SEC Filing | Magnachip Semiconductor Corporation

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 001-34791

MagnaChip Semiconductor Corporation

(Exact name of registrant as specified in its charter)

Delaware

83-0406195

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

c/o MagnaChip Semiconductor S.A.

74, rue de Merl, B.P. 709 L-2146

Luxembourg R.C.S.

Luxembourg B97483

(352) 45-62-62

(Address, zip code, and telephone number, including area code, of registrant’s principal executive offices)

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. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. x Yes ¨ No

As of October 31, 2011, the registrant had 39,363,517 shares of common stock outstanding.

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS


			Page No.
PART I FINANCIAL INFORMATION				4

	Item 1.	Interim Consolidated Financial Statements (Unaudited)		4

		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		4

		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010		5

		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2011 and 2010		6

		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010		8

		MagnaChip Semiconductor Corporation and Subsidiaries Notes to Consolidated Financial Statements		9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		55

	Item 4.	Controls and Procedures		55

PART II OTHER INFORMATION				56

	Item 1A.	Risk Factors		56

	Item 6.	Exhibits		71

SIGNATURES				72

FORWARD LOOKING STATEMENTS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, 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 and in “Part II: Item 1A. Risk Factors” in this report.

All forward-looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information or future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Statements made in this Quarterly Report on Form 10-Q, unless the context otherwise requires, 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.

PART I—FINANCIAL INFORMATION

Item 1.

Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands of US dollars, except share data)


	September 30, 2011			December 31, 2010
Assets
Current assets
Cash and cash equivalents	$	159,468		$	172,172
Restricted cash		9,210			—
Accounts receivable, net		124,150			119,054
Inventories, net		69,817			68,435
Other receivables		1,950			2,919
Prepaid expenses		8,770			8,207
Other current assets		8,159			18,920

Total current assets		381,524			389,707

Property, plant and equipment, net		180,032			179,012
Intangible assets, net		18,565			27,538
Long-term prepaid expenses		4,759			8,235
Other non-current assets		20,986			21,252

Total assets	$	605,866		$	625,744

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	75,947		$	58,264
Other accounts payable		12,425			14,645
Accrued expenses		37,012			32,635
Current portion of capital lease obligations		4,415			5,557
Other current liabilities		13,762			5,048

Total current liabilities		143,561			116,149

Long-term borrowings, net		201,325			246,882
Long-term obligations under capital lease		—			3,105
Accrued severance benefits, net		91,106			87,778
Other non-current liabilities		9,927			8,979

Total liabilities		445,919			462,893

Stockholders’ equity
Common stock, $0.01 par value, 150,000,000 shares authorized, 39,354,006 and 38,401,985 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		394			384
Additional paid-in capital		98,310			95,585
Retained earnings		70,245			72,157
Accumulated other comprehensive loss		(9,002	)		(5,275	)

Total stockholders’ equity		159,947			162,851

Total liabilities and stockholders’ equity	$	605,866		$	625,744

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

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands of US dollars, except share data)


	Three Months Ended						Nine Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
Net sales	$	200,405		$	209,448		$	592,005		$	583,633
Cost of sales		140,284			140,133			409,228			400,426

Gross profit		60,121			69,315			182,777			183,207

Selling, general and administrative expenses		17,881			16,202			50,740			50,074
Research and development expenses		19,003			23,119			58,115			64,193
Restructuring and impairment charges		1,621			442			4,096			1,045
Special expense for IPO incentive		—			—			12,146			—

Operating income		21,616			29,552			57,680			67,895

Other income (expenses)
Interest expense, net		(5,860	)		(7,312	)		(19,340	)		(15,918	)
Foreign currency gain (loss), net		(68,058	)		41,400			(28,465	)		14,743
Loss on early extinguishment of senior notes		(1,357	)		—			(5,460	)		—
Other		(558	)		312			(189	)		(690	)

		(75,833	)		34,400			(53,454	)		(1,865	)

Income (loss) before income taxes		(54,217	)		63,952			4,226			66,030

Income tax expense		1,793			2,457			6,138			4,181

Net income (loss)	$	(56,010	)	$	61,495		$	(1,912	)	$	61,849

Earnings (loss) per common share—
Basic	$	(1.43	)	$	1.63		$	(0.05	)	$	1.64
Diluted	$	(1.43	)	$	1.57		$	(0.05	)	$	1.58
Weighted average number of shares—
Basic		39,064,071			37,819,820			38,823,720			37,815,080
Diluted		39,064,071			39,200,585			38,823,720			39,113,200

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; in thousands of US dollars, except share data)


	Common Stock					Additional Paid-In		Retained Earnings (Accumulated			Accumulated Other Comprehensive
	Shares			Amount		Capital		deficit)			Income (loss)			Total
Three Months Ended September 30, 2011
Balance at July 1, 2011		39,357,471		$	394	$	97,987	$	126,255		$	(34,822	)	$	189,814
Forfeiture of restricted units		(3,465	)		—		—		—			—			—
Stock-based compensation		—			—		323		—			—			323
Comprehensive loss:
Net loss		—			—		—		(56,010	)		—			(56,010	)
Fair valuation of derivatives		—			—		—		—			(16,289	)		(16,289	)
Reclassification to net loss from accumulated other comprehensive gain related to hedge derivatives		—			—		—		—			(1,536	)		(1,536	)
Foreign currency translation adjustments		—			—		—		—			43,801			43,801
Unrealized loss on investments		—			—		—		—			(156	)		(156	)

Total comprehensive loss															(30,190	)

Balance at September 30, 2011		39,354,006		$	394	$	98,310	$	70,245		$	(9,002	)	$	159,947

