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, 2023
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.)
|
Cheongju-si, Chungcheongbuk-do, Republic of Korea 28581
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: +82 (2) 6903-3000
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Trading
Symbol(s)
|
Name of each exchange
on which registered
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||
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|
|
|
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.
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☒
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Accelerated filer
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☐
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|||
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Non-accelerated filer
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☐
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Smaller reporting company
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Emerging growth company
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|||||
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 April 30, 2023, the registrant had 42,265,480
shares of common stock outstanding.
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Page No.
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3
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Item 1.
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3
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3
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4
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5
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6
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7
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8
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Item 2.
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25
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Item 3.
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42
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Item 4.
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43
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44
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Item 1.
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44
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Item 1A.
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44
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Item 2.
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44
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Item 3.
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44
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Item 4.
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44
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Item 5.
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44
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Item 6.
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45
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46
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| Item 1. |
Interim Consolidated Financial Statements (Unaudited)
|
|
March 31,
2023
|
December 31,
2022
|
|||||||
|
(In thousands of U.S. dollars, except share data)
|
||||||||
|
Assets
|
||||||||
|
Current assets
|
||||||||
|
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
|
|
|
||||||
|
Hedge collateral (Note 7)
|
|
|
||||||
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Other current assets (Note 18)
|
|
|
||||||
|
Total current assets
|
|
|
||||||
|
Property, plant and equipment, net
|
|
|
||||||
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Operating lease right-of-use assets
|
|
|
||||||
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Intangible assets, net
|
|
|
||||||
|
Long-term prepaid expenses
|
|
|
||||||
|
Deferred income taxes
|
|
|
||||||
|
Other non-current assets
|
|
|
||||||
|
Total assets
|
$
|
|
$
|
|
||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Current liabilities
|
||||||||
|
Accounts payable
|
$
|
|
$
|
|
||||
|
Other accounts payable
|
|
|
||||||
|
Accrued expenses (Note 6)
|
|
|
||||||
|
Accrued income taxes
|
|
|
||||||
|
Operating lease liabilities
|
|
|
||||||
|
Other current liabilities
|
|
|
||||||
|
Total current liabilities
|
|
|
||||||
|
Accrued severance benefits, net
|
|
|
||||||
|
Non-current operating lease liabilities
|
|
|
||||||
|
Other non-current liabilities
|
|
|
||||||
|
Total liabilities
|
|
|
||||||
|
Commitments and contingencies (Note 18)
|
||||||||
|
Stockholders’ equity
|
||||||||
|
Common stock, $
|
|
|
||||||
|
Additional paid-in capital
|
|
|
||||||
|
Retained earnings
|
|
|
||||||
|
Treasury stock,
|
(
|
)
|
(
|
)
|
||||
|
Accumulated other comprehensive loss
|
(
|
)
|
(
|
)
|
||||
|
Total stockholders’ equity
|
|
|
||||||
|
Total liabilities and stockholders’ equity
|
$
|
|
$
|
|
||||
The accompanying notes are an integral part of these consolidated financial statements.
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
|
Three Months Ended
|
||||||||
|
March 31,
2023
|
March 31,
2022
|
|||||||
|
(In thousands of U.S. dollars, except share data)
|
||||||||
|
Revenues:
|
||||||||
|
Net sales – standard products business
|
$
|
|
$
|
|
||||
|
Net sales – transitional Fab 3 foundry services
|
|
|
||||||
|
Total revenues
|
|
|
||||||
|
Cost of sales:
|
||||||||
|
Cost of sales – standard products business
|
|
|
||||||
|
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
|
|
|
||||||
|
Early termination charges
|
|
|
||||||
|
Total operating expenses
|
|
|
||||||
|
Operating income (loss)
|
(
|
)
|
|
|||||
|
Interest income
|
||||||||
|
Interest expense
|
(
|
)
|
(
|
)
|
||||
|
Foreign currency loss, net
|
(
|
)
|
(
|
)
|
||||
|
Other income (expense), net
|
(
|
)
|
|
|||||
|
Income (loss) before income tax expense
|
(
|
)
|
|
|||||
|
Income tax expense (benefit)
|
(
|
)
|
|
|||||
|
Net income (loss)
|
$
|
(
|
)
|
$
|
|
|||
|
Basic earnings (loss) per common share—
|
$
|
(
|
)
|
$
|
|
|||
|
Diluted earnings (loss) per common share—
|
$
|
(
|
)
|
$
|
|
|||
|
Weighted average number of shares—
|
||||||||
|
Basic
|
|
|
||||||
|
Diluted
|
|
|
||||||
The accompanying notes are an integral part of these consolidated financial statements.
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
|
Three Months Ended
|
||||||||
|
March 31,
2023
|
March 31,
2022
|
|||||||
|
(In thousands of U.S. dollars)
|
||||||||
|
Net income (loss)
|
$
|
(
|
)
|
$
|
|
|||
|
Other comprehensive loss
|
||||||||
|
Foreign currency translation adjustments
|
(
|
)
|
(
|
)
|
||||
|
Derivative adjustments
|
||||||||
|
Fair valuation of derivatives
|
(
|
)
|
(
|
)
|
||||
|
Reclassification adjustment for loss on derivatives included in net income (loss)
|
|
|
||||||
|
Total other comprehensive loss
|
(
|
)
|
(
|
)
|
||||
|
Total comprehensive income (loss)
|
$
|
(
|
)
|
$
|
|
|||
The accompanying notes are an integral part of these consolidated financial statements.
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
|
Common Stock
|
Additional
Paid-In
Capital
|
Retained
Earnings
|
Treasury Stock
|
Accumulated
Other
Comprehensive
Loss
|
Total
|
|||||||||||||||||||||||
|
(In thousands of U.S. dollars, except share data)
|
Shares
|
Amount
|
||||||||||||||||||||||||||
|
Three Months Ended March 31, 2023:
|
||||||||||||||||||||||||||||
|
Balance at December 31, 2022
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
|||||||||||||
|
Stock-based compensation
|
—
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Exercise of stock options
|
||||||||||||||||||||||||||||
|
Settlement of restricted stock units
|
|
|
(
|
) |
|
|
|
|
||||||||||||||||||||
|
Acquisition of treasury stock
|
(
|
)
|
|
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||
|
Other comprehensive loss, net
|
—
|
|
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||
|
Net loss
|
—
|
|
|
(
|
)
|
|
|
(
|
)
|
|||||||||||||||||||
|
Balance at March 31, 2023
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
|||||||||||||
|
Three Months Ended March 31, 2022:
|
||||||||||||||||||||||||||||
|
Balance at December 31, 2021
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
|||||||||||||
|
Stock-based compensation
|
—
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Exercise of stock options
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Settlement of restricted stock units
|
|
|
(
|
)
|
|
|
|
|
||||||||||||||||||||
|
Acquisition of treasury stock
|
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
|
Accelerated stock repurchase
|
( |
) | ( |
) | ||||||||||||||||||||||||
|
Other comprehensive loss, net
|
—
|
|
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||
|
Net income
|
—
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Balance at March 31, 2022
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
|||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
|
Three Months Ended
|
||||||||
|
March 31,
2023
|
March 31,
2022
|
|||||||
|
(In thousands of U.S. dollars)
|
||||||||
|
Cash flows from operating activities
|
||||||||
|
Net income (loss)
|
$
|
(
|
)
|
$
|
|
|||
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities
|
||||||||
|
Depreciation and amortization
|
|
|
||||||
|
Provision for severance benefits
|
|
|
||||||
|
Loss on foreign currency, net
|
|
|
||||||
|
Provision for inventory reserves
|
|
|
||||||
|
Stock-based compensation
|
|
|
||||||
|
Other, net
|
|
|
||||||
|
Changes in operating assets and liabilities
|
||||||||
|
Accounts receivable, net
|
|
(
|
)
|
|||||
|
Inventories
|
|
|
||||||
|
Other receivables
|
|
|
||||||
|
Other current assets
|
|
(
|
)
|
|||||
|
Accounts payable
|
|
|
||||||
|
Other accounts payable
|
(
|
)
|
(
|
)
|
||||
|
Accrued expenses
|
|
|
||||||
|
Accrued income taxes
|
(
|
)
|
(
|
)
|
||||
|
Other current liabilities
|
(
|
)
|
(
|
)
|
||||
|
Other non-current liabilities
|
(
|
)
|
(
|
)
|
||||
|
Payment of severance benefits
|
(
|
)
|
(
|
)
|
||||
|
Other, net
|
(
|
)
|
(
|
)
|
||||
|
Net cash provided by operating activities
|
|
|
||||||
|
Cash flows from investing activities
|
||||||||
|
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, net
|
|
|
||||||
|
Net cash used in investing activities
|
(
|
)
|
(
|
)
|
||||
|
Cash flows from financing activities
|
||||||||
|
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
|
(
|
)
|
(
|
)
|
||||
|
Net cash provided by (used in) financing activities
|
(
|
)
|
|
|||||
|
Effect of exchange rates on cash and cash equivalents
|
(
|
)
|
(
|
)
|
||||
|
Net increase (decrease) in cash and cash equivalents
|
(
|
)
|
|
|||||
|
Cash and cash equivalents at beginning of period
|
|
|
||||||
|
Cash and cash equivalents at end of period
|
$
|
|
$
|
|
||||
|
Supplemental cash flow information
|
||||||||
|
Cash paid for income taxes
|
$
|
|
$
|
|
||||
|
Non-cash investing activities
|
||||||||
|
Property, plant and equipment additions in other accounts payable
|
$
|
|
$
|
|
||||
|
Non-cash financing activities
|
||||||||
|
Acquisition of treasury stock to satisfy the tax withholding obligations in connection with equity-based compensation
|
$
|
|
$
|
|
||||
|
Unsettled common stock repurchases
|
$
|
|
$
|
|
||||
The accompanying notes are an integral part of these consolidated financial statements.
