Form 10-Q
Table of Contents

 

 

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 March 31, 2013

or

 

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

For the transition period from             to             .

Commission File Number: 001-34791

 

 

MagnaChip Semiconductor Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   83-0406195

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

c/o MagnaChip Semiconductor S.A.

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.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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 March 31, 2013, the registrant had 35,408,032 shares of common stock outstanding.

 

 

 


Table of Contents

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 March 31, 2013 and December 31, 2012

     4   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and March 31, 2012

     5   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and March 31, 2012

     6   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2013 and March 31, 2012

     7   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and March 31, 2012

     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

     28   
   Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     43   
   Item 4.   

Controls and Procedures

     44   

PART II OTHER INFORMATION

     45   
   Item 1A.   

Risk Factors

     45   
   Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     57   
   Item 6.   

Exhibits

     58   

SIGNATURES

     59   

 

2


Table of Contents

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, that include the use of the terms “we,” “us,” “our” and “MagnaChip” refer to MagnaChip Semiconductor Corporation and its consolidated subsidiaries. The term “Korea” refers to the Republic of Korea or South Korea.

 

3


Table of Contents

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)

 

     March 31,
2013
    December 31,
2012
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 182,987      $ 182,238   

Restricted cash

     37        133   

Accounts receivable, net

     146,267        143,331   

Inventories, net

     83,910        89,363   

Other receivables

     3,662        1,429   

Prepaid expenses

     10,401        7,884   

Current deferred income tax assets

     22,870        22,768   

Other current assets

     5,322        9,680   
  

 

 

   

 

 

 

Total current assets

     455,456        456,826   
  

 

 

   

 

 

 

Property, plant and equipment, net

     255,144        238,256   

Intangible assets, net

     12,169        15,260   

Long-term prepaid expenses

     16,101        18,048   

Deferred income tax assets

     42,804        46,710   

Other non-current assets

     15,359        14,866   
  

 

 

   

 

 

 

Total assets

   $ 797,033      $ 789,966   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 79,425      $ 79,236   

Other accounts payable

     29,975        15,600   

Accrued expenses

     49,268        43,486   

Derivative liabilities

     4,619        —    

Other current liabilities

     3,136        9,973   
  

 

 

   

 

 

 

Total current liabilities

     166,423        148,295   
  

 

 

   

 

 

 

Long-term borrowings, net

     201,727        201,653   

Accrued severance benefits, net

     111,806        112,446   

Other non-current liabilities

     13,897        17,263   
  

 

 

   

 

 

 

Total liabilities

     493,853        479,657   
  

 

 

   

 

 

 

Stockholders’ equity

    

Common stock, $0.01 par value, 150,000,000 shares authorized 39,747,933 shares issued and 35,408,032 shares outstanding at March 31, 2013 and 39,599,374 shares issued and 35,635,357 shares outstanding at December 31, 2012

     397        396   

Additional paid-in capital

     103,310        101,885   

Retained earnings

     279,846        287,251   

Treasury stock, 4,339,901 shares and 3,964,017 shares at March 31, 2013 and December 31, 2012, respectively

     (45,918     (39,918

Accumulated other comprehensive loss

     (34,455     (39,305
  

 

 

   

 

 

 

Total stockholders’ equity

     303,180        310,309   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 797,033      $ 789,966   
  

 

 

   

 

 

 

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

 

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Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     Three Months Ended  
     March 31,
2013
    March 31,
2012
 

Net sales

   $ 205,298      $ 177,002   

Cost of sales

     139,555        127,087   
  

 

 

   

 

 

 

Gross profit

     65,743        49,915   
  

 

 

   

 

 

 

Selling, general and administrative expenses

     19,791        18,209   

Research and development expenses

     20,582        19,831   

Restructuring and impairment charges

     2,446        —     
  

 

 

   

 

 

 

Operating income

     22,924        11,875   
  

 

 

   

 

 

 

Other income (expenses)

    

Interest expense, net

     (5,849     (5,580

Foreign currency gain (loss), net

     (22,558     11,109   

Others

     (260     89   
  

 

 

   

 

 

 
     (28,667     5,618   
  

 

 

   

 

 

 

Income (loss) before income taxes

     (5,743     17,493   
  

 

 

   

 

 

 

Income tax expense

     1,662        2,230   
  

 

 

   

 

 

 

Net income (loss)

   $ (7,405   $ 15,263   
  

 

 

   

 

 

 

Earnings (loss) per common share—

    

Basic

   $ (0.21   $ 0.41   

Diluted

   $ (0.21   $ 0.40   

Weighted average number of shares—

    