Nine Months Ended September 30, 2011 Balance at January 1, 2011		38,401,985		$	384	$	95,585	$	72,157		$	(5,275	)	$	162,851
Forfeiture of restricted units		(3,465	)		—		—		—			—			—
Stock-based compensation		—			—		1,140		—			—			1,140
Issuance of new stock		950,000			10		1,553		—			—			1,563
Exercise of stock options		5,486			—		32		—			—			32
Comprehensive loss:
Net loss		—			—		—		(1,912	)		—			(1,912	)
Fair valuation of derivatives		—			—		—		—			(10,213	)		(10,213	)
Reclassification to net loss from accumulated other comprehensive gain related to hedge derivatives		—			—		—		—			(11,478	)		(11,478	)
Foreign currency translation adjustments		—			—		—		—			18,083			18,083
Unrealized loss on investments		—			—		—		—			(119	)		(119	)

Total comprehensive loss															(5,639	)

Balance at September 30, 2011		39,354,006		$	394	$	98,310	$	70,245		$	(9,002	)	$	159,947

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; in thousands of US dollars, except share data)


	Common Stock					Additional Paid-In			Retained Earnings (Accumulated			Accumulated Other Comprehensive
	Shares			Amount		Capital			deficit)			Income (loss)			Total
Three Months Ended September 30, 2010
Balance at July 1, 2010		38,404,294		$	384	$	94,293		$	(1,609	)	$	8,852		$	101,920
Forfeiture of restricted units		(2,310	)		—		—			—			—			—
Stock-based compensation		—			—		663			—			—			663
Comprehensive income:
Net Income		—			—		—			61,495			—			61,495
Fair valuation of derivatives		—			—		—			—			8,207			8,207
Reclassification to net income from accumulated other comprehensive loss related to hedge derivatives		—			—		—			—			2,374			2,374
Foreign currency translation adjustments		—			—		—			—			(27,478	)		(27,478	)
Unrealized loss on investments		—			—		—			—			(76	)		(76	)

Total comprehensive income																44,522

Balance at September 30, 2010		38,401,984		$	384	$	94,956		$	59,886		$	(8,121	)	$	147,105

Nine Months Ended September 30, 2010
Balance at January 1, 2010		38,385,544		$	384	$	223,451		$	(1,963	)	$	(6,182	)	$	215,690
Forfeiture of restricted units		(2,310	)		—		—			—			—			—
Stock-based compensation		18,750			—		2,202			—			—			2,202
Distribution to stockholders		—			—		(130,697	)		—			—			(130,697	)
Comprehensive income:
Net income		—			—		—			61,849			—			61,849
Fair valuation of derivatives		—			—		—			—			2,805			2,805
Reclassification to net income from accumulated other comprehensive loss related to hedge derivatives		—			—		—			—			4,252			4,252
Foreign currency translation adjustments		—			—		—			—			(9,056	)		(9,056	)
Unrealized gains on investments		—			—		—			—			60			60

Total comprehensive income																59,910

Balance at September 30, 2010		38,401,984		$	384	$	94,956		$	59,886		$	(8,121	)	$	147,105

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

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands of US dollars)


	Nine Months Ended
	September 30, 2011			September 30, 2010
Cash flows from operating activities
Net income (loss)	$	(1,912	)	$	61,849
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		42,368			44,332
Provision for severance benefits		13,137			15,123
Amortization of debt issuance costs and original issue discount		728			687
Loss (gain) on foreign currency translation, net		33,220			(16,704	)
Gain on disposal of property, plant and equipment, net		(15	)		(7	)
Loss on disposal of intangible assets, net		17			9
Restructuring and impairment charges		4,096			1,045
Stock-based compensation		1,798			4,072
Cash used for reorganization items		—			1,573
Loss on early extinguishment of senior notes		5,460			—
Other		651			951
Changes in operating assets and liabilities
Accounts receivable		(4,400	)		(61,771	)
Inventories		(4,400	)		193
Other receivables		836			(1,229	)
Other current assets		(3,196	)		(221	)
Deferred tax assets		1,483			1,133
Accounts payable		15,072			10,400
Other accounts payable		7,157			6,332
Accrued expenses		(18,278	)		22,094
Other current liabilities		(1,209	)		516
Payment of severance benefits		(6,549	)		(4,707	)
Other non-current liabilities		141			(2,470	)

Net cash provided by operating activities before reorganization items		86,205			83,200

Cash used for reorganization items		—			(1,573	)

Net cash provided by operating activities		86,205			81,627

Cash flows from investing activities
Increase in restricted cash		(9,711	)		—
Proceeds from disposal of plant, property and equipment		29			10
Purchase of plant, property and equipment		(42,945	)		(29,739	)
Payment for intellectual property registration		(521	)		(437	)
Decrease in short-term financial instruments		—			329
Collection of guarantee deposits		984			1,011
Payment of guarantee deposits		(2,489	)		(794	)
Other		(625	)		(13	)

Net cash used in investing activities		(55,278	)		(29,633	)

Cash flows from financing activities
Proceeds from issuance of common stock		8,835			—
Proceeds from issuance of senior notes		—			246,685
Debt issuance costs paid		—			(8,313	)
Distribution to stockholders		—			(130,697	)
Repayment of long-term borrowings		—			(61,750	)
Repurchase of senior notes		(50,307	)		—
Repayment of obligations under capital lease		(4,831	)		(1,812	)

Net cash provided by (used in) financing activities		(46,303	)		44,113
Effect of exchange rates on cash and cash equivalents		2,672			397

Net increase (decrease) in cash and cash equivalents		(12,704	)		96,504

Cash and cash equivalents
Beginning of the period		172,172			64,925

End of the period	$	159,468		$	161,429

Supplemental cash flow information
Cash paid for interest	$	14,004		$	3,499

Cash paid for income taxes	$	1,776		$	(290	)

Noncash transactions
Deferred offering costs reclassified as reduction of additional paid-in capital	$	7,236		$	—
Assets acquired under capital lease obligations	$	—		$	10,673

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

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited; tabular dollars in thousands, except share data)

1. General

The Company

MagnaChip Semiconductor Corporation (together with its subsidiaries, the “Company”) is a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer applications. The Company’s business is comprised of three key segments: Display Solutions, Power Solutions and Semiconductor Manufacturing Services. The Company’s Display Solutions products include display drivers for use in a wide range of flat panel displays and mobile multimedia devices. The Company’s Power Solutions products include discrete and integrated circuit solutions for power management in high-volume consumer applications. The Company’s Semiconductor Manufacturing Services segment provides specialty analog and mixed-signal foundry services for fabless semiconductor companies that serve the consumer, computing and wireless end markets.