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
(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, computing, industrial and automotive applications.
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 a wide range of applications including smartphones, TVs, automotive and IT applications such as monitors, notebook PCs, tablet
PCs as well as AR/VRs. The Company’s Power Solutions products include discrete and integrated circuit solutions for power management in communications, consumer, computing, servers, automotive, and industrial applications.
On September 1, 2020, 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”. Following the consummation of the sale, and for up to three years, the Company is expected to provide transitional foundry services associated with its fabrication facility located in Gumi, Korea, known as
“Fab 3”, at an agreed upon cost plus mark-up (the “Transitional Fab 3 Foundry Services”).
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, 2023 are not necessarily indicative of the results to be expected for a full year or for any other periods.
The December 31, 2022 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, 2022.
There have been no material changes to the Company’s significant accounting policies as of and for the three months ended March 31, 2023 as
compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
2. Inventories
Inventories as of March 31, 2023 and December 31, 2022 consist of the following (in thousands):
|
March 31,
2023
|
December 31,
2022
|
|||||||
|
Finished goods
|
$
|
|
$
|
|
||||
|
Semi-finished goods and work-in-process
|
|
|
||||||
|
Raw materials
|
|
|
||||||
|
Materials in-transit
|
|
|
||||||
|
Less: inventory reserve
|
(
|
)
|
(
|
)
|
||||
|
Inventories, net
|
$
|
|
$
|
|
||||
Changes in inventory reserve for the three months ended March 31, 2023 and 2022 are as follows (in thousands):
|
Three Months Ended
|
||||||||
|
March 31,
2023
|
March 31,
2022
|
|||||||
|
Beginning balance
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Change in reserve
|
||||||||
|
Inventory reserve charged to costs of sales
|
(
|
)
|
(
|
)
|
||||
|
Sale of previously reserved inventory
|
|
|
||||||
|
(
|
)
|
(
|
)
|
|||||
|
Write off
|
|
|
||||||
|
Translation adjustments
|
|
|
||||||
|
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, work-in-process and raw materials. Write off of
this reserve is recognized only when the related inventory has been disposed or scrapped.
3. Property, Plant and Equipment
Property, plant and equipment as of March 31, 2023 and December 31, 2022 are comprised of the following (in thousands):
|
March 31,
2023
|
December 31,
2022
|
|||||||
|
Buildings and related structures
|
$
|
|
$
|
|
||||
|
Machinery and equipment
|
|
|
||||||
|
Finance lease right-of-use assets
|
|
|
||||||
|
Others
|
|
|
||||||
|
|
|
|||||||
|
Less: accumulated depreciation
|
(
|
)
|
(
|
)
|
||||
|
Land
|
|
|
||||||
|
Construction in progress
|
|
|
||||||
|
Property, plant and equipment, net
|
$
|
|
$
|
|
||||
Aggregate depreciation expenses totaled $4,193
thousand and $3,706 thousand for the three months ended March 31, 2023 and 2022, respectively.
4. Intangible Assets
Intangible assets as of March 31, 2023 and December 31, 2022 are comprised of the following (in thousands):
|
March 31, 2023
|
||||||||||||
|
Gross
amount
|
Accumulated
amortization
|
Net
amount
|
||||||||||
|
Intellectual property assets
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Intangible assets
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
December 31, 2022
|
||||||||||||
|
Gross
amount
|
Accumulated
amortization
|
Net
amount
|
||||||||||
|
Intellectual property assets
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Intangible assets
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
Aggregate amortization expenses for intangible assets totaled $164 thousand and $185 thousand for the three months ended March 31, 2023
and 2022, respectively.
5. 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, 2023 and December 31, 2022 are as follows (in thousands):
|
Leases
|
Classification
|
March 31,
2023
|
December 31,
2022
|
||||||
|
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
|
|
|
|
||||||
|
Non-current
|
|||||||||
|
Operating
|
Non-current operating lease liabilities
|
|
|
||||||
|
Finance
|
|
|
|
||||||
|
Total lease liabilities
|
$
|
|
$
|
|
|||||
The following table presents the weighted average remaining lease term and discount rate:
|
March 31,
2023
|
December 31,
2022
|
|||||||
|
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,
2023
|
March 31,
2022
|
|||||||
|
Operating lease cost
|
$
|
|
$
|
|
||||
|
Finance lease cost
|
||||||||
|
Amortization of right-of-use assets
|
|
|
||||||
|
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, 2023 and 2022.
Other lease information is as follows (in thousands):
|
Three Months Ended
|
||||||||
|
March 31,
2023
|
March 31,
2022
|
|||||||
|
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
|
|
|
||||||
The aggregate future lease payments for operating and finance leases as of March 31, 2023 are as follows (in thousands):
|
Operating
Leases
|
Finance
Leases
|
|||||||
|
Remainder of 2023
|
$
|
|
$
|
|
||||
|
2024
|
|
|
||||||
|
2025
|
|
|
||||||
|
2026
|
|
|
||||||
|
2027
|
|
|
||||||
|
Total future lease payments
|
|
|
||||||
|
Less: Imputed interest
|
(
|
)
|
(
|
)
|
||||
|
Present value of future payments
|
$
|
|
$
|
|
||||
6. Accrued Expenses
Accrued expenses as of March 31, 2023 and December 31, 2022 are comprised of the following (in thousands):
|
March 31,
2023
|
December 31,
2022
|
|||||||
|
Payroll, benefits and related taxes, excluding severance benefits
|
$
|
|
$
|
|
||||
|
Withholding tax attributable to intercompany interest income
|
|
|
||||||
|
Outside service fees
|
|
|
||||||
|
Others
|
|
|
||||||
|
Accrued expenses
|
$
|
|
$
|
|
||||
Payroll, benefits and related taxes
payable as of March 31, 2023 in the table above includes termination related charges under the voluntary resignation program (the “Program”) of $8,449
thousand, which are expected to be paid in the second quarter of 2023.
See
“Note 10. Early Termination Charges” for more information regarding the Program.
7. 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, 2023 are as follows (in thousands):
|
Date of transaction
|
Total notional amount
|
Month of settlement
|
|||
|
|
$
|
|
to
|
||
|
|
$
|
|
to
|
||
|
|
$
|
|
to
|
||
|
|
$
|
|
to
|
||
Details of the zero cost collar contracts as of December 31, 2022 are as follows (in thousands):
|
Date of transaction
|
Total notional amount
|
Month of settlement
|
|||
|
|
$
|
|
to
|
||
|
|
$
|
|
to
|
||
| $ |
to | ||||
The 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, 2023 and December 31,
2022 are as follows (in thousands):
|
Derivatives designated as hedging instruments:
|
March 31,
2023
|
December 31,
2022
|
|||||||
| Asset Derivatives: | |||||||||
|
Zero cost collars
|
$ |
$ |
|||||||
|
Liability Derivatives:
|
|||||||||
|
Zero cost collars
|
|
$
|
|
$
|
|
||||
Offsetting of derivative assets and liabilities as of March 31, 2023 is as follows (in thousands):
|
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
|
||||||||||||||||||||
|
As of March 31, 2023
|
Financial
instruments
|
Cash collateral
pledged
|
||||||||||||||||||||||
|
Asset Derivatives:
|
||||||||||||||||||||||||
|
Zero cost collars
|
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
|
Liability Derivatives:
|
||||||||||||||||||||||||
|
Zero cost collars
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||||
Offsetting of derivative liabilities as of December 31, 2022 is as follows (in thousands):
|
Gross amounts of
recognized
liabilities
|
Gross amounts
offset in the
balance sheets
|
Net amounts of
liabilities
presented in the
balance sheets
|
Gross amounts not offset
in the balance sheets
|
Net amount
|
||||||||||||||||||||
|
As of December 31, 2022
|
Financial
instruments
|
Cash collateral
pledged
|
||||||||||||||||||||||
|
Liability Derivatives:
|
||||||||||||||||||||||||
|
Zero cost collars
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||||
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 or loss (“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, 2023 and 2022 (in thousands):
|
Derivatives in ASC
815 Cash Flow Hedging
Relationships
|
Amount of Loss
Recognized in
AOCI on
Derivatives
|
Location/Amount of
Loss
Reclassified from AOCI
Into Statement of Operations
|
Location/Amount of Loss
Recognized in
Statement of Operations on Derivatives
|
|||||||||||||||||||||||
|
Three Months Ended
March 31,
|
Three Months Ended
March 31,
|
Three Months Ended
March 31,
|
||||||||||||||||||||||||
|
2023
|
2022
|
2023
|
2022
|
2023
|
2022
|
|||||||||||||||||||||
|
Zero cost collars
|
$
|
(
|
)
|
$
|
(
|
)
|
|
$
|
(
|
)
|
$
|
(
|
)
|
Other income, net
|
$
|
(
|
)
|
$
|
(
|
)
|
||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ |
( |
) | |||||||||
As of March 31, 2023, the amount expected to be reclassified from accumulated other comprehensive loss into loss within the next 12 months is $1,757 thousand.