Basic

     35,539,413        37,524,127   

Diluted

     35,539,413        38,298,336   

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

 

5


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; in thousands of US dollars)

 

     Three Months Ended  
     March 31,
2013
    March 31,
2012
 

Net income (loss)

   $ (7,405   $ 15,263   

Other comprehensive income (loss)

    

Unrealized gain on investments

     228        79   

Derivative adjustments

     (4,511     1,574   

Foreign currency translation adjustments

     9,133        (8,312
  

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (2,555   $ 8,604   
  

 

 

   

 

 

 

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

 

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Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS’ EQUITY

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

 

            Additional
Paid-In
Capital
     Retained
Earnings
    Common
Stock
Held in
Treasury
    Accumulated
Other
Comprehensive
Income (loss)
    Total  
     Common Stock              
     Shares     Amount              

Three Months Ended March 31, 2013

                

Balance at January 1, 2013

     35,635,357      $ 396       $ 101,885       $ 287,251      $ (39,918   $ (39,305   $ 310,309   

Stock-based compensation

     —         —          420         —         —         —         420   

Exercise of stock options

     147,810        1         993         —         —         —         994   

Exercise of warrants

     749        —          12         —         —         —         12   

Acquisitions of treasury stock

     (375,884     —          —          —         (6,000     —         (6,000

Comprehensive income (loss):

                

Net loss

     —         —          —          (7,405     —         —         (7,405

Fair valuation of derivatives

     —         —          —          —         —         (4,207     (4,207

Reclassification to net loss from accumulated other comprehensive loss related to hedge derivatives

     —         —          —          —         —         (304     (304

Foreign currency translation adjustments

     —         —          —          —         —         9,133        9,133   

Unrealized gains on investments

     —         —          —          —         —         228        228   
                

 

 

 

Total comprehensive loss

                   (2,555
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

     35,408,032      $ 397       $ 103,310       $ 279,846      $ (45,918   $ (34,455   $ 303,180   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2012

                

Balance at January 1, 2012

     37,907,575      $ 394       $ 98,929       $ 93,950      $ (11,793   $ (14,810   $ 166,670   

Stock-based compensation

     —         —          458         —         —         —         458   

Issuance of new stock

     818        —          8         —         —         —         8   

Exercise of stock options

     17,130        —          100         —         —         —         100   

Acquisitions of treasury stock

     (1,044,644     —          —          —         (11,935     —         (11,935

Comprehensive income:

                

Net income

     —         —          —          15,263        —         —         15,263   

Fair valuation of derivatives

     —         —          —          —         —         1,542        1,542   

Reclassification to net income from accumulated other comprehensive loss related to hedge derivatives

     —         —          —          —         —         32        32   

Foreign currency translation adjustments

     —         —          —          —         —         (8,312     (8,312

Unrealized gains on investments

     —         —          —          —         —         79        79   
                

 

 

 

Total comprehensive income

                   8,604   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

     36,880,879      $ 394       $ 99,495       $ 109,213      $ (23,728   $ (21,469   $ 163,905   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands of US dollars)

 

     Three Months Ended  
     March 31,
2013
    March 31,
2012
 

Cash flows from operating activities

    

Net income (loss)

   $ (7,405   $ 15,263   

Adjustments to reconcile net income (loss) to net cash provided by operating activities

    

Depreciation and amortization

     8,522        7,474   

Provision for severance benefits

     4,229        4,703   

Amortization of debt issuance costs and original issue discount

     283        242   

(Gain) loss on foreign currency translation, net

     28,280        (12,824

Gain on disposal of property, plant and equipment, net

     —         (269

Loss on disposal of intangible assets, net

     1        11   

Restructuring and impairment charges

     618        —    

Stock-based compensation

     420        458   

Other

     635        123   

Changes in operating assets and liabilities

    

Accounts receivable

     (6,409     1,339   

Inventories

     2,022        (2,860

Other receivables

     (1,278     (4,024

Other current assets

     2,014        8,536   

Deferred tax assets

     2,182        871   

Accounts payable

     2,290        12,581   

Other accounts payable

     9,734        (298

Accrued expenses

     (1,125     9,886   

Other current liabilities

     (5,838     2,225   

Payment of severance benefits

     (627     (2,323

Other

     (1,004     (1,261
  

 

 

   

 

 

 

Net cash provided by operating activities

     37,544        39,853   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Decrease in restricted cash