2. Significant Accounting Policies

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 (“US GAAP”). These interim consolidated financial statements include all adjustments consisting only of normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair presentation of financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with ASC 270, “Interim Reporting,” (“ASC 270”) and, accordingly, do not include all of the information and note disclosures required by US GAAP for complete financial statements. The results of operations for the nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for a full year or for any other periods.

The December 31, 2010 balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP.

Recent Accounting Pronouncements

In May, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04 “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The ASU is the result of joint efforts by the FASB and the International Accounting Standards Board (“IASB”) to develop a single, converged fair value framework. While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands existing disclosure requirements for fair value measurements and makes other amendments. Key additional disclosures include quantitative disclosures about unobservable inputs in Level 3 measures, qualitative information about sensitivity of Level 3 measures and valuation process, and classification within the fair value hierarchy for instruments where fair value is only disclosed in the footnotes but carrying amount is on some other basis. For public companies, the ASU is effective for interim and annual periods beginning after December 15, 2011. The Company does not expect adoption of this ASU to have a material impact on our results of operations, financial position or cash flow.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income,” which amends current comprehensive income guidance. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, it requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (“OCI”). The ASU does not change the items that must be reported in OCI. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. The Company does not expect adoption of this ASU to have a material impact on our results of operations, financial position or cash flow.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

3. Completion of Initial Public Offering

Prior to the Company’s initial public offering (“IPO”), the Company’s board of directors and the holders of a majority of its outstanding common units elected to convert the Company from a Delaware limited liability company to a Delaware corporation and to change the Company’s name from MagnaChip Semiconductor LLC to MagnaChip Semiconductor Corporation. The corporate conversion was completed on March 10, 2011. In connection with the corporate conversion, outstanding common units of MagnaChip Semiconductor LLC were automatically converted into shares of common stock of the Company, outstanding options to purchase common units of the Company were automatically converted into options to purchase shares of common stock of the Company and outstanding warrants to purchase common units of MagnaChip Semiconductor LLC were automatically converted into warrants to purchase shares of common stock of the Company, all at a ratio of one share of common stock for eight common units.

On March 16, 2011, the Company also completed an IPO of 9,500,000 shares of common stock at an offering price of $14.00 per share and on March 11, 2011 listed on the NYSE. All shares were sold in the form of depositary shares and each depositary share represented an ownership interest in one share of common stock. Of the 9,500,000 shares, 950,000 shares were newly issued by the Company and 8,550,000 shares were sold by selling stockholders. The Company received $12,369 thousand of net proceeds from the issuance of the new shares of common stock after deducting underwriters’ discounts and commissions, and the Company did not receive any proceeds from the sale of shares of common stock offered by the selling stockholders. The Company incurred $10,807 thousand of IPO expenses that were recorded as reduction of additional paid-in capital in the consolidated balance sheets.

The Company previously stated an intention to use a part of the net proceeds from the IPO to make incentive payments to all employees, excluding management. The payment of such employee incentives was contingent upon the consummation of the IPO. The Company paid $12,146 thousand of the incentives in March 2011.

4. Inventories

Inventories as of September 30, 2011 and December 31, 2010 consist of the following:


	September 30, 2011			December 31, 2010
Finished goods	$	10,071		$	13,529
Semi-finished goods and work-in-process		46,589			50,542
Raw materials		14,299			9,762
Materials in-transit		905			1,643
Less: inventory reserve		(2,047	)		(7,041	)

Inventories, net	$	69,817		$	68,435

5. Property, Plant and Equipment

Property, plant and equipment as of September 30, 2011 and December 31, 2010 comprise the following:


	September 30, 2011			December 31, 2010
Buildings and related structures	$	71,398		$	73,945
Machinery and equipment		140,800			112,398
Vehicles and others		10,603			8,007
Equipment under capital lease		11,085			11,457

		233,886			205,807
Less: accumulated depreciation		(71,320	)		(41,440	)
accumulated depreciation on equipment under capital lease		(2,232	)		(836	)
Land		15,575			15,481
Construction in progress		4,123			—

Property, plant and equipment, net	$	180,032		$	179,012

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Prior to July 1, 2011, the Company depreciated machinery and measurement equipment using the straight-line method over 5 to 10 years. However, based on an evaluation of the appropriateness of depreciable lives including a review of historical usage and a change in its strategic business plan, the Company determined that machinery and measurement equipment have a longer life than previously estimated. As a result, the Company changed the estimate of depreciable lives for machinery and measurement equipment to 10 to 12 years. The purpose of this change was to more accurately reflect the productive life of these assets. In accordance with ASC 250-10-45, “Accounting Changes and Error Corrections,” the change in life has been accounted for as a change in accounting estimate on a prospective basis from July 1, 2011. As a result of the change in the estimated life of machinery and measurement equipment, cost of sales was $1.6 million lower, net income was $1.8 million higher and net income per diluted share was $0.05 higher for the three and nine months ended September 30, 2011.

6. Intangible Assets

Intangible assets as of September 30, 2011 and December 31, 2010 are as follows:


	September 30, 2011			December 31, 2010
Technology	$	20,657		$	19,969
Customer relationships		26,182			27,115
Intellectual property assets		5,747			5,444
In-process research and development		—			3,418
Less: accumulated amortization		(34,021	)		(28,408	)

Intangible assets, net	$	18,565		$	27,538

7. Derivative Financial Instruments

The Company’s Korean subsidiary entered into option, forward and 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 derivative contracts as of September 30, 2011 are as follows:


Date of transaction	Type of derivative	Total notional amount		Month of settlement
August 12, 2010	Zero cost collar	$	54,000	October to December 2011
January 17, 2011	Zero cost collar		60,000	January to June 2012
March 16, 2011	Zero cost collar		24,000	January to March 2012
August 2, 2011	Zero cost collar		24,000	April to June 2012
August 8, 2011	Forward		54,000	July to September 2012
August 19, 2011	Forward		54,000	October to December 2012

The option, forward and zero cost collar contracts qualify as cash flow hedges under ASC 815, “Derivatives and Hedging,” (“ASC 815”), 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 Company is utilizing the “hypothetical derivative” method to measure the effectiveness by comparing the changes in value of the actual derivative versus the change in fair value of the “hypothetical derivative.”

