Buyer assumed, all rights and obligations of Magnus under the Business Transfer Agreement. This divestiture of the Foundry Services Group business and Fab 4 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 and nine months ended September 30, 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 and nine months ended September 30, 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 nine months ended September 30, 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.
 
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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.
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 (as it may be amended, supplemented or modified from time to time, the “Merger Agreement”). The Merger Agreement provides that, among other things, and subject to the terms and conditions thereof, 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 in the Merger and becoming a wholly owned subsidiary of Parent.
Pursuant to the Merger Agreement, each share of the Company’s common stock, par value $0.01 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, the “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 $29.00 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 or authorizations (including from the Committee on Foreign Investment in the United States (“CFIUS”) and the Korean Ministry of Trade, Industry and Energy (“MOTIE”)), (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 December 25, 2021 (subject to extension to March 25, 2022 at the option of either party if certain regulatory approvals or authorizations 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.
For the three and nine months ended September 30, 2021, the Company incurred $1,552 thousand and $13,842 thousand, respectively, 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 filed as Exhibit 2.1 to the Company’s Current Report on Form
8-K
filed on March 29, 2021 and as amended by the Letter Agreement attached as Exhibit 2.1 to the Company’s Form
8-K
filed on August 23, 2021.
 
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3. Discontinued Operations
On September 1, 2020, the Company completed the sale of the Company’s Foundry Services Group business and Fab 4. As a result of the sale of the Foundry Services Group business and Fab 4, the Company recorded a gain of $287,117 thousand and all operations from the Foundry Services Group business and Fab 4 were classified as discontinued operations for the three and nine months ended September 30, 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 were $11,428 thousand and $36,218 thousand for the three and nine months ended September 30, 2021, respectively.
The following table summarizes the results from discontinued operations, net of tax, for the three and nine months ended September 30, 2020.
 
    
Three Months

Ended
    
Nine Months

Ended
 
               
    
September 30, 2020
 
    
(In thousands of U.S. dollars)
 
Revenues:
                 
Net sales – Foundry Services Group
   $ 72,674      $ 254,732  
Net sales – transitional Fab 3 foundry services
     (6,277      (25,887
    
 
 
    
 
 
 
Total revenues
     66,397        228,845  
Cost of sales:
                 
Cost of sales – Foundry Services Group
     52,420        182,872  
Cost of sales – transitional Fab 3 foundry services
     (6,277      (25,887
    
 
 
    
 
 
 
Total cost of sales
     46,143        156,985  
    
 
 
    
 
 
 
Gross profit
     20,254        71,860  
Operating expenses:
                 
Selling, general and administrative expenses
     4,068        14,704  
Research and development expenses
     5,166        19,484  
Restructuring and other charges
     7,870        10,574  
    
 
 
    
 
 
 
Total operating expenses
     17,104        44,762  
    
 
 
    
 
 
 
Operating income from discontinued operations
     3,150        27,098  
Foreign currency gain (loss), net
     (797      1,277  
Others, net
     18        66  
    
 
 
    
 
 
 
Income from discontinued operations before income tax expense
     2,371        28,441  
Income tax expense
     14,173        15,517  
Gain on sale of discontinued operations
     287,117        287,117  
Transaction costs
     (10,814      (10,814
    
 
 
    
 
 
 
Income from discontinued operations, net of tax
     264,501        289,227  
    
 
 
    
 
 
 
For the three and nine months ended September 30, 2020, the Company recorded $7,870 thousand and $10,574 thousand, respectively, in professional fees incurred in connection with the sale of the Foundry Services Group business and Fab 4, and recorded such costs as restructuring and other charges in the above.
The following table provides supplemental cash flows information related to discontinued operations:
 
    
Nine Months Ended
 
    
September 30,

2020
 
    
(In thousands of U.S. dollars)
 
Significant
non-cash
operating activities:
        
Depreciation and amortization
   $ 5,365  
Provision for severance benefits
     8,209  
Stock-based compensation
     388  
Investing activities:
        