The Company set aside cash deposit to the counterparty, Standard Chartered Bank Korea Limited (“SC”), as required for the zero cost collar
contracts. This
cash deposit is recorded as hedge collateral on the consolidated balance sheets. Cash deposits as of March 31, 2023 and December 31, 2022 are as follows (in thousands):
|
Counterparty
|
March 31,
2023
|
December 31,
2022
|
||||||
|
SC
|
$
|
|
$
|
|
||||
|
Total
|
$ |
$ |
||||||
The Company is required to deposit additional cash collateral with Nomura Financial Investment (Korea) Co., Ltd. (“NFIK”) and SC for any exposure
in excess of $500 1,820 thousand of additional cash collateral was required by NFIK, and recorded as hedge collateral on the consolidated balance sheet. As of December 31, 2022, $1,840 thousand and $100 thousand of
additional cash collateral were required by NFIK and SC, respectively, and recorded as hedge collateral on the consolidated balance sheet.
These zero cost collar contracts may be terminated by the counterparties if the Company’s total cash and cash equivalents is less than $30,000 thousand at the end of a fiscal quarter, unless a waiver is obtained.
8. Fair Value Measurements
Fair Value of Financial Instruments
As of March 31, 2023, 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, 2023
|
Fair Value
Measurement
March 31, 2023
|
Quoted Prices in
Active Markets
for Identical
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)
|
$
|
|
$
|
|
|
$
|
|
|
|
|||||||||||
As of December 31, 2022, the following table represents the Company’s liabilities measured at fair value on a recurring basis and the basis
for that measurement (in thousands):
|
Carrying Value
December 31, 2022
|
Fair Value
Measurement
December 31, 2022
|
Quoted Prices in
Active Markets
for Identical
Liability (Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
||||||||||||||||
|
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.
9. 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,
2023, 97 % 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,
2023
|
March 31,
2022
|
|||||||
|
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 pursuant to Employee Retirement Benefit Security Act of Korea. 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 2023
|
$
|
|
||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028
|
|
|||
|
2029 – 2033
|
|
|||
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
years of age or older under the Employment Promotion for the Aged Act. The Company sets the retirement age of employees at 60 .
10. Early Termination Charges
During the first quarter of 2023, the Company commenced the Program, which was available for the employees with more than 20 years of service. For the three months ended March 31, 2023, the Company recorded in its consolidated statement of operations $8,449 thousand of termination related charges as “early termination charges”, which are expected to be paid during the second quarter of 2023.
11. Foreign Currency Loss, Net
Net foreign currency gain or loss includes 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, 2023 and December 31, 2022, the outstanding intercompany loan balances including accrued interest between the Korean subsidiary and the Dutch subsidiary were $301,860 thousand and $310,988
thousand, respectively. The Korean won to U.S. dollar exchange rates were 1,303.8 :1 and 1,267.3 :1 using the first base rate as of March 31, 2023 and December 31, 2022, respectively, as quoted by the KEB Hana Bank.
12. 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.
For the three months ended March 31, 2023, the Company recorded an income tax benefit of $1,227 thousand, primarily related to its primary operating entity in Korea based on the estimated taxable loss for the respective period.
For the three months ended March 31, 2022, the Company recorded an income tax expense of $3,483 thousand, primarily related to its primary operating entity in Korea based on the estimated taxable income for the respective period.
13. Geographic and Other Information
The following sets forth information relating to the single operating segment (in thousands):
|
Three Months Ended
|
||||||||
|
March 31,
2023
|
March 31,
2022
|
|||||||
|
Revenues
|
||||||||
|
Standard products business
|
||||||||
|
Display Solutions
|
$
|
|
$
|
|
||||
|
Power Solutions
|
|
|
||||||
|
Total standard products business
|
$ |
|
$ |
|
||||
|
Transitional Fab 3 foundry services
|
|
|
||||||
|
Total revenues
|
$
|
|
$
|
|
||||
|
Three Months Ended
|
||||||||
|
March 31,
2023
|
March 31,
2022
|
|||||||
|
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,
2023
|
March 31,
2022
|
|||||||
|
Korea
|
$
|
|
$
|
|
||||
|
Asia Pacific (other than Korea)
|
|
|
||||||
|
United States
|
|
|
||||||
|
Europe
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
For the three months ended March 31, 2023 and 2022, 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 together represented 57.9 % and 71.1 %, respectively, and net sales—standard products business in Vietnam represented 17.8 % and 14.4 %, respectively.
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 71 % and 72 %
for the three months ended March 31, 2023 and 2022, respectively.
For the three months ended March 31, 2023, the Company had two customers that represented 16.4 % and 13.7 % of its net sales—standard products business, respectively.
For the three months ended March 31, 2022, the Company had two customers that represented 25.5 % and 12.9 % of its net sales—standard products business, respectively.
As of March 31, 2023, two customers of the Company’s standard products business accounted for 22.3 % and 14.3 % of its accounts receivable – standard
products business (which does not include the Transitional Fab 3 Foundry Services), respectively. As of December 31, 2022, two customers of the Company’s standard products business accounted for 25.1 % and 15.2 % of its accounts receivable – standard
products business (which does not include the Transitional Fab 3 Foundry Services), respectively.
14. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following as of March 31, 2023 and December 31, 2022, respectively (in thousands):
|
March 31,
2023
|
December 31,
2022
|
|||||||
|
Foreign currency translation adjustments
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Derivative adjustments
|
(
|
)
|
(
|
)
|
||||
|
Total
|
$
|
(
|
)
|
$
|
(
|
)
|
||
Changes in accumulated other comprehensive loss for the three months ended March 31, 2023 and 2022 are as follows (in thousands):
|
Three Months Ended March 31, 2023
|
Foreign
currency
translation
adjustments
|
Derivative
adjustments
|
Total
|
|||||||||
|
Beginning balance
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Other comprehensive loss before reclassifications
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
|
|||||||||
|
Net current-period other comprehensive loss
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Ending balance
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Three Months Ended March 31, 2022
|
Foreign
currency
translation
adjustments
|
Derivative
adjustments
|
Total
|
|||||||||
|
Beginning balance
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Other comprehensive loss before reclassifications
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
|
|||||||||
|
Net current-period other comprehensive loss
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Ending balance
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
15. Stock Repurchases
Accelerated Stock Repurchase Program
On December 21, 2021, the Board of Directors authorized the Company to repurchase up to $75,000 thousand of its outstanding common stock and the Company entered into an accelerated stock repurchase agreement (the “ASR Agreement”) with JPMorgan Chase Bank,
National Association (“JPM”) to repurchase an aggregate of $37,500 thousand of its common stock.
Pursuant to the terms of the ASR Agreement dated December 21, 2021, the Company paid to JPM $37,500 thousand in cash and received an initial delivery of 994,695
shares of its common stock in the open market for an aggregate purchase price of $20,073 thousand and a price per share of $20.18 on December 22, 2021.
As of December 31, 2021, the Company accounted for the remaining portion of the ASR Agreement as a forward contract indexed to its own common stock
and recorded $17,427 thousand in additional paid-in capital in stockholders’ equity in its consolidated balance sheets.
In March 2022, the previously announced repurchase of $37,500
thousand of the Company’s common stock was completed pursuant to the ASR Agreement, and as a result, the Company additionally received 1,031,576
shares of its common stock for an aggregate purchase price of $17,217 thousand at a price per share of $16.69 , which was reclassified as treasury stock from additional paid-in capital in stockholder’s equity in its consolidated balance sheets.