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

The fair values of the Company’s outstanding option, forward and zero cost collar contracts recorded as assets and liabilities as of September 30, 2011 and December 31, 2010 are as follows:


Derivatives designated as hedging instruments:		September 30, 2011		December 31, 2010
Asset Derivatives:
Options	Other current assets	$	—	$	104
Forward	Other current assets	$	—	$	6,674
Zero cost collars	Other current assets	$	—	$	1,544
Liabilities Derivatives:
Forward	Other current liabilities	$	3,965	$	—
Forward	Other non current liabilities	$	3,952	$	—
Zero cost collars	Other current liabilities	$	5,355	$	—

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or 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 statement of operations for the three months ended September 30, 2011:


Derivatives in Cash Flow Hedging Relationships	Amount of Loss Recognized in AOCI on Derivatives (Effective Portion)			Location of Gain Reclassified from AOCI into Statement of Operations (Effective Portion)	Amount of Gain Reclassified from AOCI into Statement of Operations (Effective Portion)		Location of Gain (Loss) Recognized in Statement of Operations on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Statement of Operations on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Forward		(8,044	)	Net sales		—	Other income (expenses) — Others		171
Zero cost collars		(8,245	)	Net sales		1,536	Other income (expenses) — Others		(729	)

Total	$	(16,289	)		$	1,536		$	(558	)

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the three months ended September 30, 2010:


Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)			Location of Loss Reclassified from AOCI into Statement of Operations (Effective Portion)	Amount of Loss Reclassified from AOCI into Statement of Operations (Effective Portion)			Location of Gain Recognized in Statement of Operations on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain Recognized in Statement of Operations on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Options	$	(24	)	Net sales	$	(230	)	Other income (expenses) — Others	$	—
Forward		7,108		Net sales		(2,144	)	Other income (expenses) — Others		281
Zero cost collars		1,123		Net sales		—		Other income (expenses) — Others		31

Total	$	8,207			$	(2,374	)		$	312

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the nine months ended September 30, 2011:


Derivatives in Cash Flow Hedging Relationships	Amount of Loss Recognized in AOCI on Derivatives (Effective Portion)			Location of Gain (Loss) Reclassified from AOCI into Statement of Operations (Effective Portion)	Amount of Gain (Loss) Reclassified from AOCI into Statement of Operations (Effective Portion)			Location of Gain (Loss) Recognized in Statement of Operations on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Statement of Operations on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Options	$	(85	)	Net sales	$	(829	)	Other income (expenses) — Others	$	(18	)
Forward		(5,337	)	Net sales		10,771		Other income (expenses) — Others		435
Zero cost collars		(4,791	)	Net sales		1,536		Other income (expenses) — Others		(614	)

Total	$	(10,213	)		$	11,478			$	(197	)

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the nine months ended September 30, 2010:


Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)			Location of Loss Reclassified from AOCI into Statement of Operations (Effective Portion)	Amount of Loss Reclassified from AOCI into Statement of Operations (Effective Portion)			Location of Gain (Loss) Recognized in Statement of Operations on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Statement of Operations on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Options	$	(1,345	)	Net sales	$	(413	)	Other income (expenses) — Others	$	(62	)
Forward		3,027		Net sales		(3,839	)	Other income (expenses) — Others		(663	)
Zero cost collars		1,123		Net sales		—		Other income (expenses) — Others		31

Total	$	2,805			$	(4,252	)		$	(694	)

The estimated net loss as of September 30, 2011 that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings within the next twelve months is $9,440 thousand.

The Company’s option, forward and zero cost collar contracts are subject to termination upon the occurrence of the following events:

(i) On the last day of a fiscal quarter, the sum of qualified and unrestricted cash and cash equivalents held by the Company is less than $30 million.

(ii) The rating of the Company’s debt is B- or lower by Standard & Poor’s Ratings Group or any successor rating agency thereof (“S&P”) or B3 or lower by Moody’s Investor Services, Inc. or any successor rating agency thereof (“Moody’s”) or the Company’s debt ceases to be assigned a rating by either S&P or Moody’s.

In addition, the Company is required to deposit cash collateral with Goldman Sachs International Bank (“GS”), the counterparty to the forward and zero cost collar contracts, for any exposure in excess of $5 million. As of September 30, 2011, the Company has transferred $9.2 million of cash collateral to GS for the purpose of credit support to the counterparty. This cash collateral is changed depending on derivative market exposures. GS is required to return the cash collateral to the Company when the derivative market exposures decreases. Under this circumstance, the Company recorded the balance of $9.2 million as restricted cash in the balance sheet as of September 30, 2011.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

8. Fair Value Measurements

The Company’s assets measured at fair value on a recurring basis as of September 30, 2011, and the basis for that measurement is as follows:


	Carrying Value		Fair Value Measurement		Quoted Prices in Active Markets for Identical Asset (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available-for-sale securities		548		548		548		—		—
Liabilities:
Current derivative liabilities	$	9,320	$	9,320	$	—	$	9,320	$	—
Non current derivative liabilities	$	3,952	$	3,952	$	—	$	3,952	$	—

9. Long-Term Borrowings

Long-term borrowings as of September 30, 2011 and December 31, 2010 are as follows:


	September 30, 2011			December 31, 2010
10.500% senior notes due April 2018		203,691			250,000
Discount on 10.500% senior notes due April 2018		(2,366	)		(3,118	)

Long-term borrowings, net of unamortized discount	$	201,325		$	246,882

On May 16, 2011, two of the Company’s wholly-owned subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, repurchased $35.0 million out of $250.0 million aggregate principal amount of the Company’s 10.500% senior notes due April 15, 2018 at a price of 109.0% from funds affiliated with Avenue Capital Management II, L.P.

