Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 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.) |
436beon-gil
,
Cheongju-si,
Chungcheongbuk-do,
(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 | ||
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 Yes
past 90 days. ☒
☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act. ☒ |
Accelerated filer | ☐ | ||||
Non-accelerated filer |
☐ | Smaller reporting company | ||||
| Emerging growth company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule ☒
12b-2
of the Exchange Act). ☐ Yes
No
As of October 31, 2023, the registrant had 38,763,018 shares of common stock outstanding.
Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
| Page No. | ||||||
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| Item 1. |
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| Magnachip Semiconductor Corporation and Subsidiaries Notes to Consolidated Financial Statements |
8 | |||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
22 | ||||
| Item 3. |
44 | |||||
| Item 4. |
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| Item 1. |
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| Item 1A. |
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| Item 6. |
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| 49 | ||||||
2
Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. |
Interim Consolidated Financial Statements (Unaudited) |
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, 2023 |
December 31, 2022 |
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(In thousands of U.S. dollars, except share data) |
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| Assets |
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| Current assets |
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| Cash and cash equivalents |
$ | $ | ||||||
| Accounts receivable, net |
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| Inventories, net |
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| Other receivables |
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| Prepaid expenses |
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| Hedge collateral (Note 6) |
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| Other current assets (Note 16) |
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| Total current assets |
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| Property, plant and equipment, net |
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| Operating lease right-of-use |
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| Intangible assets, net |
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| Long-term prepaid expenses |
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| Deferred income taxes |
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| Other non-current assets |
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| Total assets |
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| Liabilities and Stockholders’ Equity |
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| Current liabilities |
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| Accounts payable |
$ | $ | ||||||
| Other accounts payable |
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| Accrued expenses |
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| Accrued income taxes |
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| Operating lease liabilities |
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| Other current liabilities |
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| Total current liabilities |
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| Accrued severance benefits, net |
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| Non-current operating lease liabilities |
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| Other non-current liabilities |
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| Total liabilities |
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| Commitments and contingencies (Note 16) |
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| Stockholders’ equity |
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| Common stock, $ |
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| Additional paid-in capital |
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| Retained earnings |
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| Treasury stock, |
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| Accumulated other comprehensive loss |
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| Total stockholders’ equity |
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| Total liabilities and stockholders’ equity |
$ | $ | ||||||
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The accompanying notes are an integral part of these consolidated financial statements.
3
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
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(In thousands of U.S. dollars, except share data) |
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| Revenues: |
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| Net sales – standard products business |
$ | $ | $ | $ | ||||||||||||
| Net sales – transitional Fab 3 foundry services |
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| Total revenues |
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| Cost of sales: |
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| Cost of sales – standard products business |
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| Cost of sales – transitional Fab 3 foundry services |
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| Total cost of sales |
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| Gross profit |
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| Operating expenses: |
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| Selling, general and administrative expenses |
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| Research and development expenses |
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| Early termination and other charges, net |
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| Total operating expenses |
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| Operating income (loss) |
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| Interest income |
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| Interest expense |
( |
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| Foreign currency loss, net |
( |
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| Other income, net |
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| Loss before income tax expense |
( |
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| Income tax benefit |
( |
) | ( |
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) | ( |
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| Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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| Basic loss per common share— |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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| Diluted loss per common share— |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Weighted average number of shares— |
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| Basic |
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| Diluted |
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The accompanying notes are an integral part of these consolidated financial statements.
4
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
|||||||||||||
(In thousands of U.S. dollars) |
||||||||||||||||
| Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
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| Other comprehensive loss |
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| Foreign currency translation adjustments |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Derivative adjustments |
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| Fair valuation of derivatives |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Reclassification adjustment for loss on derivatives included in net loss |
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| Total other comprehensive loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
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| Total comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| |
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The accompanying notes are an integral part of these consolidated financial statements.
5
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
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Common Stock |
Retained Earnings |
Treasury Stock |
Total |
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| (In thousands of U.S. dollars, except share data) |
Shares |
Amount |
||||||||||||||||||||||||||
| Three Months Ended September 30, 2023: |
||||||||||||||||||||||||||||
| Balance at June 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
| Settlement of restricted stock units |
( |
) | — | — | — | ( |
) | |||||||||||||||||||||
| Acquisition of treasury stock |
( |
) | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
| Other comprehensive loss, net |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
| Net loss |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
| |
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| Balance at September 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| |
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| Three Months Ended September 30, 2022: |
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| Balance at June 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
| Settlement of restricted stock units |
— | — | ( |
) | — | — | — | ( |
) | |||||||||||||||||||
| Acquisition of treasury stock |
( |
) | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
| Other comprehensive loss, net |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
| Net loss |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
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| Balance at September 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| |
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Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
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Common Stock |
Retained Earnings |
Treasury Stock |
Total |
|||||||||||||||||||||||||
| (In thousands of U.S. dollars, except share data) |
Shares |
Amount |
||||||||||||||||||||||||||
| Nine Months Ended September 30, 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 |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
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| Balance at September 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| |
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| Nine Months Ended September 30, 2022: |
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| 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 loss |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
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| Balance at September 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| |
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The accompanying notes are an integral part of these consolidated financial statements.