Expanded Stock Repurchase Program
On August 31, 2022, the Board of Directors has authorized an expansion of the Company’s previously announced stock repurchase program from $75,000 thousand to $87,500 thousand
of its common stock. The remaining $50,000 thousand of the expanded $87,500 thousand program was planned to be repurchased in the open market or through privately negotiated transactions. In connection with the repurchase program, the Company
established a stock trading plan with Oppenheimer & Co. Inc. in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
From September 2022 to December 2022, the Company repurchased 1,235,650
shares of its common stock in the open market for an aggregate purchase price of $12,511 thousand and a price per share of $10.13 under the stock repurchase program.
During the first quarter of 2023, the Company repurchased 1,238,472
shares of its common stock in the open market for an aggregate purchase price of $11,887 thousand and a price per share of $9.60 under the stock repurchase program.
16. Earnings (Loss) Per Share
The following table illustrates the computation of basic and diluted earnings (loss) per common share for the three months ended March 31,
2023 and 2022:
|
Three Months Ended
|
||||||||
|
March 31,
2023
|
March 31,
2022
|
|||||||
|
(In thousands of U.S. dollars, except share data)
|
||||||||
|
Basic Earnings (Loss) per Share
|
||||||||
|
Net income (loss)
|
$
|
(
|
)
|
$
|
|
|||
|
Basic weighted average common stock outstanding
|
|
|
||||||
|
Basic earnings (loss) per share
|
$
|
(
|
)
|
$
|
|
|||
|
Diluted Earnings (Loss) per Share
|
||||||||
|
Net income (loss)
|
$
|
(
|
)
|
$
|
|
|||
|
Basic weighted average common stock outstanding
|
|
|
||||||
|
Net effect of dilutive equity awards
|
|
|
||||||
|
Diluted weighted average common stock outstanding
|
|
|
||||||
|
Diluted earnings (loss) per share
|
$
|
(
|
)
|
$
|
|
|||
Diluted earnings (loss) per share adjusts basic earnings (loss) per share for the potentially dilutive impact of stock
options. As the Company has reported loss for the three months ended March 31, 2023, all potentially dilutive securities, including stock options, are antidilutive and accordingly not considered, therefore basic net loss per share equals
diluted net loss per share.
The following outstanding instruments were excluded from the computation of diluted earnings (loss) per share, as they have an anti-dilutive effect
on the calculation:
|
Three Months Ended
|
||||||||
|
March 31,
2023
|
March 31,
2022
|
|||||||
|
Options
|
|
|
||||||
|
Restricted Stock Units
|
|
|
||||||
17. Merger Agreement
On March 25, 2021, the Company, South Dearborn Limited, an exempted company incorporated in the Cayman Islands with limited liability (“Holdco”),
formed by an affiliate of Wise Road Capital LTD (“Wise Road”), and Michigan Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Holdco (“Merger Sub”), entered into an Agreement and Plan of Merger (as amended, the “Merger
Agreement”), providing for, among other things and subject to the terms and conditions thereof, the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Holdco.
The closing of the Merger was subject to certain conditions, including clearance by the Committee on Foreign Investment in the United States
(“CFIUS”) under the Defense Production Act of 1950, as amended. The Company and Holdco were advised that CFIUS clearance of the Merger would not be forthcoming and received permission from CFIUS to withdraw their joint filing. In connection
therewith, the Company and Holdco entered into a Termination and Settlement Agreement, dated December 13, 2021 (the “Termination Agreement”), pursuant to which Holdco agreed to pay $70,200 thousand (the “Termination Fee”) to the Company on the terms specified in the Termination Agreement in satisfaction of Holdco’s obligation to pay a termination fee
in connection with the termination of the Merger Agreement. On December 20, 2021, the Merger Agreement was terminated pursuant to the Termination Agreement after the Company’s receipt of a fee of $51,000 thousand from Holdco and a standby letter of credit, which secures a deferred fee of $19,200 thousand from Holdco due on or before March 31, 2022. As of December 31, 2021, of the Termination Fee, $19,200
thousand deferred fee was recorded as other receivables. In connection therewith, the Company, Holdco and Wise Road entered into a First Amendment to the Termination Agreement, dated April 4, 2022, pursuant to which Holdco paid $14,400 thousand on April 4, 2022, with $4,800
thousand remaining outstanding. The Company, Holdco and Wise Road entered into a Second Amendment to the Termination Agreement, dated August 5, 2022 pursuant to which Holdco paid $3,000 thousand on August 5, 2022, of the deferred fee and payment of the remaining $1,800 thousand was due on or before October 31, 2022. The Company, Holdco and Wise Road entered into a series of letter agreements pursuant to which the parties ultimately agreed to defer the remaining $1,800 thousand due on or before March 31, 2023. As of March 31, 2023, the remaining fee of $1,800 thousand was recorded as other receivables. On April 6, 2023, Holdco paid the remaining $1,800 thousand.
18. Commitments and Contingencies
Advances to Suppliers
The Company, from time to time, may make advances in form of prepayments or deposits to suppliers, including external foundries, to meet its
planned production. The Company recorded advances of $4,372 thousand and $6,605 thousand as other current assets as of March 31, 2023 and December 31, 2022, respectively.
COVID-19 Pandemic
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and governmental authorities throughout the world implemented numerous restrictions and containment measures that
resulted in rapidly changing market and economic conditions. Many of these restrictions and
containment measures have since been lifted or scaled back. The Company will continue to 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 actions it deems necessary or
appropriate to respond in the event of a reemergence of the pandemic.
19. Subsequent Events
Derivative contracts
In April 2023, the Company and SC entered into derivative contract of zero cost collar for December 2023. The total notional
amounts are $5,000 thousand.
In April 2023, the Company and NFIK entered into derivative contracts of zero cost collars for the period from January 2024 to
June 2024. The total notional amounts are $18,000 thousand.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) 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 for our fiscal year ended December 31, 2022 filed on February 22, 2023 (“2022 Form 10-K”).
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 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.
| 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 have a proven
record with more than 40 years of operating history, a portfolio of approximately 1,100 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 line of products provide 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, IT applications such as monitors, notebook PCs, tablet PC and TVs applied with liquid crystal display (LCD), organic light emitting
diodes (OLED) and Micro light emitting diode (Micro LED) panel. 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 (High Definition) to UHD (Ultra High Definition) for a wide range of applications including smartphones, TVs, automotive and IT applications such as monitors, notebook PCs, tablet PCs as well as AR/VRs.
Our Power Solutions business line produces power management semiconductor products including discrete and integrated circuit solutions for power management in communications, consumer, computing, servers,
automotive, and industrial applications. These products include metal oxide semiconductor field effect transistors (MOSFETs), insulated-gate bipolar transistors (IGBTs), AC-DC/DC-DC converters, LED drivers, regulators and power management
integrated circuits (PMICs) for a range of devices, including televisions, smartphones, mobile phones, wearable devices, desktop PCs, notebooks, tablet PCs, other consumer electrics, automotive, and industrial applications such as power
suppliers, e-bikes, solar inverters, LED lighting and motor drives.
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 in Korea and substantial manufacturing operations 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. Certain of our OLED products are produced using external 12-inch foundries. Through a strategic cooperation with external 12-inch
foundries, we are managing to ensure outsourcing wafers at competitive price and produce quality products.
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 and industrial 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 continually strive to diversify 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.
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 certain 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 internally manufactured 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 and 8-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 external 12-inch foundries starting in the second half of 2015 and we have started outsourcing 8-inch wafer for OLED TV IC after the sale
of our fabrication facility located in Cheongju, Korea in 2020. This additional source of manufacturing is an increasingly important part of our supply chain management. By outsourcing manufacturing of OLED products to external foundries, we are
able to adapt dynamically to changing customer requirements and address growing markets without substantial capital investments by us. However, relying on external foundries exposes us to the risk of being unable to secure manufacturing capacity
in the case of facing with a worldwide shortage of foundry services. Although we are working strategically with external foundries to ensure long-term wafer capacity, if these efforts are unsuccessful, our ability to deliver products to our
customers may be negatively impacted, which would adversely affect our relationship with customers and opportunities to secure new design-wins.
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.
Recent Developments
Voluntary Resignation Program
During the first quarter of 2023, we commenced a voluntary resignation program (the “Program”), which was available for the employees with more than 20 years of service. For the three months ended March 31, 2023,
we recorded in our consolidated statement of operations $8.4 million of termination related charges as “early termination charges”, which are expected to be paid during the second quarter of 2023.