On September 19, 2011, two of the Company’s wholly-owned subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, additionally repurchased $11.3 million out of the Company’s $215.0 million aggregate principal amount of 10.500% senior notes due April 15, 2018 at a price of 107.5% from unrelated note holders in the open market.

In connection with the repurchases of the Company’s senior notes, the Company recognized $5,460 thousand of loss on early extinguishment of senior notes, which consisted of $3,998 thousand from repurchase premium, $554 thousand from write-off of discounts, $609 thousand from write-off of debt issuance costs and $299 thousand from incurrence of direct legal and advisory service fees.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

10. Capital Leases

The Company entered into several lease agreements for the use of equipment for manufacturing and research and development. These leases are accounted for as capital leases as the ownership of the equipment will be transferred to the Company upon expiration of the lease terms, or the Company has bargain purchase options at the end of the lease terms.


Payable during	Capital Lease
Remainder of 2011	$	1,494
2012		3,094
2013		26

Total future minimum lease payments		4,614
Less: Amount representing interest (a)		(199	)

Present value of net minimum lease payments		4,415
Less: Current portion of capital lease obligations		(4,415	)

Long-term obligations under capital lease		—

(a)	The lessor’s implicit rate at lease inception was applied.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

11. Accrued Severance Benefits

The majority of accrued severance benefits is for employees in the Company’s Korean subsidiary, MagnaChip Semiconductor Ltd. (Korea). Pursuant to the Employee Retirement Benefit Security Act of Korea, most 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, 2011, 98.3% of employees of the Company were eligible for severance benefits.

Changes in accrued severance benefits for each period are as follows:


	Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended
	September 30, 2011						September 30, 2010
Beginning balance	$	98,647		$	88,973		$	77,538		$	73,646
Provisions		4,741			13,137			5,743			15,123
Severance payments		(2,804	)		(6,549	)		(1,947	)		(4,707	)
Translation adjustments		(8,370	)		(3,347	)		4,802			2,074

		92,214			92,214			86,136			86,136
Less: Cumulative contributions to the National Pension Fund		(414	)		(414	)		(487	)		(487	)
Group Severance insurance plan		(694	)		(694	)		(706	)		(706	)

Accrued severance benefits, net	$	91,106		$	91,106		$	84,943		$	84,943

The severance benefits are funded approximately 1.20% and 1.48% as of September 30, 2011 and 2010, respectively, through the Company’s National Pension Fund and group severance insurance plan which will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.

The Company is liable to pay the following future benefits to its non-executive employees upon their normal retirement age:


	Severance benefit
Remainder of 2011	$	—
2012		154
2013		—
2014		311
2015		337
2016		1,167
2017 – 2021		12,982

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.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

12. Restructuring and Impairment Charges

2011 Restructuring and Impairment Charge

The Company recognized $1,610 and $2,409 thousand of impairment charges for the three and nine months ended September 30, 2011 from nine and twelve abandoned in-process research and development projects and one abandoned system project. The Company recognized $90 thousand of impairment charges for the nine months ended September 30, 2011 from impairment of tangible and intangible assets caused by the closure of the Company’s research and development center in Japan.

The Company recognized $11 and $1,597 thousand of restructuring charges for the three and nine months ended September 30, 2011, which were incurred by the closure of the Company’s research and development center in Japan and sales subsidiary in U.K.

2010 Restructuring and Impairment Charges

The Company recognized $442 thousand of impairment charges for the three months ended September 30, 2010, which consists

of $391 thousand from in-process research and development annual impairment test performed on September 30, 2010 and $51 thousand from one abandoned in-process research and development project. The Company recognized $1,045 thousand of impairment charges for the nine months ended September 30, 2010, which consists of $391 thousand from in-process research and development annual impairment test and $654 thousand from five abandoned in-process research and development projects.

13. Foreign Currency Gain (Loss), Net

Net foreign currency gain or loss is non-cash translation gain or loss associated with intercompany balances.

14. Income Taxes

The Company files income tax returns in the U.S., Korea, Japan, Taiwan and various other jurisdictions.

The predecessor entity to MagnaChip Semiconductor Corporation (the “Parent”) was a non-taxable partnership entity until its conversion to a Delaware corporation on March 10, 2011.

MagnaChip Semiconductor Ltd. (Korea) is the principal operating entity within the consolidated Company. For the three and nine months ended September 30, 2011 and 2010, no income tax expense for MagnaChip Semiconductor, Ltd. (Korea) was recorded due to net operating loss carry-forwards that were available to offset taxable income. The net deferred tax assets of MagnaChip Semiconductor Ltd., which include net operating carry-forwards, have a valuation allowance against them at September 30, 2011. The Company assesses 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, the Company considers 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 the Company were to determine that it would be able to realize the deferred income tax assets in the future in excess of their net recorded amount, the Company would adjust the valuation allowance, which would reduce the provision for income taxes.

Income tax expense recorded for the nine month period ended September 30, 2011 principally relates to withholding taxes of $4.5 million mostly accrued on intercompany interest payments, income tax effect of $1.0 million resulting from the change of deferred tax assets and a $0.5 million increase in liability related to uncertain tax positions.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

15. Geographic and Segment Information

The following sets forth information relating to the reportable segments:


	Three Months Ended
	September 30, 2011		September 30, 2010
Net Sales
Display Solutions	$	91,767	$	77,989
Semiconductor Manufacturing Services		81,571		113,171
Power Solutions		26,358		17,801
All other		709		487

Total segment net sales	$	200,405	$	209,448


	Nine Months Ended
	September 30, 2011		September 30, 2010
Net Sales
Display Solutions	$	248,950	$	235,303
Semiconductor Manufacturing Services		270,295		307,936
Power Solutions		70,509		38,875
All other		2,251		1,519

Total segment net sales	$	592,005	$	583,633

The following is a summary of net sales by region, based on the location of the customer:


	Three Months Ended
	September 30, 2011		September 30, 2010
Korea	$	106,698	$	98,614
Asia Pacific		52,922		62,279
Japan		17,123		18,885
North America		19,367		24,719
Europe		3,353		4,040
Africa		942		911

Total	$	200,405	$	209,448

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)


	Nine Months Ended
	September 30, 2011		September 30, 2010
Korea	$	293,509	$	297,584
Asia Pacific		169,802		163,440
Japan		48,913		41,876
North America		66,004		68,785
Europe		11,349		10,819
Africa		2,428		1,129

Total	$	592,005	$	583,633

Net sales from the Company’s top ten largest customers accounted for 61.7 % and 62.9% for the three months ended September 30, 2011 and 2010, respectively, and 61.4% and 63.8% for the nine months ended September 30, 2011 and 2010, respectively.