Capital expenditures
   $ (5,838
 
10

4. Inventories
Inventories as of September 30, 2021 and December 31, 2020 consist of the following (in thousands):
 
    
September 30,
2021
    
December 31,
2020
 
Finished goods
   $ 6,529      $ 6,425  
Semi-finished goods and
work-in-process
     29,895        30,968  
Raw materials
     7,801        6,526  
Materials
in-transit
     284        1,021  
Less: inventory reserve
     (5,736      (5,901
    
 
 
    
 
 
 
Inventories, net
   $ 38,773      $ 39,039  
    
 
 
    
 
 
 
Changes in inventory reserve for the three and nine months ended September 30, 2021 and 2020 are as follows (in thousands):
 
 
  
Three Months

Ended
 
  
Nine Months

Ended
 
  
Three Months

Ended
 
  
Nine Months

Ended
 
 
  
September 30, 2021
 
  
September 30, 2020
 
                             
Beginning balance
   $ (8,101    $ (5,901    $ (5,307    $ (5,947
Change in reserve
                                   
Inventory reserve charged to costs of sales
     (242      (5,592      (3,472      (6,541
Sale of previously reserved inventory
     2,099        4,076        1,578        3,231  
    
 
 
    
 
 
    
 
 
    
 
 
 
       1,857        (1,516      (1,894      (3,310
Write off
     180        1,110        835        1,976  
Translation adjustments
     328        571        (139      82  
Reclassified to assets held for sale
                          694  
    
 
 
    
 
 
    
 
 
    
 
 
 
Ending balance
   $ (5,736    $ (5,736    $ (6,505    $ (6,505
    
 
 
    
 
 
    
 
 
    
 
 
 
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,
work-in-process
and raw materials. Write off of this reserve is recognized only when the related inventory has been disposed or scrapped.
 
11

5. Property, Plant and Equipment
Property, plant and equipment as of September 30, 2021 and December 31, 2020 are comprised of the following (in thousands):
 
    
September 30,
2021
    
December 31,
2020
 
Buildings and related structures
   $ 24,159      $ 24,882  
Machinery and equipment
     102,280        106,244  
Finance lease
right-of-use
assets
     316        344  
Others
     29,591        31,208  
    
 
 
    
 
 
 
       156,346        162,678  
Less: accumulated depreciation
     (92,363      (90,370
Land
     13,905        15,167  
Construction in progress
     25,464        8,908  
    
 
 
    
 
 
 
Property, plant and equipment, net
   $ 103,352      $ 96,383  
    
 
 
    
 
 
 
Aggregate depreciation expenses totaled $10,018 thousand and $7,473 thousand for the nine months ended September 30, 2021 and 2020, respectively.
6. Intangible Assets
Intangible assets as of September 30, 2021 and December 31, 2020 are comprised of the following (in thousands):
 
    
September 30, 2021
 
    
Gross
amount
    
Accumulated
amortization
    
Net
amount
 
Intellectual property assets
   $ 9,176      $ (6,771    $ 2,405  
    
 
 
    
 
 
    
 
 
 
Intangible assets
   $ 9,176      $ (6,771    $ 2,405  
    
 
 
    
 
 
    
 
 
 
 
    
December 31, 2020
 
    
Gross
amount
    
Accumulated
amortization
    
Net
amount
 
Intellectual property assets
   $ 9,486      $ (6,759    $ 2,727  
    
 
 
    
 
 
    
 
 
 
Intangible assets
   $ 9,486      $ (6,759    $ 2,727  
    
 
 
    
 
 
    
 
 
 
Aggregate amortization expenses for intangible assets totaled $558 thousand and $495 thousand for the nine months ended September 30, 2021 and 2020, respectively.
 
