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


graphic
Magnachip Semiconductor Corporation
(Exact name of registrant as specified in its charter)



Delaware
 
83-0406195
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

c/o Magnachip Semiconductor, Ltd.
15F, 76 Jikji-daero 436beon-gil, Heungdeok-gu
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
Common Stock, par value $0.01 per share
 
MX
 
New York Stock Exchange



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒Yes ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
 
Accelerated filer
 
       
Non-accelerated filer
 
 
Smaller reporting company
 

       
       
Emerging growth company
 


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes ☒  No

As of April 30, 2023, the registrant had 42,265,480 shares of common stock outstanding.



MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS

         
       
Page No.
 
3
Item 1.
   
3
     
3
     
4
     
5
     
6
     
7
     
8
Item 2.
   
25
Item 3.
   
42
Item 4.
   
43
 
44
Item 1.
   
44
Item 1A.
   
44
Item 2.
   
44
Item 3.
   
44
Item 4.
   
44
Item 5.
   
44
Item 6.
   
45
 
46

PART I—FINANCIAL INFORMATION

Item 1.
Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)

   
March 31,
2023
   
December 31,
2022
 
   
(In thousands of U.S. dollars, except share data)
 
Assets
           
Current assets
           
Cash and cash equivalents
 
$
212,085
   
$
225,477
 
Accounts receivable, net
   
32,143
     
35,380
 
Inventories, net
   
36,360
     
39,883
 
Other receivables
   
5,342
     
7,847
 
Prepaid expenses
   
11,238
     
10,560
 
Hedge collateral (Note 7)
   
2,820
     
2,940
 
Other current assets (Note 18)
   
14,927
     
15,766
 
Total current assets
   
314,915
     
337,853
 
Property, plant and equipment, net
   
104,568
     
110,747
 
Operating lease right-of-use assets
   
5,413
     
5,265
 
Intangible assets, net
   
1,784
     
1,930
 
Long-term prepaid expenses
   
9,101
     
10,939
 
Deferred income taxes
   
37,380
     
38,324
 
Other non-current assets
   
14,683
     
11,587
 
Total assets
 
$
487,844
   
$
516,645
 
Liabilities and Stockholders’ Equity
               
Current liabilities
               
Accounts payable
 
$
19,921
   
$
17,998
 
Other accounts payable
   
9,216
     
9,702
 
Accrued expenses (Note 6)
   
17,125
     
9,688
 
Accrued income taxes
   
146
     
3,154
 
Operating lease liabilities
   
1,622
     
1,397
 
Other current liabilities
   
5,261
     
5,306
 
Total current liabilities
   
53,291
     
47,245
 
Accrued severance benefits, net
   
23,608
     
23,121
 
Non-current operating lease liabilities
   
3,996
     
4,091
 
Other non-current liabilities
   
13,596
     
14,035
 
Total liabilities
   
94,491
     
88,492
 
Commitments and contingencies (Note 18)
           
Stockholders’ equity
               
Common stock, $0.01 par value, 150,000,000 shares authorized, 56,437,182 shares issued and 42,589,315 outstanding at March 31, 2023 and 56,432,449 shares issued and 43,824,575 outstanding at December 31, 2022
   
564
     
564
 
Additional paid-in capital
   
267,187
     
266,058
 
Retained earnings
   
314,036
     
335,506
 
Treasury stock, 13,847,867 shares at March 31, 2023 and 12,607,874 shares at December 31, 2022, respectively
   
(173,441
)
   
(161,422
)
Accumulated other comprehensive loss
   
(14,993
)
   
(12,553
)
Total stockholders’ equity
   
393,353
     
428,153
 
Total liabilities and stockholders’ equity
 
$
487,844
   
$
516,645
 

The accompanying notes are an integral part of these consolidated financial statements.