The Company recorded $ 29,478 thousand and $28,976 thousand of sales to one customer within its Display Solutions segment, which represents greater than 10% of net sales, for the three months ended September 30, 2011 and 2010, respectively, and $87,586 thousand and $99,869 thousand for the nine months ended September 30, 2011 and 2010, respectively.

Over 99% of the Company’s property, plant and equipment are located in Korea as of September 30, 2011.

16. Earnings Per Share

The following table illustrates the computation of basic and diluted earnings per common share:


	Three Months Ended
	September 30, 2011			September 30, 2010
Net income (loss)	$	(56,010	)	$	61,495
Weighted average common stock outstanding—
Basic		39,064,071			37,819,820
Diluted		39,064,071			39,200,585
Earnings per share—
Basic	$	(1.43	)	$	1.63
Diluted	$	(1.43	)	$	1.57


	Nine Months Ended
	September 30, 2011			September 30, 2010
Net income (loss)	$	(1,912	)	$	61,849
Weighted average common stock outstanding—
Basic		38,823,720			37,815,080
Diluted		38,823,720			39,113,200
Earnings per share—
Basic	$	(0.05	)	$	1.64
Diluted	$	(0.05	)	$	1.58

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

The following outstanding instruments were excluded from the computation of diluted earnings per share, as they have an anti-dilutive effect on the calculation:


	Nine Months Ended
	September 30, 2011		September 30, 2010
Options		213,250		114,250
Warrants		1,875,018		1,875,017

17. Condensed Consolidating Financial Information

The $203.7 million senior notes outstanding as of September 30, 2011 are fully and unconditionally, jointly and severally, guaranteed by the Company and all of its subsidiaries, except for MagnaChip Semiconductor, Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited.

The senior notes are structurally subordinated to the creditors of the Company’s principal manufacturing and selling subsidiary, MagnaChip Semiconductor, Ltd. (Korea), which accounts for substantially all of the Company’s net sales and assets.

Below are condensed consolidating balance sheets as of September 30, 2011 and December 31, 2010, condensed consolidating statements of operations for the three months and nine months ended September 30, 2011 and 2010 and condensed consolidating statements of cash flows for the nine months ended September 30, 2011 and 2010 of those entities that guarantee the senior notes, those that do not, MagnaChip Semiconductor Corporation, and the co-issuers.

For the purpose of the guarantor financial information, the investments in subsidiaries are accounted for under the equity method.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Balance Sheets

September 30, 2011


	MagnaChip Semiconductor Corporation (Parent)			Co-Issuers			Non- Guarantors			Guarantors			Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	1,408		$	25,688		$	121,344		$	11,028		$	—		$	159,468
Restricted cash		—			—			9,210			—			—			9,210
Accounts receivable, net		—			—			125,232			25,216			(26,298	)		124,150
Inventories, net		—			—			69,789			186			(158	)		69,817
Other receivables		12			—			11,829			206			(10,097	)		1,950
Prepaid expenses		91			3			11,067			506			(2,897	)		8,770
Other current assets		37,204			172,402			5,360			148,518			(355,325	)		8,159

Total current assets		38,715			198,093			353,831			185,660			(394,775	)		381,524

Property, plant and equipment, net		—			—			179,759			273			—			180,032
Intangible assets, net		—			—			18,177			388			—			18,565
Long-term prepaid expenses		—			—			11,601			127			(6,969	)		4,759
Investment in subsidiaries		(572,443	)		(673,869	)		—			(492,977	)		1,739,289			—
Long-term intercompany loan		697,125			840,410			—			664,868			(2,202,403	)		—
Other non-current assets		(900	)		6,679			8,055			7,152			—			20,986

Total Assets	$	162,497		$	371,313		$	571,423		$	365,491		$	(864,858	)	$	605,866

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	—		$	—		$	100,557		$	1,602		$	(26,212	)	$	75,947
Other accounts payable		1,334			560			11,371			9,257			(10,097	)		12,425
Accrued expenses		691			44,045			172,749			174,938			(355,411	)		37,012
Current portion of capital lease obligations		—			—			4,134			281			—			4,415
Other current liabilities		(2,093	)		—			12,895			5,858			(2,898	)		13,762

Total current liabilities		(68	)		44,605			301,706			191,936			(394,618	)		143,561

Long-term borrowings, net		—			898,450			664,868			840,415			(2,202,403	)		201,325
Accrued severance benefits, net		—			—			89,613			1,493			—			91,106
Other non-current liabilities		2,618			—			8,134			6,145			(6,970	)		9,927

Total liabilities		2,550			943,055			1,064,321			1,039,984			(2,603,991	)		445,919

Stockholders’ equity
Common stock		394			136,229			39,005			51,976			(227,210	)		394
Additional paid-in capital		98,310			(733,291	)		(536,944	)		(731,303	)		2,001,538			98,310
Retained earnings		70,245			34,322			18,412			13,879			(66,613	)		70,245
Accumulated other comprehensive loss		(9,002	)		(9,002	)		(13,391	)		(9,045	)		31,418			(9,002	)

Total stockholders’ equity		159,947			(571,742	)		(492,898	)		(674,493	)		1,739,133			159,947

Total liabilities and stockholders’ equity	$	162,497		$	371,313		$	571,423		$	365,491		$	(864,858	)	$	605,866