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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 4 years.
The tables below present financial information related to the Company’s leases.
Supplemental balance sheets information related to leases as of September 30, 2021 and December 31, 2020 are as follows (in thousands):
 
Leases
  
Classification
 
  
September 30,
2021
 
  
December 31,
2020
 
Assets
  
     
  
     
  
     
Operating lease
  
 
Operating lease right-of-use
assets
 
  
$
3,727
 
  
$
4,632
 
Finance lease
  
 
Property, plant and equipment, net
 
  
 
142
 
  
 
206
 
 
  
     
  
 
 
 
  
 
 
 
Total lease assets
  
     
  
$
3,869
 
  
$
4,838
 
 
  
     
  
 
 
 
  
 
 
 
Liabilities
  
     
  
     
  
     
Current
  
     
  
     
  
     
Operating
  
 
Operating lease liabilities
 
  
$
1,757
 
  
$
2,210
 
Finance
  
 
Other current liabilities
 
  
 
67
 
  
 
68
 
Non-current
  
     
  
     
  
     
Operating
  
 
Non-current operating lease liabilities
 
  
 
1,970
 
  
 
2,422
 
Finance
  
 
Other
non-current
liabilities
 
  
 
90
 
  
 
153
 
 
  
     
  
 
 
 
  
 
 
 
Total lease liabilities
  
     
  
$
3,884
 
  
$
4,853
 
 
  
     
  
 
 
 
  
 
 
 
The following table presents the weighted average remaining lease term and discount rate:
 
    
September 30,
2021
   
December 31,
2020
 
Weighted average remaining lease term
                
Operating leases
     2.7 years       3.0 years  
Finance leases
     2.3 years       3.0 years  
Weighted average discount rate
                
Operating leases
     4.61     5.55
Finance leases
     7.75     7.75
The components of lease cost included in the Company’s consolidated statements of operations, are as follows (in thousands):
 
    
Three Months Ended
    
Nine Months Ended
 
    
September 30,
2021
    
September 30,
2020
    
September 30,
2021
    
September 30,
2020
 
Operating lease cost
   $ 691      $ 480      $ 2,098      $ 1,409  
Finance lease cost
                                   
Amortization of
right-of-use
assets
     17        16        50        47  
Interest on lease liabilities
     4        4        11        13  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total lease cost
   $ 712      $ 500      $ 2,159      $ 1,469  
    
 
 
    
 
 
    
 
 
    
 
 
 
The above table does not include an immaterial cost of short-term leases for the three and nine months ended September 30, 2021 and 2020.
 
13

Other lease information is as follows (in thousands):
 
    
Three Months Ended
    
Nine Months Ended
 
    
September 30,
2021
    
September 30,
2020
    
September 30,
2021
    
September 30,
2020
 
Cash
 
paid
 
for
 
amounts
 
included
 
in
 
the
 
measurement
 
of
lease liabilities
                                   
Operating cash flows from operating leases
   $ 691      $ 480      $ 2,098      $ 1,409  
Operating cash flows from finance leases
     4        4        11        13  
Financing cash flows from finance leases
     16        15        49        43  
The aggregate future lease payments for operating and finance leases as of September 
30
,
2021
are as follows (in thousands):
 
    
Operating
Leases
    
Finance
Leases
 
Remainder of 2021
   $ 674      $ 19  
2022
     1,518        76  
2023
     812        76  
2024
     581            
2025
     396            
    
 
 
    
 
 
 
Total future lease payments
     3,981        171  
Less: Imputed interest
     (254      (14
    
 
 
    
 
 
 
Present value of future payments
   $ 3,727      $ 157  
    
 
 
    
 
 
 
8. Accrued Expenses
Accrued expenses as of September 30, 2021 and December 31, 2020 are comprised of the following (in thousands):
 
 
  
September 30,
2021
 
  
December 31,
2020
 
Payroll, benefits and related taxes, excluding severance benefits
   $ 9,095      $ 10,296  
Withholding tax attributable to intercompany interest income
     1,789        28  
Interest on senior notes
     —          1,396  
Outside service fees
     1,014        755  
Restructuring and others
     750        2,658  
Others
     520        1,108  
    
 
 
    
 
 
 
Accrued expenses
   $  13,168      $ 16,241  
    
 
 
    
 
 
 
 
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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 September 30, 2021 are as follows (in thousands):
 
Date of transaction
  
Total notional amount
 
  
Month of settlement
December 15, 2020
   $ 15,000      October 2021 to December 2021