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
   
Three Months Ended
 
   
March 31,
2023
   
March 31,
2022
 
   
(In thousands of U.S. dollars, except share data)
 
Revenues:
     
Net sales – standard products business
 
$
51,514
   
$
94,010
 
Net sales – transitional Fab 3 foundry services
   
5,491
     
10,083
 
Total revenues
   
57,005
     
104,093
 
Cost of sales:
               
Cost of sales – standard products business
   
37,312
     
56,080
 
Cost of sales – transitional Fab 3 foundry services
   
7,599
     
9,017
 
Total cost of sales
   
44,911
     
65,097
 
Gross profit
   
12,094
     
38,996
 
Operating expenses:
               
Selling, general and administrative expenses
   
12,165
     
14,163
 
Research and development expenses
   
13,298
     
11,954
 
Early termination charges
   
8,449
     
 
Total operating expenses
   
33,912
     
26,117
 
Operating income (loss)
   
(21,818
)
   
12,879
 
Interest income
    2,842       715  
Interest expense
   
(256
)
   
(111
)
Foreign currency loss, net
   
(3,430
)
   
(690
)
Other income (expense), net
   
(35
)
   
218
 
Income (loss) before income tax expense
   
(22,697
)
   
13,011
 
Income tax expense (benefit)
   
(1,227
)
   
3,483
 
Net income (loss)
 
$
(21,470
)
 
$
9,528
 
Basic earnings (loss) per common share—
 
$
(0.49
)
 
$
0.21
 
Diluted earnings (loss) per common share—
 
$
(0.49
)
 
$
0.20
 
Weighted average number of shares—
               
Basic
   
43,390,832
     
45,603,208
 
Diluted
   
43,390,832
     
46,693,294
 

The accompanying notes are an integral part of these consolidated financial statements.
 
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

   
Three Months Ended
 
   
March 31,
2023
   
March 31,
2022
 
   
(In thousands of U.S. dollars)
 
Net income (loss)
 
$
(21,470
)
 
$
9,528
 
Other comprehensive loss
               
Foreign currency translation adjustments
   
(1,908
)
   
(3,045
)
Derivative adjustments
               
Fair valuation of derivatives
   
(1,135
)
   
(1,264
)
Reclassification adjustment for loss on derivatives included in net income (loss)
   
603
     
762
 
Total other comprehensive loss
   
(2,440
)
   
(3,547
)
Total comprehensive income (loss)
 
$
(23,910
)
 
$
5,981
 

The accompanying notes are an integral part of these consolidated financial statements.
 
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

   
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
   
43,824,575
   
$
564
   
$
266,058
   
$
335,506
   
$
(161,422
)
 
$
(12,553
)
 
$
428,153
 
Stock-based compensation
   
     
     
1,120
     
     
     
     
1,120
 
Exercise of stock options
    1,400       0       9                         9  
Settlement of restricted stock units
   
3,333
     
0
     
(0
)
   
     
     
     
 
Acquisition of treasury stock
   
(1,239,993
)
   
     
     
     
(12,019
)
   
     
(12,019
)
Other comprehensive loss, net
   
     
     
     
     
     
(2,440
)
   
(2,440
)
Net loss
   
     
     
     
(21,470
)
   
     
     
(21,470
)
Balance at March 31, 2023
   
42,589,315
   
$
564
   
$
267,187
   
$
314,036
   
$
(173,441
)
 
$
(14,993
)
 
$
393,353
 
Three Months Ended March 31, 2022:
                                                       
Balance at December 31, 2021
   
45,659,304
   
$
559
   
$
241,197
   
$
343,542
   
$
(130,306
)
 
$
(2,230
)
 
$
452,762
 
Stock-based compensation
   
     
     
1,638
     
     
     
     
1,638
 
Exercise of stock options
   
151,326
     
1
     
1,780
     
     
     
     
1,781
 
Settlement of restricted stock units
   
168,795
     
2
     
(2
)
   
     
     
     
 
Acquisition of treasury stock
    (53,464 )                       (1,000 )           (1,000 )
Accelerated stock repurchase
    (1,031,576 )           17,217             (17,217 )            
Other comprehensive loss, net
   
     
     
     
     
     
(3,547
)
   
(3,547
)
Net income
   
     
     
     
9,528
     
     
     
9,528
 
Balance at March 31, 2022
   
44,894,385
   
$
562
   
$
261,830
   
$
353,070
   
$
(148,523
)
 
$
(5,777
)
 
$
461,162
 

The accompanying notes are an integral part of these consolidated financial statements.
 