6
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended |
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September 30, 2023 |
September 30, 2022 |
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(In thousands of U.S. dollars) |
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Cash flows from operating activities |
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Net loss |
$ | ( |
) | $ | ( |
) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities |
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Depreciation and amortization |
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Provision for severance benefits |
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Loss on foreign currency, net |
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Provision for inventory reserves |
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Stock-based compensation |
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Other, net |
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Changes in operating assets and liabilities |
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Accounts receivable, net |
( |
) | ||||||
Inventories |
( |
) | ||||||
Other receivables |
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Other current assets |
( |
) | ( |
) | ||||
Accounts payable |
( |
) | ||||||
Other accounts payable |
( |
) | ( |
) | ||||
Accrued expenses |
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Accrued income taxes |
( |
) | ( |
) | ||||
Other current liabilities |
( |
) | ( |
) | ||||
Other non-current liabilities |
( |
) | ||||||
Payment of severance benefits |
( |
) | ( |
) | ||||
Other, net |
( |
) | ( |
) | ||||
Net cash provided by (used in) operating activities |
( |
) | ||||||
Cash flows from investing activities |
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Proceeds from settlement of hedge collateral |
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Payment of hedge collateral |
( |
) | ( |
) | ||||
Purchase of property, plant and equipment |
( |
) | ( |
) | ||||
Payment for intellectual property registration |
( |
) | ( |
) | ||||
Collection of guarantee deposits |
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Payment of guarantee deposits |
( |
) | ( |
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Other |
— | |||||||
Net cash used in investing activities |
( |
) | ( |
) | ||||
Cash flows from financing activities |
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Proceeds from exercise of stock options |
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Acquisition of treasury stock |
( |
) | ( |
) | ||||
Repayment of financing related to water treatment facility arrangement |
( |
) | ( |
) | ||||
Repayment of principal portion of finance lease liabilities |
( |
) | ( |
) | ||||
Net cash used in financing activities |
( |
) | ( |
) | ||||
Effect of exchange rates on cash and cash equivalents |
( |
) | ( |
) | ||||
Net decrease in cash and cash equivalents |
( |
) | ( |
) | ||||
Cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ | $ | ||||||
Supplemental cash flow information |
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Cash paid for income taxes |
$ | $ | ||||||
Non-cash investing activities |
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Property, plant and equipment additions in other accounts payable |
$ | $ | ||||||
Non-cash financing activities |
||||||||
Unsettled common stock repurchases |
$ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. Business, Basis of Presentation and Significant Accounting Policies
Business
Magnachip Semiconductor Corporation (together with its subsidiaries, the “Company”) is a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, Internet of Things (“IoT”) applications, consumer, 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”, to Key Foundry Co., Ltd., a Korean corporation (“Key Foundry”). Following the consummation of the sale, the Company provided Key Foundry with 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”). The contractual obligation to provide the Transitional Fab 3 Foundry Services ended August 31, 2023, and the Company is planning to wind down these foundry services and convert portions of the idle capacity to Power Solutions standard products beginning around the second half of 2024. Because these foundry services during the wind-down period are still provided to Key Foundry by the Company using its Fab 3 based on mutually agreed terms and conditions, the Company will continue to report its revenue from providing these foundry services and related cost of sales within the Transitional Fab 3 Foundry Services line in its consolidated statement of operations until such wind down is completed. 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. The results of operations for the three and nine months ended September 30, 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 nine months ended September 30, 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. 8
2. Inventories
Inventories as of September 30, 2023 and December 31, 2022 consist of the following (in thousands):
September 30, 2023 |
December 31, 2022 |
|||||||
| Finished goods |
$ | $ | ||||||
| Semi-finished goods and work-in-process |
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| Raw materials |
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| Materials in-transit |
||||||||
| Less: inventory reserve |
( |
) | ( |
) | ||||
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| Inventories, net |
$ | $ | ||||||
| |
|
|
|
|||||
Changes in inventory reserve for the three and nine months ended September 30, 2023 and 2022 are as follows (in thousands):
Three Months Ended |
Nine Months Ended |
Three Months Ended |
Nine Months Ended |
|||||||||||||
September 30, 2023 |
September 30, 2022 |
|||||||||||||||
| Beginning balance |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Change in reserve |
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| Inventory reserve charged to costs of sales |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Sale of previously reserved inventory |
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| ( |
) | ( |
) | ( |
) | ( |
) | |||||||||
| Write off |
||||||||||||||||
| Translation adjustments |
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| |
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| Ending balance |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
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|
|||||||||
Inventory reserve represents the Company’s best estimate in value lost due to excessive inventory level, physical deterioration, obsolescence, changes in price levels, or other causes based on individual facts and circumstances. Inventory reserve relates to inventory items including finished goods, semi-finished goods, and raw materials. Write off of this reserve is recognized only when the related inventory has been disposed or scrapped.