Expanded Stock Repurchase Program
On August 31, 2022, our Board of Directors authorized an expansion of the previously announced stock repurchase program from $75.0 million to $87.5 million of our common stock. We have already repurchased shares
worth $37.5 million under the program through an accelerated stock repurchase agreement on December 21, 2021 with JPMorgan Chase Bank, National Association. The remaining $50.0 million of the expanded $87.5 million program has been and will be
repurchased in the open market or through privately negotiated transactions. In connection with the repurchase program, we established a stock trading plan with Oppenheimer & Co. Inc. in accordance with Rule 10b5-1 under the Securities
Exchange Act of 1934, as amended.
From September 2022 to December 2022, we repurchased 1,235,650 shares of our common stock in the open market for an aggregate purchase price of $12.5 million and a price per share of $10.13 under the stock
repurchase program.
During the first quarter of 2023, we repurchased 1,238,472 shares of our common stock in the open market for an aggregate purchase price of $11.9 million and a price per share of $9.60 under the stock repurchase
program.
Global Semiconductor Industry Trends
Increases in demand for semiconductor products resulted in a global shortage of manufacturing capacity over the prior two years. As a result, we may experience increased costs to manufacture our products and may
not be able to manufacture and deliver all of the orders placed by our customers. Specifically, if we are unable to secure manufacturing capacity from the external foundries we rely on, our ability to deliver products to our customers may be
negatively impacted. Also, shortage of manufacturing capacity may lead to an increase in our manufacturing costs. Our principal pricing strategy is to pass on the increased manufacturing costs to our customers; however, we may not be fully able
to do this in all cases.
In an effort to minimize the potential adverse impact of the supply shortage, we continue to work strategically with certain external foundries to help ensure long-term wafer capacity. If these efforts are
unsuccessful, however, such shortage could limit our ability to meet demand for our products in the future, which would adversely affect our reputation and competitive position, resulting in a negative impact on results of operations.
We are not able to foresee when the shortage of manufacturing capacity will subside, but we are beginning to see some indicators of improvement of such supply shortage situation. However, the global shortage for
semiconductor products over the prior two years has led to overbooking backordered demand and oversupply. Additionally, the current global macroeconomic conditions, including remaining effects from the COVID-19 pandemic, inflation and higher
interest rates, uncertainty caused by geopolitical conflict between the Russian and Ukraine and escalated trade tensions between the U.S. and China have led to weaker end-market demand and an oversupply of inventory. We continue to monitor these
trends and uncertainties, and any decline in end-market demand and increase in inventory levels could negatively impact our financial condition and results of operations.
COVID-19 Pandemic
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and governmental authorities throughout the world implemented numerous restrictions and containment measures that resulted in
rapidly changing market and economic conditions. Many of these restrictions and containment measures have since been lifted or scaled back. We will continue to 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 actions it deems necessary or appropriate to respond in the event of a reemergence of the pandemic.
Developments in Export Control Regulations
On October 7, 2022, the Bureau of Industry and Security of the U.S. Department of Commerce published changes to U.S. export control regulations (U.S. Export Regulations), including new restrictions on Chinese
entities’ ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. Further, on October 12, 2022, a new rule went into effect requiring U.S. persons to obtain a license prior to
engaging in certain activities that could “support” certain end-uses and end-users, including those related to weapons of mass destruction. Additionally, on October 21, 2022, the Bureau of Industry and Security brought into effect a series of new
Foreign Direct Product (FDP) rules and various new controls on advanced computing items, significantly expanding the scope of items that are subject to export control under the U.S. Export Regulations. Based on our understanding of the current
U.S. Export Regulations and related rules, we do not anticipate that they will have a material impact on our business. Additional changes to the U.S. Export Regulations are expected, but the scope or timing of such changes is unknown. We will
continue to monitor such developments, including potential additional trade restrictions, and other regulatory or policy changes by the U.S. and foreign governments.
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, net and (iv) early termination charges. EBITDA for the
periods indicated is defined as net income (loss) before interest income, interest expense, income tax expense (benefit), 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 and may be a better indicator of future performance;
|
| • |
we believe that Adjusted EBITDA is commonly requested and used by securities analysts, investors and other interested parties in the evaluation of a 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 a company’s period-to-period core operating performance and to understand and assess the manner in which management analyzes operating performance.
|
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 net income or any other performance measure derived in accordance with U.S GAAP, or as an alternative to
cash flows from operating activities as a measure of liquidity. A reconciliation of net income (loss) to Adjusted EBITDA is as follows:
|
Three Months
Ended
March 31,
2023
|
Three Months
Ended
March 31,
2022
|
|||||||
|
(Dollars in millions)
|
||||||||
|
Net Income (loss)
|
$
|
(21.5
|
)
|
$
|
9.5
|
|||
|
Interest income
|
(2.8
|
)
|
(0.7
|
)
|
||||
|
Interest expense
|
0.3
|
0.1
|
||||||
|
Income tax expense (benefit)
|
(1.2
|
)
|
3.5
|
|||||
|
Depreciation and amortization
|
4.4
|
3.9
|
||||||
|
EBITDA
|
(20.9
|
)
|
16.3
|
|||||
|
Adjustments:
|
||||||||
|
Equity-based compensation expense(a)
|
1.1
|
1.6
|
||||||
|
Foreign currency loss, net(b)
|
3.4
|
0.7
|
||||||
|
Derivative valuation loss, net(c)
|
0.1
|
0.1
|
||||||
|
Early termination charges(d)
|
8.4
|
—
|
||||||
|
Adjusted EBITDA
|
$
|
(7.9
|
)
|
$
|
18.8
|
|||
| (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, 2023, this adjustment eliminates the termination related charges of $8.4 million in connection with the Program that we offered to certain employees during the first quarter of 2023. As this
adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is 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.
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 or any other performance measure derived 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) early termination charges.
The following table summarizes the adjustments to operating income (loss) that we make in order to calculate Adjusted Operating Income (Loss) for the periods indicated:
|
Three Months
Ended
March 31,
2023
|
Three Months
Ended
March 31,
2022
|
|||||||
|
(Dollars in millions)
|
||||||||
|
Operating income (loss)
|
$
|
(21.8
|
)
|
$
|
12.9
|
|||
|
Adjustments:
|
||||||||
|
Equity-based compensation expense(a)
|
1.1
|
1.6
|
||||||
|
Early termination charges(b)
|
8.4
|
—
|
||||||
|
Adjusted Operating Income (Loss)
|
$
|
(12.2
|
)
|
$
|
14.5
|
|||
| (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, 2023, this adjustment eliminates the termination related charges of $8.4 million in connection with the Program that we offered to certain employees during the first quarter of 2023. As this
adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is excluded.
|
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 net income (loss)
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 net income or any other performance measure derived in
accordance with U.S GAAP, or as an alternative to cash flows from operating activities as a measure of liquidity. 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 net income (loss), adjusted to exclude (i) equity-based compensation
expense, (ii) foreign currency loss, net, (iii) derivative valuation loss, net, (iv) early termination charges and (v) income tax effect on non-GAAP adjustments.
The following table summarizes the adjustments to net income (loss) that we make in order to calculate Adjusted Net Income (Loss) (including on a per share basis) for the periods indicated:
|
Three Months
Ended
March 31,
2023
|
Three Months
Ended
March 31,
2022
|
|||||||
|
(Dollars in millions, except per
share data)
|
||||||||
|
Net Income (Loss)
|
$
|
(21.5
|
)
|
$
|
9.5
|
|||
|
Adjustments:
|
||||||||
|
Equity-based compensation expense(a)
|
1.1
|
1.6
|
||||||
|
Foreign currency loss, net(b)
|
3.4
|
0.7
|
||||||
|
Derivative valuation loss, net(c)
|
0.1
|
0.1
|
||||||
|
Early termination charges(d)
|
8.4
|
—
|
||||||
|
Income tax effect on non-GAAP adjustments(e)
|
(1.9
|
)
|
1.0
|
|||||
|
Adjusted Net Income (Loss)
|
$
|
(10.4
|
)
|
$
|
12.9
|
|||
|
Reported earnings (loss) per share—basic
|
$
|
(0.49
|
)
|
$
|
0.21
|
|||
|
Reported earnings (loss) per share—diluted
|
$
|
(0.49
|
)
|
$
|
0.20
|
|||
|
Weighted average number of shares—basic
|
43,390,832
|
45,603,208
|
||||||
|
Weighted average number of shares—diluted
|
43,390,832
|
46,693,294
|
||||||
|
Adjusted earnings (loss) per share—basic
|
$
|
(0.24
|
)
|
$
|
0.28
|
|||
|
Adjusted earnings (loss) per share—diluted
|
$
|
(0.24
|
)
|
$
|
0.28
|
|||
|
Weighted average number of shares—basic
|
43,390,832
|
45,603,208
|
||||||
|
Weighted average number of shares—diluted
|
43,390,832
|
46,693,294
|
| (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, 2023, this adjustment eliminates the termination related charges of $8.4 million in connection with the Program that we offered to certain employees during the first quarter of 2023. As this
adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is excluded.
|
| (e) |
For the three months ended March 31, 2023 and 2022, income tax effect on non-GAAP adjustments were calculated by calculating the tax expense of each jurisdiction with or without the non-GAAP adjustments. For the three months ended
March 31, 2023, income tax effect on non-GAAP adjustments related to our Korean subsidiary and the U.S parent entity were negative $1.2 million and negative $0.7 million, respectively. For the three months ended March 31, 2022, this
adjustment eliminates the income tax effect on non-GAAP adjustments of $1.0 million related to our Korean subsidiary using a calculation method that we compare the tax expense of our Korean subsidiary with and without the non-GAAP
adjustments.
|
We believe that all adjustments to net income (loss) used to calculate Adjusted Net Income (Loss) 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.