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

   
Three Months Ended
 
   
March 31,
2023
   
March 31,
2022
 
   
(In thousands of U.S. dollars)
 
Cash flows from operating activities
           
Net income (loss)
 
$
(21,470
)
 
$
9,528
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities
               
Depreciation and amortization
   
4,357
     
3,891
 
Provision for severance benefits
   
2,330
     
1,670
 
Loss on foreign currency, net
   
9,082
     
6,380
 
Provision for inventory reserves
   
1,138
     
145
 
Stock-based compensation
   
1,120
     
1,638
 
Other, net
   
237
     
161
 
Changes in operating assets and liabilities
               
Accounts receivable, net
   
2,973
     
(1,213
)
Inventories
   
1,062
     
1,456
 
Other receivables
   
2,376
     
667
 
Other current assets
   
1,456
     
(6,829
)
Accounts payable
   
1,904
     
538
 
Other accounts payable
   
(1,424
)
   
(702
)
Accrued expenses
   
7,600
     
187
 
Accrued income taxes
   
(2,923
)
   
(2,346
)
Other current liabilities
   
(596
)
   
(711
)
Other non-current liabilities
   
(169
)
   
(73
)
Payment of severance benefits
   
(871
)
   
(1,389
)
Other, net
   
(306
)
   
(178
)
Net cash provided by operating activities
   
7,876
     
12,820
 
Cash flows from investing activities
               
Proceeds from settlement of hedge collateral
   
1,155
     
1,829
 
Payment of hedge collateral
   
(1,093
)
   
(2,891
)
Purchase of property, plant and equipment
   
(135
)
   
(944
)
Payment for intellectual property registration
   
(74
)
   
(59
)
Payment of guarantee deposits
   
(3,482
)
   
(79
)
Other, net
   
19
     
2
 
Net cash used in investing activities
   
(3,610
)
   
(2,142
)
Cash flows from financing activities
               
Proceeds from exercise of stock options
   
9
     
1,781
 
Acquisition of treasury stock
   
(12,264
)
   
(830
)
Repayment of financing related to water treatment facility arrangement
   
(126
)
   
(134
)
Repayment of principal portion of finance lease liabilities
   
(24
)
   
(16
)
Net cash provided by (used in) financing activities
   
(12,405
)
   
801
 
Effect of exchange rates on cash and cash equivalents
   
(5,253
)
   
(6,105
)
Net increase (decrease) in cash and cash equivalents
   
(13,392
)
   
5,374
 
Cash and cash equivalents at beginning of period
   
225,477
     
279,547
 
Cash and cash equivalents at end of period
 
$
212,085
   
$
284,921
 
Supplemental cash flow information
               
Cash paid for income taxes
 
$
2,644
   
$
5,421
 
Non-cash investing activities
               
Property, plant and equipment additions in other accounts payable
 
$
629
   
$
524
 
Non-cash financing activities
               
Acquisition of treasury stock to satisfy the tax withholding obligations in connection with equity-based compensation
 
$
   
$
996
 
Unsettled common stock repurchases
 
$
401
   
$
 

The accompanying notes are an integral part of these consolidated financial statements.