work-in-process
9
3. Property, Plant and Equipment
Property, plant and equipment as of September 30, 2023 and December 31, 2022 are comprised of the following (in thousands):
September 30, 2023 |
December 31, 2022 |
|||||||
Buildings and related structures |
$ | $ | ||||||
Machinery and equipment |
||||||||
Finance lease right-of-use |
||||||||
Others |
||||||||
Less: accumulated depreciation |
( |
) | ( |
) | ||||
Land |
||||||||
Construction in progress |
||||||||
Property, plant and equipment, net |
$ | $ | ||||||
Aggregate depreciation expenses totaled $12,111 thousand and $10,699 thousand for the nine months ended September 30, 2023 and 2022, respectively.
4. Intangible Assets
Intangible assets as of September 30, 2023 and December 31, 2022 are comprised of the following (in thousands):
September 30, 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 $472 thousand and $526 thousand for the nine months ended September 30, 2023 and 2022, respectively.
5. Accrued Expenses
Accrued expenses as of September 30, 2023 and December 31, 2022 are comprised of the following (in thousands):
September 30, 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 |
$ | $ | ||||||
10
6. Derivative Financial Instruments
The Company’s Korean subsidiary from time to time has entered into zero cost collar contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues.
Details of the zero cost collar contracts as of September 30, 2023 are as follows (in thousands):
Date of transaction |
Total notional amount |
Month of settlement | ||||
| $ | ||||||
| $ | ||||||
| $ | ||||||
| $ | ||||||
| $ | ||||||
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 | ||||
| $ | ||||||
| $ | ||||||
| $ | ||||||
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 liabilities as of September 30, 2023 and December 31, 2022 are as follows (in thousands):
Derivatives designated as hedging instruments: |
September 30, 2023 |
December 31, 2022 |
||||||||||
Liability Derivatives: |
||||||||||||
Zero cost collars |
$ | $ | ||||||||||
Offsetting of derivative liabilities as of September 30, 2023 is as follows (in thousands):
As of September 30, 2023 |
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 |
|||||||||||||||||||
Financial instruments |
Cash collateral pledged |
|||||||||||||||||||||||
Liability Derivatives: |
||||||||||||||||||||||||
Zero cost collars |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
Offsetting of derivative liabilities as of December 31, 2022 is as follows (in thousands):
As of December 31, 2022 |
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 |
|||||||||||||||||||
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 September 30, 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 Gain (Loss) Recognized in Statement of Operations on Derivatives |
|||||||||||||||||||||||||||||
Three Months Ended September 30, |
Three Months Ended September 30, |
Three Months Ended September 30, |
||||||||||||||||||||||||||||||
2023 |
2022 |
2023 |
2022 |
2023 |
2022 |
|||||||||||||||||||||||||||
| Zero cost collars |
$ | ( |
) | $ | ( |
) | Net sales | $ | ( |
) | $ | ( |
) | Other income, net | $ | ( |
) | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
The following table summarizes the impact of derivative instruments on the consolidated statements of operations for the nine months ended September 30, 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 Gain (Loss) Recognized in Statement of Operations on Derivatives |
|||||||||||||||||||||||||||||
Nine Months Ended September 30, |
Nine Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||||||||||||||||||
2023 |
2022 |
2023 |
2022 |
2023 |
2022 |
|||||||||||||||||||||||||||
| Zero cost collars |
$ | ( |
) | $ | ( |
) | Net sales | $ | ( |
) | $ | ( |
) | Other income, net | $ | ( |
) | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
As of September 30, 2023, the amount expected to be reclassified from accumulated other comprehensive loss into loss within the next 12 months is $1,204 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 September 30, 2023 and December 31, 2022 are as follows (in thousands):
| Counterparty |
September 30, 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 thousand. As of September 30, 2023, $1,680 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.
12
7. Fair Value Measurements
Fair Value of Financial Instruments
As of September 30, 2023, 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 September 30, 2023 |
Fair Value Measurement September 30, 2023 |
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) |
$ | $ | — | $ | — | |||||||||||||||
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.