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Balance Sheets

December 31, 2010


	MagnaChip Semiconductor Corporation (Parent)			Co-Issuers			Non- Guarantors			Guarantors			Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	79		$	46,595		$	112,370		$	13,128		$	—		$	172,172
Accounts receivable, net		—			—			160,317			60,533			(101,796	)		119,054
Inventories, net		—			—			68,435			158			(158	)		68,435
Other receivables		718			718			23,111			2,969			(24,597	)		2,919
Prepaid expenses		52			2			10,957			93			(2,897	)		8,207
Short-term intercompany loan		—			95,000			—			95,000			(190,000	)		—
Other current assets		41,363			124,376			9,606			111,628			(268,053	)		18,920

Total current assets		42,212			266,691			384,796			283,509			(587,501	)		389,707

Property, plant and equipment, net		—			—			178,623			389			—			179,012
Intangible assets, net		—			—			27,009			529			—			27,538
Long-term prepaid expenses		—			—			17,371			—			(9,136	)		8,235
Investment in subsidiaries		(567,941	)		(641,799	)		—			(475,696	)		1,685,436			—
Long-term intercompany loan		697,125			792,846			—			621,000			(2,110,971	)		—
Other non-current assets		—			7,819			6,611			6,821			1			21,252

Total Assets	$	171,396		$	425,557		$	614,410		$	436,552		$	(1,022,171	)	$	625,744

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	—		$	—		$	118,353		$	41,634		$	(101,723	)	$	58,264
Other accounts payable		8,334			8,987			15,994			5,927			(24,597	)		14,645
Accrued expenses		211			39,887			134,460			126,204			(268,127	)		32,635
Short-term intercompany borrowings		—			—			95,000			95,000			(190,000	)		—
Current portion of capital lease obligations		—			—			5,373			184			—			5,557
Other current liabilities		—			—			3,815			4,130			(2,897	)		5,048

Total current liabilities		8,545			48,874			372,995			273,079			(587,344	)		116,149

Long-term borrowings, net		—			944,007			621,000			792,846			(2,110,971	)		246,882
Long-term obligations under capital lease		—			—			2,888			217			—			3,105
Accrued severance benefits, net		—			—			86,511			1,267			—			87,778
Other non-current liabilities		—			—			6,653			11,462			(9,136	)		8,979

Total liabilities		8,545			992,881			1,090,047			1,078,871			(2,707,451	)		462,893

Commitments and contingencies
Stockholders’ equity
Common stock		384			136,229			39,005			51,976			(227,210	)		384
Additional paid-in capital		95,585			(734,101	)		(537,608	)		(732,266	)		2,003,975			95,585
Retained earnings		72,157			35,823			31,799			43,269			(110,891	)		72,157
Accumulated other comprehensive loss		(5,275	)		(5,275	)		(8,833	)		(5,298	)		19,406			(5,275	)

Total stockholders’ equity		162,851			(567,324	)		(475,637	)		(642,319	)		1,685,280			162,851

Total liabilities and stockholders’ equity	$	171,396		$	425,557		$	614,410		$	436,552		$	(1,022,171	)	$	625,744

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Statements of Operations

For the three months ended September 30, 2011


	MagnaChip Semiconductor Corporation (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Net sales	$	—		$	—		$	200,405		$	6,692		$	(6,692	)	$	200,405
Cost of sales		—			—			140,291			780			(787	)		140,284

Gross profit		—			—			60,114			5,912			(5,905	)		60,121

Selling, general and administrative expenses		354			24			17,946			3,144			(3,587	)		17,881
Research and development expenses		—			—			19,846			1,470			(2,313	)		19,003
Restructuring and impairment charges		—			—			1,610			11			—			1,621

Operating income (loss)		(354	)		(24	)		20,712			1,287			(5	)		21,616

Other income (expense)		—			(3,774	)		(82,121	)		10,062			—			(75,833	)

Income (loss) before income taxes, equity in loss of related equity investment		(354	)		(3,798	)		(61,409	)		11,349			(5	)		(54,217	)

Income tax expenses (benefits)		(1,456	)		—			(661	)		3,910			—			1,793

Income (loss) before equity in loss of related investment		1,102			(3,798	)		(60,748	)		7,439			(5	)		(56,010	)

Equity in loss of related investment		(57,112	)		(53,031	)		—			(60,753	)		170,896			—

Net loss	$	(56,010	)	$	(56,829	)	$	(60,748	)	$	(53,314	)	$	170,891		$	(56,010	)

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Statements of Operations

For the nine months ended September 30, 2011


	MagnaChip Semiconductor Corporation (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Net sales	$	—		$	—		$	591,967		$	19,439		$	(19,401	)	$	592,005
Cost of sales		—			—			409,250			1,392			(1,414	)		409,228

Gross profit		—			—			182,717			18,047			(17,987	)		182,777

Selling, general and administrative expenses		1,650			610			49,740			9,731			(10,991	)		50,740
Research and development expenses		—			—			60,538			4,561			(6,984	)		58,115
Restructuring and impairment charges		—			—			2,409			1,687			—			4,096
Special expense for IPO incentive		—			—			11,355			791			—			12,146

Operating income (loss)		(1,650	)		(610	)		58,675			1,277			(12	)		57,680

Other income (expense)		1			28,262			(71,531	)		(10,186	)		—			(53,454	)

Income (loss) before income taxes, equity in loss of related equity investment		(1,649	)		27,652			(12,856	)		(8,909	)		(12	)		4,226

Income tax expenses (benefits)		(1,474	)		—			532			7,080			—			6,138

Income (loss) before equity in loss of related investment		(175	)		27,652			(13,388	)		(15,989	)		(12	)		(1,912	)

Equity in loss of related investment		(1,737	)		(29,153	)		—			(13,400	)		44,290			—

Net loss	$	(1,912	)	$	(1,501	)	$	(13,388	)	$	(29,389	)	$	44,278		$	(1,912	)

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Statements of Operations

For the three months ended September 30, 2010


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors		Guarantors			Eliminations			Consolidated
Net sales	$	—		$	—		$	209,580	$	7,416		$	(7,548	)	$	209,448
Cost of sales		—			—			140,126		1,116			(1,109	)		140,133