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1. Business, Basis of Presentation and Significant Accounting Policies

Business


Magnachip Semiconductor Corporation (together with its subsidiaries, the “Company”) is a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, Internet of Things (“IoT”) applications, consumer, 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
 
$
5,523
   
$
6,799
 
Semi-finished goods and work-in-process
   
39,427
     
40,265
 
Raw materials
   
6,351
     
7,460
 
Materials in-transit
   
     
36
 
Less: inventory reserve
   
(14,941
)
   
(14,677
)
Inventories, net
 
$
36,360
   
$
39,883
 



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
 
$
(14,677
)
 
$
(5,730
)
Change in reserve
               
Inventory reserve charged to costs of sales
   
(2,584
)
   
(1,607
)
Sale of previously reserved inventory
   
1,476
     
1,452
 
     
(1,108
)
   
(155
)
Write off
   
415
     
211
 
Translation adjustments
   
429
     
119
 
Ending balance
 
$
(14,941
)
 
$
(5,555
)



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
 
$
24,214
   
$
24,780
 
Machinery and equipment
   
134,843
     
137,666
 
Finance lease right-of-use assets
   
707
     
389
 
Others
   
33,529
     
33,890
 
     
193,293
     
196,725
 
Less: accumulated depreciation
   
(102,768
)
   
(101,502
)
Land
   
12,670
     
13,034
 
Construction in progress
   
1,373
     
2,490
 
Property, plant and equipment, net
 
$
104,568
   
$
110,747
 



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
 
$
8,916
   
$
(7,132
)
 
$
1,784
 
Intangible assets
 
$
8,916
   
$
(7,132
)
 
$
1,784
 

 
December 31, 2022
 
   
Gross
amount
   
Accumulated
amortization
   
Net
amount
 
Intellectual property assets
 
$
9,111
   
$
(7,181
)
 
$
1,930
 
Intangible assets
 
$
9,111
   
$
(7,181
)
 
$
1,930
 



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
 
$
5,413
   
$
5,265
 
Finance lease
Property, plant and equipment, net
   
436
     
143
 
Total lease assets
   
$
5,849
   
$
5,408
 
Liabilities
                 
Current
                 
Operating
Operating lease liabilities
 
$
1,622
   
$
1,397
 
Finance
Other current liabilities
   
90
     
90
 
Non-current
                 
Operating
Non-current operating lease liabilities
   
3,996
     
4,091
 
Finance
Other non-current liabilities
   
364
     
63
 
Total lease liabilities
   
$
6,072
   
$
5,641
 



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
 
3.4 years
   
3.7 years
 
Finance leases
 
4.1 years
   
2.4 years
 
Weighted average discount rate
           
Operating leases
   
6.6
%
   
6.6
%
Finance leases
   
7.7
%
   
7.6
%



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
 
$
555
   
$
569
 
Finance lease cost
               
Amortization of right-of-use assets
   
32
     
16
 
Interest on lease liabilities
   
7
     
2
 
Total lease cost
 
$
594
   
$
587
 



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
 
$
567
   
$
569
 
Operating cash flows from finance leases
   
7
     
2
 
Financing cash flows from finance leases
   
24
     
16
 



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
 
$
1,448
   
$
91
 
2024
   
1,925
     
122
 
2025
   
1,419
     
121
 
2026
   
937
     
108
 
2027
   
644
     
95
 
Total future lease payments
   
6,373
     
537
 
Less: Imputed interest
   
(755
)
   
(83
)
Present value of future payments
 
$
5,618
   
$
454
 

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
 
$
14,475
   
$
7,620
 
Withholding tax attributable to intercompany interest income
   
473
     
43
 
Outside service fees
   
1,625
     
1,642
 
Others
   
552
     
383
 
Accrued expenses
 
$
17,125
   
$
9,688
 


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
January 04, 2022
 
$
15,000
 
April 2023 to June 2023
March 07, 2022
 
$
24,000
 
July 2023 to December 2023
April 27, 2022
 
$
33,000
 
April 2023 to December 2023
March 08, 2023
 
$
18,000
 
July 2023 to December 2023



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
January 04, 2022
 
$
30,000
 
January 2023 to June 2023
March 07, 2022
 
$
24,000
 
July 2023 to December 2023
April 27, 2022   $
42,000   January 2023 to December 2023