13
8. 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 September 30, 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 |
Nine Months Ended |
Three Months Ended |
Nine Months Ended |
|||||||||||||
September 30, 2023 |
September 30, 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 .
14
9. Early Termination and Other Charges
During the first quarter of 2023, the Company commenced the voluntary resignation program (the “2023 Voluntary Resignation Program”), which was available for the employees with more than 20 years of service. For the nine months ended September 30, 2023, the Company recorded in its consolidated statement of operations $8,449 thousand of termination related charges as “early termination and other charges”, which were paid during the second quarter of 2023.
For the nine months ended September 30, 2023, the Company also recorded $802 thousand of
one-time
employee incentives, which were paid during the third quarter of 2023.
For the three and nine months ended September 30, 2022, the Company recorded $2,821 217 thousand and $1,014 thousand, respectively, incurred in connection with certain strategic evaluations, both of which were offset in part by a $537
one-time
employee incentives, in each period, and professional service fees and expenses of $back-end
line in our fabrication facility in Gumi. 10. Foreign Currency Loss, Net
Net foreign currency gain or loss includes 281,685 thousand and $310,988 thousand, respectively. The Korean won to U.S. dollar exchange rates were 1,344.8 :1 and 1,267.3 :1 using the first base rate as of September 30, 2023 and December 31, 2022, respectively, as quoted by the KEB Hana Bank.
non-cash
translation gain or loss associated with intercompany balances. A substantial portion of the Company’s net foreign currency gain or loss is non-cash
translation gain or loss associated with intercompany long-term loans to the Company’s Korean subsidiary. The loans are denominated in U.S. dollars and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of September 30, 2023 and December 31, 2022, the outstanding intercompany loan balances including accrued interest between the Korean subsidiary and the Dutch subsidiary were $11. 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 and nine months ended September 30, 2023, the Company recorded an income tax benefit of $4,373 thousand and $8,577 thousand, respectively, primarily related to its primary operating entity in Korea based on the estimated taxable loss for the respective period.
For the three and nine months ended September 30, 2022, the Company recorded an income tax benefit of $3,942 thousand and $1,356 thousand, respectively, primarily attributable to a decrease in its Korean subsidiary’s
pre-tax
income for the respective period due to the foreign currency translation loss recorded in its Korean subsidiary in connection with intercompany loans. 15
12. Geographic and Other Information
The following sets forth information relating to the single operating segment (in thousands):
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
|||||||||||||
| Revenues |
||||||||||||||||
| Standard products business |
||||||||||||||||
| Display Solutions |
$ | $ | $ | $ | ||||||||||||
| Power Solutions |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total standard products business |
||||||||||||||||
| Transitional Fab 3 foundry services |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total revenues |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 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 |
Nine Months Ended |
|||||||||||||||
September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
|||||||||||||
| Korea |
$ | $ | $ | $ | ||||||||||||
| Asia Pacific (other than Korea) |
||||||||||||||||
| United States |
||||||||||||||||
| Europe |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
For the three months ended September 30, 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 73.3 % and 74.2 %, respectively. For the nine months ended September 30, 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 represented 66.1 % and 66.4 %, 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 74 % and 64 % for the three months ended September 30, 2023 and 2022, respectively, and 70
For the three months ended September 30, 2023, the Company had one customer that represented 18.8 % of its net sales—standard products business. For the nine months ended September 30, 2023, the Company had two customers that represented 15.9 % and 13.3 % of its net sales—standard products business, respectively. For the three months ended September 30, 2022, the Company had one customer that represented 16.2 % of its net sales – standard products business. For the nine months ended September 30, 2022, the Company had two customers that represented 20.6 % and 13.9 % of its net sales – standard products business.
As of September 30, 2023, two customers of the Company’s standard products business accounted for 30.6 % and 10.4 % 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.
16
13. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following as of September 30, 2023 and December 31, 2022, respectively (in thousands):
September 30, 2023 |
December 31, 2022 |
|||||||
| Foreign currency translation adjustments |
$ | ( |
) | $ | ( |
) | ||
| Derivative adjustments |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total |
$ | ( |
) | $ | ( |
) | ||
| |
|
|
|
|||||
Changes in accumulated other comprehensive loss for the three months ended September 30, 2023 and 2022 are as follows (in thousands):
| Three Months Ended September 30, 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 September 30, 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 |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| |
|
|
|
|
|
|||||||
Changes in accumulated other comprehensive loss for the nine months ended September 30, 2023 and 2022 are as follows (in thousands):
| Nine Months Ended September 30, 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 |
$ | ( | ||||||||||