Factors Affecting Our Results of Operations
Net Sales. We derive substantially all of our sales (net of sales returns and allowances) from
our standard products business. We outsource manufacturing of mobile OLED products to external 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 offices near concentrations of major customers. Our sales offices are located in
Korea, Japan, Taiwan 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, 2023 and 2022, we sold products to 120 and 140 customers, respectively, and our net sales to our ten largest customers represented 71% and 72% 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.
Gross Profit. Our overall gross profit generally fluctuates as a result of changes in overall sales volumes and in the average selling prices of our
products and services. Other factors that influence our gross profit include changes in product mix, the introduction of new products and services and subsequent generations of existing products and services, shifts in the utilization of our
manufacturing facility and the yields achieved by our manufacturing operations, changes in material, labor and other manufacturing costs including outsourced manufacturing expenses, and variation in depreciation expense.
Average Selling Prices. Average
selling prices for our products tend to be highest at the time of introduction of new products which utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products.
We strive to offset the impact of declining selling prices for existing products through our product development activities and by introducing 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 preclude losses from product and productive capacity obsolescence.
Material Costs. Our material costs consist of costs of raw materials, such as silicon wafers, chemicals, gases and tape and packaging supplies. We use
processes that require specialized raw materials, such as silicon wafers, that are generally available from a limited number of suppliers. If demand increases or supplies decrease, the costs of our raw materials could increase significantly.
Labor Costs. A significant portion of our employees are located in Korea. Under Korean labor
laws, most employees and certain 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, 2023,
approximately 97% of our employees were eligible for severance benefits.
Depreciation Expense. We periodically evaluate the carrying values of long-lived assets, including property, plant and equipment and intangible assets, as
well as the related depreciation periods. We depreciated our property, plant and equipment using the straight-line method over the estimated useful lives of our assets. Depreciation rates vary from 30-40 years on buildings to 3 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. We sell our products worldwide through a direct sales force as well as a
network of sales agents and representatives to OEMs, including major branded customers and contract manufacturers, and indirectly through distributors. Selling expenses consist primarily of the personnel costs for the members of our direct sales
force, a network of sales representatives and other costs of distribution. Personnel costs include base salary, benefits and incentive compensation.
General and Administrative Expenses. General and administrative expenses consist of the costs of various corporate operations, including finance, legal, human resources and other administrative functions. These
expenses primarily consist of payroll-related expenses, consulting and other professional fees and office facility-related expenses.
Research and Development. The
rapid technological change and product obsolescence that characterize our industry require us to make continuous investments in research and development. Product development time frames vary but, in general, we incur research and development
costs one to two years before generating sales from the associated new products. These expenses include personnel costs for members of our engineering workforce, cost of photomasks, silicon wafers and other 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 28-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.
Impact of Foreign Currency Exchange Rates on Reported Results of Operations. Historically, a portion of our revenues and cost of sales and greater than
the majority of our operating expenses have been denominated in 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, 2023, the outstanding intercompany loan balance including accrued interest between our Korean subsidiary and our Dutch subsidiary was
$301.9 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 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. Foreign currency translation gains or losses on transactions by us or our subsidiaries in a currency other than our or our
subsidiaries’ functional currency are included in foreign currency gain (loss), net in our statements of operations. A substantial portion of this net foreign currency gain or loss relates to 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. We record our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach
whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax basis of our assets and liabilities. We exercise significant management judgment in determining our provision for income taxes,
deferred tax assets and liabilities. We assess whether it is more likely than not that the deferred tax assets existing at the 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.
Capital Expenditures. We primarily invest in manufacturing equipment, software design tools
and other tangible assets mainly for fabrication facility maintenance, capacity expansion and technology improvement. Capacity expansions and technology improvements typically occur in anticipation of increases in demand. We typically pay for
capital expenditures in partial installments with portions due on order, delivery and final acceptance. Our capital expenditures mainly include our payments for the purchase of property, plant and equipment.
Inventories. We monitor our inventory levels in light of product development changes and market expectations. We may be required to take additional
charges for quantities in excess of demand, cost in excess of market value and product age. Our analysis may take into consideration historical usage, expected demand, anticipated sales price, new product development schedules, the effect new
products might have on the sales of existing products, product age, customer design activity, customer concentration and other factors. These forecasts require us to estimate our ability to predict demand for current and future products and
compare those estimates with our current inventory levels and inventory purchase commitments. Our forecasts for our inventory may differ from actual inventory use.
Results of Operations – Comparison of Three Months Ended March 31, 2023 and 2022
The following table sets forth consolidated results of operations for the three months ended March 31, 2023 and 2022:
|
Three Months Ended
March 31, 2023
|
Three Months Ended
March 31, 2022
|
|||||||||||||||||||
|
Amount
|
% of
Total Revenues
|
Amount
|
% of
Total Revenues
|
Change
Amount
|
||||||||||||||||
|
(Dollars in millions)
|
||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Net sales – standard products business
|
$
|
51.5
|
90.4
|
%
|
$
|
94.0
|
90.3
|
%
|
$
|
(42.5
|
)
|
|||||||||
|
Net sales – transitional Fab 3 foundry services
|
5.5
|
9.6
|
10.1
|
9.7
|
(4.6
|
)
|
||||||||||||||
|
Total revenues
|
57.0
|
100.0
|
104.1
|
100.0
|
(47.1
|
)
|
||||||||||||||
|
Cost of sales
|
||||||||||||||||||||
|
Cost of sales – standard products business
|
37.3
|
65.5
|
56.1
|
53.9
|
(18.8
|
)
|
||||||||||||||
|
Cost of sales – transitional Fab 3 foundry services
|
7.6
|
13.3
|
9.0
|
8.7
|
(1.4
|
)
|
||||||||||||||
|
Total cost of sales
|
44.9
|
78.8
|
65.1
|
62.5
|
(20.2
|
)
|
||||||||||||||
|
Gross profit
|
12.1
|
21.2
|
39.0
|
37.5
|
(26.9
|
)
|
||||||||||||||
|
Selling, general and administrative expenses
|
12.2
|
21.3
|
14.2
|
13.6
|
(2.0
|
)
|
||||||||||||||
|
Research and development expenses
|
13.3
|
23.3
|
12.0
|
11.5
|
1.3
|
|||||||||||||||
|
Early termination charges
|
8.4
|
14.8
|
—
|
—
|
8.4
|
|||||||||||||||
|
Operating income (loss)
|
(21.8
|
)
|
(38.3
|
)
|
12.9
|
12.4
|
(34.7
|
)
|
||||||||||||
|
Interest income
|
2.8
|
5.0
|
0.7
|
0.7
|
2.1
|
|||||||||||||||
|
Interest expense
|
(0.3
|
)
|
(0.4
|
)
|
(0.1
|
)
|
(0.1
|
)
|
(0.1
|
)
|
||||||||||
|
Foreign currency loss, net
|
(3.4
|
)
|
(6.0
|
)
|
(0.7
|
)
|
(0.7
|
)
|
(2.7
|
)
|
||||||||||
|
Others, net
|
(0.0
|
)
|
(0.1
|
)
|
0.2
|
0.2
|
(0.3
|
)
|
||||||||||||
|
(0.9
|
)
|
(1.5
|
)
|
0.1
|
0.1
|
(1.0
|
)
|
|||||||||||||
|
Income (loss) before income tax expense
|
(22.7
|
)
|
(39.8
|
)
|
13.0
|
12.5
|
(35.7
|
)
|
||||||||||||
|
Income tax expense (benefit)
|
(1.2
|
)
|
(2.2
|
)
|
3.5
|
3.3
|
(4.7
|
)
|
||||||||||||
|
Net income (loss)
|
$
|
(21.5
|
)
|
(37.7
|
)
|
$
|
9.5
|
9.2
|
$
|
(31.0
|
)
|
|||||||||
|
Three Months Ended
March 31, 2023
|
Three Months Ended
March 31, 2022
|
|||||||||||||||||||
|
Amount
|
% of
Total Revenues
|
Amount
|
% of
Total Revenues
|
Change
Amount
|
||||||||||||||||
|
(Dollars in millions)
|
||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Net sales – standard products business
|
||||||||||||||||||||
|
Display Solutions
|
$
|
10.8
|
19.0
|
%
|
$
|
29.2
|
28.0
|
%
|
$
|
(18.3
|
)
|
|||||||||
|
Power Solutions
|
40.7
|
71.4
|
64.8
|
62.3
|
(24.2
|
)
|
||||||||||||||
|
Total standard products business
|
51.5
|
90.4
|
94.0
|
90.3
|
(42.5
|
)
|
||||||||||||||
|
Net sales – transitional Fab 3 foundry services
|
5.5
|
9.6
|
10.1
|
9.7
|
(4.6
|
)
|
||||||||||||||
|
Total revenues
|
$
|
57.0
|
100.0
|
%
|
$
|
104.1
|
100.0
|
%
|
$
|
(47.1
|
)
|
|||||||||
|
Three Months Ended
March 31, 2023
|
Three Months Ended
March 31, 2022
|
|||||||||||||||||||
|
Amount
|
% of
Net Sales
|
Amount
|
% of
Net Sales
|
Change
Amount
|
||||||||||||||||
|
(Dollars in millions)
|
||||||||||||||||||||
|
Gross Profit
|
||||||||||||||||||||
|
Gross profit – standard products business
|
$
|
14.2
|
27.6
|
%
|
$
|
37.9
|
40.3
|
%
|
$
|
(23.7
|
)
|
|||||||||
|
Gross profit – transitional Fab 3 foundry services
|
(2.1
|
)
|
(38.4
|
)
|
1.1
|
10.6
|
(3.2
|
)
|
||||||||||||
|
Total gross profit
|
$
|
12.1
|
21.2
|
%
|
$
|
39.0
|
37.5
|
%
|
$
|
(26.9
|
)
|
|||||||||
Revenues
Total revenues were $57.0 million for the three months ended March 31, 2023, a $47.1 million, or 45.2%, decrease compared to $104.1 million for the three months ended March 31, 2022. This decrease was primarily due
to a decrease in revenue related to our standard products business as described below.