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
Other current assets
  $
2     $
 
Liability Derivatives:
                 
Zero cost collars
Other current liabilities
 
$
2,641
   
$
2,015
 



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
  $
2     $
    $
2     $
    $
    $
2  
Liability Derivatives:
                                               
Zero cost collars
 
$
2,641
   
$
   
$
2,641
   
$
   
$
(1,820
)
 
$
821
 



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
 
$
2,015
   
$
   
$
2,015
   
$
   
$
(1,940
)
 
$
75


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
 
$
(1,135
)
 
$
(1,264
)
Net sales
 
$
(603
)
 
$
(762
)
Other income, net
 
$
(54
)
 
$
(129
)
    $ (1,135 )   $ (1,264 )     $ (603 )   $ (762 )     $ (54 )   $
(129 )



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
 
$
1,000
   
$
1,000
 
Total
  $
1,000     $
1,000  



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 thousand. As of March 31, 2023, $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)
  $
2     $
2      
    $
2    
 
Liabilities:
                                       
Derivative liabilities (other current liabilities)
 
$
2,641
   
$
2,641
     
   
$
2,641
     
 



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)
 
$
2,015
   
$
2,015
     
   
$
2,015
     
 



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
  $ 48,496     $ 51,567  
Provisions
    2,330       1,670  
Severance payments
    (871 )     (1,389 )
Translation adjustments
    (1,381 )     (1,077 )
      48,574       50,771  
Less: Cumulative contributions to severance insurance deposit accounts
    (24,747 )     (17,954 )
The National Pension Fund
    (40 )     (50 )
Group severance insurance plan
    (179 )     (195 )
Accrued severance benefits, net
  $ 23,608     $ 32,572  



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
 
$
634
 
2024
   
906
 
2025
   
1,502
 
2026
   
1,829
 
2027
   
1,718
 
2028
   
3,699
 
2029 – 2033
   
21,043
 



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
 
$
10,841
   
$
29,185
 
Power Solutions
   
40,673
     
64,825
 
Total standard products business
  $
51,514
    $
94,010
 
Transitional Fab 3 foundry services
   
5,491
     
10,083
 
Total revenues
 
$
57,005
   
$
104,093
 
 
   
Three Months Ended
 
   
March 31,
2023
   
March 31,
2022
 
Gross Profit
           
Standard products business
 
$
14,202
   
$
37,930
 
Transitional Fab 3 foundry services
   
(2,108
)
   
1,066
 
Total gross profit
 
$
12,094
   
$
38,996
 



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
 
$
16,496
   
$
31,030
 
Asia Pacific (other than Korea)
   
31,901
     
58,260
 
United States
   
1,045
     
2,864
 
Europe
   
2,072
     
1,856
 
Total
 
$
51,514
   
$
94,010
 



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
 
$
(13,236
)
 
$
(11,328
)
Derivative adjustments
   
(1,757
)
   
(1,225
)
Total
 
$
(14,993
)
 
$
(12,553
)



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
 
$
(11,328
)
 
$
(1,225
)
 
$
(12,553
)
Other comprehensive loss before reclassifications
   
(1,908
)
   
(1,135
)
   
(3,043
)
Amounts reclassified from accumulated other comprehensive loss
   
     
603
     
603
 
Net current-period other comprehensive loss
   
(1,908
)
   
(532
)
   
(2,440
)
Ending balance
 
$
(13,236
)
 
$
(1,757
)
 
$
(14,993
)
 
Three Months Ended March 31, 2022
 
Foreign
currency
translation
adjustments
   
Derivative
adjustments
   
Total
 
Beginning balance
 
$
(770