Gross profit		—			—			69,454		6,300			(6,439	)		69,315

Selling, general and administrative expenses		140			373			16,293		2,795			(3,399	)		16,202
Research and development expenses		—			—			24,023		2,138			(3,042	)		23,119
Restructuring and impairment charges		—			—			442		—			—			442

Operating income (loss)		(140	)		(373	)		28,696		1,367			2			29,552

Other income (expense)		—			29,393			26,565		(21,558	)		—			34,400

Income (loss) before income taxes, equity in earnings of related equity investment		(140	)		29,020			55,261		(20,191	)		2			63,952

Income tax expenses		—			—			—		2,457			—			2,457

Income (loss) before equity in earnings of related investment		(140	)		29,020			55,261		(22,648	)		2			61,495

Earnings of related investment		61,635			32,494			—		55,263			(149,392	)		—

Net Income	$	61,495		$	61,514		$	55,261	$	32,615		$	(149,390	)	$	61,495

Net Income attributable to common units	$	61,495		$	61,514		$	55,261	$	32,615		$	(149,390	)	$	61,495

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Statements of Operations

For the nine months ended September 30, 2010


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors		Eliminations			Consolidated
Net sales	$	—		$	—		$	579,239		$	26,021	$	(21,627	)	$	583,633
Cost of sales		—			—			396,808			8,033		(4,415	)		400,426

Gross profit		—			—			182,431			17,988		(17,212	)		183,207

Selling, general and administrative expenses		1,318			898			49,148			7,549		(8,839	)		50,074
Research and development expenses		—			—			66,880			6,420		(9,107	)		64,193
Restructuring and impairment charges		—			—			1,045			—		—			1,045

Operating income (loss)		(1,318	)		(898	)		65,358			4,019		734			67,895

Other income (expense)		3,734			21,276			(30,181	)		3,306		—			(1,865	)

Income before income taxes, equity in earnings of related equity investment		2,416			20,378			35,177			7,325		734			66,030

Income tax expenses (benefits)		—			—			(1,947	)		6,128		—			4,181

Income before equity in earnings of related investment		2,416			20,378			37,124			1,197		734			61,849

Earnings of related investment		59,433			38,903			—			37,412		(135,748	)		—

Net income	$	61,849		$	59,281		$	37,124		$	38,609	$	(135,014	)	$	61,849

Net income attributable to common units	$	61,849		$	59,281		$	37,124		$	38,609	$	(135,014	)	$	61,849

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Statements of Cash Flows

For the nine months ended September 30, 2011


	MagnaChip Semiconductor Corporation (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Cash flow from operating activities
Net loss	$	(1,912	)	$	(1,501	)	$	(13,388	)	$	(29,389	)	$	44,278		$	(1,912	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization		—			—			42,161			207			—			42,368
Provision for severance benefits		—			—			12,959			178			—			13,137
Amortization of debt issuance costs and original issue discount		—			728			—			—			—			728
Loss (gain) on foreign currency translation, net		—			(3,696	)		31,387			5,529			—			33,220
Gain on disposal of property, plant and equipment, net		—			—			(15	)		—			—			(15	)
Loss on disposal of intangible assets, net		—			—			17			—			—			17
Restructuring and Impairment charges		—			—			2,410			1,687			(1	)		4,096
Stock-based compensation		178			—			1,442			470			(292	)		1,798
Equity in loss of related investment		1,737			29,153			—			13,400			(44,290	)		—
Other		(1,474	)		5,461			1,133			1,845			(854	)		6,111
Changes in operating assets and liabilities
Accounts receivable, net		—			—			35,467			35,630			(75,497	)		(4,400	)
Inventories, net		—			—			(4,413	)		—			13			(4,400	)
Other receivables		706			718			11,349			2,563			(14,500	)		836
Other current assets		194			(48,027	)		(1,977	)		(41,859	)		88,473			(3,196	)
Deferred tax assets		—			—			—			1,051			432			1,483
Accounts payable		—			—			(19,617	)		(40,821	)		75,510			15,072
Other accounts payable		(7,041	)		(8,555	)		4,966			3,287			14,500			7,157
Accrued expenses		106			3,987			18,065			48,050			(88,486	)		(18,278	)
Other current liabilities		—			—			(252	)		(957	)		—			(1,209	)
Long term other payable		—			—			—			100			448			548
Payment of severance benefits		—			—			(6,510	)		(39	)		—			(6,549	)
Other		—			—			2,681			(3,088	)		—			(407	)

Net cash provided by (used in) operating activities		(7,506	)		(21,732	)		117,865			(2,156	)		(266	)		86,205

Cash flows from investing activities
Increase in restricted cash		—			—			(9,711	)		—			—			(9,711	)
Decrease in short-term loans		—			51,132			19			38,452			(89,828	)		(225	)
Proceeds from disposal of plant, property and equipment		—			—			29			—			—			29
Purchases of plant, property and equipment		—			—			(42,911	)		(34	)		—			(42,945	)

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)


	MagnaChip Semiconductor Corporation (Parent)		Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Payment for intellectual property registration		—		—			(521	)		—			—			(521	)
Collection of guarantee deposits		—		—			979			5			—			984
Payment of guarantee deposits		—		—			(2,479	)		(10	)		—			(2,489	)
Other		—		—			(400	)		—			—			(400	)

Net cash provided by (used in) investing activities		—		51,132			(54,995	)		38,413			(89,828	)		(55,278	)

Cash flow from financing activities
Proceeds from issuance of common stock		8,835		—			—			—			—			8,835
Repayment of long-term borrowings		—		(50,307	)		(53,331	)		(38,466	)		91,797			(50,307	)
Repayment of obligations under capital lease		—		—			(4,607	)		(224	)		—			(4,831	)

Net cash provided by (used in) financing activities		8,835		(50,307	)		(57,938	)		(38,690	)		91,797			(46,303	)

Effect of exchange rates on cash and cash equivalents		—		—			4,042			333			(1,703	)		2,672

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company