The standard products business. Net sales from our standard products business were $51.5 million for the three months ended March 31, 2023, a $42.5
million, or 45.2%, decrease compared to $94.0 million for the three months ended March 31, 2022. The decrease in net sales from our Display Solutions business line was primarily attributable to a decrease in revenue from our mobile OLED display
driver ICs stemming from a lower customer demand resulting from weak global macroeconomic conditions, and a lack of new design-wins caused by supply shortage in 2022 (in particular for 28nm 12 inch OLED wafers) at external 12 inch foundries. The
decrease in net sales from our Power Solutions business line was attributable to lower demand for power products such as MOSFETs, including high-end MOSFETs, primarily for TVs, smartphones and e-bikes, due mainly to the industry-wide slowdown.
The transitional Fab 3 foundry services. Net sales from the transitional Fab 3 foundry services were $5.5 million and $10.1 million for the three months
ended March 31, 2023 and 2022, respectively.
Gross Profit
Total gross profit was $12.1 million for the three months ended March 31, 2023 compared to $39.0 million for the three months ended March 31, 2022, a $26.9 million, or 69.0%, decrease. Gross profit as a percentage
of net sales for the three months ended March 31, 2023 decreased to 21.2% compared to 37.5% for the three months ended March 31, 2022. The decrease 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. Gross profit from our standard products business was $14.2 million for the three months ended March 31, 2023, which
represented a $23.7 million, or 62.6%, decrease from gross profit of $37.9 million for the three months ended March 31, 2022. The decrease in gross profit was primarily attributable to a significant decrease in net sales from our standard product
business as explained above. Gross profit as a percentage of net sales for the three months ended March 31, 2023 decreased to 27.6% compared to 40.3% for the three months ended March 31, 2022. The year-over-year decrease in gross profit as a
percentage of net sales was primarily attributable to an unfavorable product mix and a significant drop in the utilization rate of our internal fabrication facility in Gumi. Gross profit as a percentage of net sales for the three months ended
March 31, 2022 was higher due to an increase in average selling price benefited from the favorable pricing environment.
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, 2023 and 2022:
|
Three Months Ended
March 31, 2023
|
Three Months Ended
March 31, 2022
|
|||||||||||||||||||
|
Amount
|
% of
Net Sales –
standard
products
business
|
Amount
|
% of
Net Sales –
standard
products
business
|
Change
Amount
|
||||||||||||||||
|
(Dollars in millions)
|
||||||||||||||||||||
|
Korea
|
$
|
16.5
|
32.0
|
%
|
$
|
31.0
|
33.0
|
%
|
$
|
(14.5
|
)
|
|||||||||
|
Asia Pacific (other than Korea)
|
31.9
|
62.0
|
58.3
|
62.0
|
(26.4
|
)
|
||||||||||||||
|
United States
|
1.0
|
2.0
|
2.9
|
3.0
|
(1.8
|
)
|
||||||||||||||
|
Europe
|
2.1
|
4.0
|
1.9
|
2.0
|
0.2
|
|||||||||||||||
|
$
|
51.5
|
100.0
|
%
|
$
|
94.0
|
100.0
|
%
|
$
|
(42.5
|
)
|
||||||||||
Net sales – standard products business in Korea for the three months ended March 31, 2023 decreased from $31.0 million to $16.5 million compared to the three months ended March 31, 2022, or by $14.5 million, or
46.8%, primarily due to lower demand for power products such as MOSFETs, including high-end MOSFETs, primarily for TVs and smartphone applications. Weak demand for our OLED TV display driver ICs also unfavorably affected this quarter.
Net sales – standard products business in Asia Pacific (other than Korea) for the three months ended March 31, 2023 decreased to $31.9 million from $58.3 million in the three months ended March 31, 2022, or by
$26.4 million, or 45.2%, primarily due to a decrease in revenue from our mobile OLED display driver ICs stemming from a lower customer demand resulting from weak global macroeconomic conditions, and a lack of new design-wins caused by supply
shortage in 2022 (in particular for 28nm 12 inch OLED wafers) at external 12 inch foundries. The decreased demand for our power products such as MOSFETs, including high-end MOSFETs, primarily for smartphones and e-bikes, also unfavorably affected
this quarter.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $12.2 million, or 21.3% of total revenues, for the
three months ended March 31, 2023, compared to $14.2 million, or 13.6% of total revenues, for the three months ended March 31, 2022. The decrease of $2.0 million, or 14.1%, was primarily attributable to a decrease in employee compensation
including certain incentives and benefit related accruals. This decrease also resulted from a decrease in professional fees mainly comprised of legal and consulting fees.
Research and Development Expenses. Research and development expenses were $13.3 million, or 23.3% of total revenues, for the three months ended March 31, 2023, compared to $12.0 million, or 11.5% of total revenues,
for the three months ended March 31, 2022. The increase of $1.3 million, or 11.2%, was primarily attributable to an increase in development activities for our 28-nanometer OLED display driver ICs, which was offset in part by a decrease in certain
employee incentives.
Early Termination Charges. For the three months ended March 31, 2023, we recorded in our consolidated statement of operations $8.4 million of termination
related charges in connection with the Program that we offered to certain employees during the first quarter of 2023.
Operating Income (Loss)
As a result of the foregoing, operating loss of $21.8 million was recorded for the three months ended March 31, 2023 compared to operating income of $12.9 million for the three months ended March 31, 2022. As
discussed above, the decrease in operating income of $34.7 million resulted primarily from a $26.9 million decrease in gross profit, an $8.4 million increase in early termination charges and a $1.3 million increase in research and development
expenses. This decrease in operating income was offset in part by a $2.0 million decrease in selling, general and administrative expenses.
Other Income (Expense)
Interest Income. Interest income was $2.8 million and $0.7 million for the three months ended
March 31, 2023 and March 31, 2022, respectively. The increase of $2.1 million, or 297.5%, was primarily attributable to an increase in interest income on cash and cash equivalents held by our Korean subsidiary, which benefited from the favorable
financial market environment.
Interest Expense. Interest expense was $0.3 million and $0.1 million for the three months
ended March 31, 2023 and March 31, 2022, respectively.
Foreign Currency Loss, Net. Net foreign currency loss for the three months ended March 31, 2023 was $3.4 million compared to net foreign currency loss of $0.7 million for the three months ended March 31, 2022. The
net foreign currency loss for the three months ended March 31, 2023 and March 31, 2022 was due to the depreciation in value of the Korean won relative to the U.S. dollar during the period.
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, 2023 and March 31, 2022, the outstanding intercompany loan balances, including accrued interest between our Korean subsidiary and our Dutch
subsidiary, were $301.9 million and $348.5 million, respectively. Foreign currency translation gain or loss from intercompany balances were included in determining our consolidated net income (loss) 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.
Income Tax Expense (Benefit)
Income tax benefit was $1.2 million for the three months ended March 31, 2023, which was primarily attributable to the estimated taxable loss in our Korean subsidiary for the respective period.
Income tax expense was $3.5 million for the three months ended March 31, 2022, which was primarily attributable to the estimated taxable income in our Korean subsidiary for the respective period.
Net Income (Loss)
As a result of the foregoing, a net loss of $21.5 million was recorded for the three months ended March 31, 2023 compared to a net income of $9.5 million for the three months ended March 31, 2022. As discussed
above, the $31.0 million decrease in net income was primarily attributable to a $34.7 million decrease in operating income and a $2.7 million increase in net foreign currency loss, which was offset in part by a $4.7 million decrease in income tax
expense and a $2.1 million increase in interest income.
Liquidity and Capital Resources
Our principal capital requirements are to fund sales and marketing, invest in research and development and capital equipment, 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, 2023, we did not have any accounts payable on extended
terms or payment deferment with our vendors.
As of June 29, 2018, our Korean subsidiary entered into an arrangement whereby it (i) acquired a water treatment facility from SK hynix for $4.2 million to support our fabrication facility in Gumi, Korea, and (ii)
subsequently sold the water treatment facility for $4.2 million to a third party management company that we engaged to run the facility for a 10-year term beginning July 1, 2018. As of March 31, 2023, the outstanding obligation of this
arrangement is approximately $23.7 million for remaining service term through 2028.
As of March 31, 2023, cash and cash equivalents held by our Korean subsidiary were $193.0 million, which represents 91% of our total cash and cash equivalents on a consolidated basis. 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, 2023 was $261.6 million compared to $290.6 million as of December 31, 2022. The $29.0 million decrease was primarily attributable to a $13.4 million decrease in cash and
cash equivalents resulted primarily from our stock repurchase program and a $7.4 million increase in accrued expense resulted primarily from termination related charges under the Program.
Cash Flows from Operating Activities
Cash inflow provided by operating activities totaled $7.9 million for the three months ended March 31, 2023, compared to $12.8 million of cash inflow provided by operating activities for the three months ended
March 31, 2022. The net operating cash inflow for the three months ended March 31, 2023 reflects our net loss of $21.5 million, as adjusted favorably by $18.3 million, which mainly consisted of depreciation and amortization, provision for
severance benefits, and net foreign currency loss, and net favorable impact of $11.1 million from changes of operating assets and liabilities.
Cash Flows from Investing Activities
Cash outflow used in investing activities totaled $3.6 million for the three months ended March 31, 2023, compared to $2.1 million of cash outflow used in investing activities for the three months ended March 31,
2022. The $1.5 million increase was primarily attributable to a $3.4 million increase in guarantee deposits, which was offset in part by a $1.1 million net decrease in hedge collateral and a $0.8 million decrease in purchase of property, plant
and equipment.
Cash Flows from Financing Activities
Cash outflow used in financing activities totaled $12.4 million for the three months ended March 31, 2023, compared to $0.8 million of cash inflow provided by financing activities for the three months ended March
31, 2022. The financing cash outflow for the three months ended March 31, 2023 was primarily attributable to a payment of $11.9 million for the repurchases of our common stock pursuant to our stock repurchase program and a payment of $0.4 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 inflow for the three months ended March 31, 2022 was primarily attributable to $1.8 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 $0.8 million for the repurchase of our common stock to satisfy tax withholding obligations in
connection with the vesting of restricted stock units.
Capital Expenditures
We routinely make capital expenditures for fabrication facility maintenance, enhancement of our existing facility and reinforcement of our global research and development capability. For the three months ended
March 31, 2023, capital expenditures for property, plant and equipment were $0.1 million, a $0.8 million, or 85.7%, decrease from $0.9 million for the three months ended March 31, 2022. The capital expenditures for the three months ended March
31, 2023 and 2022 were related to meeting our customer demand and supporting technology and facility improvement at our fabrication facility.
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, 2022, or
our 2022 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 2022 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 2022 Form 10-K.
| 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. In the normal course of our
business, we are subject to market risks associated with 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, 2023 for our Korean subsidiary, a 10% devaluation of the Korean won against the U.S. dollar would have resulted in a decrease of $0.5 million in our
U.S. dollar financial instruments and cash balances.
See “Note 7. 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.
| 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, 2023, 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, 2023.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
| Item 1. |
Legal Proceedings
|
For a discussion of legal proceedings, see “Part I: Item 3. Legal Proceedings” of our 2022 Form 10-K.
See also “Item 1A. Risk Factors” in this Report and “Part I: Item 1A. Risk Factors” of our 2022 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.
In addition to the other information contained in this Report and the other reports and materials the Company files with the SEC, investors should carefully consider the risk factors disclosed in Part I, Item 1A of
our 2022 Form 10-K as well as in our subsequent filings with the SEC. The risks described herein and therein are not the only ones we face.
There have been no material changes to the risk factors disclosed in Part I, Item 1A of our 2022 Form 10-K.
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds.
|
The following table shows the monthly activity related to our repurchases of common stock for the quarter ended March 31, 2023.
|
Period
|
Total Number
of Shares
Purchased(1)
|
Average
Price Paid
per Share
|
Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs(2)
|
Approximate dollar
value of Shares that
may yet be
Purchased under the
Plans or Programs
(in thousands)(2)
|
||||||||||||
|
January 2023
|
210,192
|
$
|
10.45
|
210,192
|
$
|
35,292
|
||||||||||
|
February 2023
|
222,314
|
$
|
10.16
|
222,314
|
$
|
33,033
|
||||||||||
|
March 2023(1)
|
807,487
|
$
|
9.22
|
805,966
|
$
|
25,601
|
||||||||||
|
Total
|
1,239,993
|
$
|
9.60
|
1,238,472
|
$
|
25,601
|
||||||||||
| (1) |
Includes 1,521 shares withheld to satisfy tax withholding obligations in connection with the vesting of restricted stock units issued under our equity incentive plans.
|
| (2) |
On August 31, 2022, the Company’s Board of Directors authorized an expansion of the Company’s previously announced stock repurchase program from $75 million to $87.5 million of the Company’s common stock. The Company has already
repurchased shares worth $37.5 million under the program through an accelerated stock repurchase agreement on December 21, 2021 with JPMorgan Chase Bank, National Association. The remaining $50.0 million of the expanded $87.5 million
program will be repurchased in the open market or through privately negotiated transactions. In connection with the repurchase program, the Company established a stock trading plan with Oppenheimer & Co. Inc. in accordance with Rule
10b5-1 under the Securities Exchange Act of 1934, as amended.
|
| Item 3. |
Defaults Upon Senior Securities
|
Not applicable.
| Item 4. |
Mine Safety Disclosures
|
Not applicable.
| Item 5. |
Other Information
|
None.
| Item 6. |
Exhibits.
|
|
Exhibit
Number
|
Description
|
|
31.1#
|
|
|
31.2#
|
|
|
32.1†
|
|
|
32.2†
|
|
|
101.INS#
|
Inline XBRL Instance Document.
|
|
101.SCH#
|
Inline XBRL Taxonomy Extension Schema Document.
|
|
101.CAL#
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
101.DEF#
|
Inline XBRL Taxonomy Extension Definition Linkbase Document.
|
|
101.LAB#
|
Inline XBRL Taxonomy Extension Label Linkbase Document.
|
|
101.PRE#
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
|
|
104
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
|
Footnotes:
| # |
Filed herewith
|
| † |
Furnished herewith
|
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 8, 2023
|
By:
|
/s/ Young-Joon Kim
|
|
Young-Joon Kim
|
||
|
Chief Executive Officer and Interim Chief Financial Officer
|
||
| (Principal Executive Officer and Principal Financial Officer) | ||
46
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 8, 2023
|
|
|
/s/ Young-Joon Kim
|
|
|
Young-Joon Kim
|
|
|
Chief Executive Officer and Interim Chief Financial 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-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 8, 2023
|
|
|
/s/ Young-Joon Kim
|
|
|
Young-Joon Kim
|
|
|
Chief Executive Officer and Interim Chief Financial Officer
|
|
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION OF PRINCIPAL 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, 2023 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 8, 2023
|
/s/ Young-Joon Kim
|
|
Young-Joon Kim
|
|
|
Chief Executive Officer and Interim Chief Financial 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 PRINCIPAL 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, 2023 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.
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Dated: May 8, 2023
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/s/ Young-Joon Kim
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Young-Joon Kim
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Chief Executive Officer and Interim Chief Financial Officer
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(Principal Financial Officer)
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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.