     92        2,995   

Proceeds from disposal of plant, property and equipment

     —         273   

Purchase of plant, property and equipment

     (32,927     (24,758

Payment for intellectual property registration

     (142     (190

Payment for purchase of Dawin, net of cash acquired

     —         (8,642

Decrease in short-term financial instruments

     —         173   

Collection of guarantee deposits

     —         31   

Payment of guarantee deposits

     (741     (178

Other

     8        (48
  

 

 

   

 

 

 

Net cash used in investing activities

     (33,710     (30,344
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from issuance of common stock

     1,006        108   

Repayment of obligations under capital lease

     —         (1,510

Acquisition of treasury stock

     (6,000     (11,935
  

 

 

   

 

 

 

Net cash used in financing activities

     (4,994     (13,337

Effect of exchange rates on cash and cash equivalents

     1,909        (1,660
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     749        (5,488
  

 

 

   

 

 

 

Cash and cash equivalents

    

Beginning of the period

     182,238        162,111   
  

 

 

   

 

 

 

End of the period

   $ 182,987      $ 156,623   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for interest

   $ 1      $ 25   
  

 

 

   

 

 

 

Cash paid (refunded) for income taxes

   $ 6,384      $ (416
  

 

 

   

 

 

 

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

 

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Table of Contents

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 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 the Company’s 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 three months ended March 31, 2013 are not necessarily indicative of the results to be expected for a full year or for any other periods.

The December 31, 2012 balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP.

Recent Accounting Pronouncements

In February 2013, the FASB issued ASU No.2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” (“ASU 2013-02”) which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, ASU 2013-02 requires an entity to present, either on the face of the income statement or in the notes to financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The update does not change the current requirements for reporting net income or other comprehensive income in financial statements and is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted ASU 2013-02 from the quarter ended March 31, 2013.

In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. This authoritative guidance was issued to enhance disclosure requirements on offsetting financial assets and liabilities. The new rules require the Company to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position, as well as instruments and transactions subject to a netting arrangement. In January 2013, the FASB further issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” to address implementation issues surrounding the scope of ASU No. 2011-11 and to clarify the scope of the offsetting disclosures and address any unintended consequences. The Company adopted ASU No.2013-01 from the quarter ended March 31, 2013.

In July 2012, the FASB issued ASU No.2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU 2012-02”). Under ASU 2012-02, testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill has been simplified. ASU 2012-02 provides the Company the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. The Company electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the Company determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. ASU 2012-02 is effective for impairment tests for fiscal years beginning after September 15, 2012. The Company adopted ASU 2012-02 from the year ended December 31, 2012, and the adoption does not have a material impact on the Company’s consolidated financial statements.

 

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Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles-Goodwill and Other (Topic 350)-Testing Goodwill for Impairment” (“ASU 2011-08”). ASU 2011-08 gives the option to first assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit. Under the amendments in ASU 2011-08, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments in ASU 2011-08 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2011. Early adoption is permitted. The Company adopted the applicable requirements of ASU 2011-08 in fiscal 2012.

3. Sales of Accounts Receivable

The Company has entered into an agreement to sell selected trade accounts receivable to a financial institution. After the sale, the Company does not retain any interest in the receivables and the applicable financial institution collects these accounts receivable directly from the customer. The proceeds from the sales of these accounts receivable totaled $10,072 thousand and $8,412 thousand for the three month period ended March 31, 2013 and 2012, respectively and these sales resulted in a pre-tax loss of $20 thousand and $4 thousand for the three month period ended March 31, 2013 and 2012, respectively which is included in selling, general and administrative expenses in the consolidated statements of operations. Net proceeds of this accounts receivable sale program are recognized in the consolidated statements of cash flows as part of operating cash flows.

4. Inventories

Inventories as of March 31, 2013 and December 31, 2012 consist of the following:

 

     March 31,
2013
    December 31,
2012
 

Merchandise

   $ 6      $ 7   

Finished goods

     15,775        16,215   

Semi-finished goods and work-in-process

     66,162        66,050   

Raw materials

     10,286        11,426   

Materials in-transit

     1,363        2,177   

Less: inventory reserve

     (9,682     (6,512
  

 

 

   

 

 

 

Inventories, net

   $ 83,910      $ 89,363   
  

 

 

   

 

 

 

 

10


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

5. Property, Plant and Equipment

Property, plant and equipment as of March 31, 2013 and December 31, 2012 comprise the following:

 

     March 31,
2013
    December 31,
2012
 

Buildings and related structures

   $ 77,022      $ 79,822   

Machinery and equipment

     244,550        221,927   

Vehicles and others

     17,493        17,143   

Equipment under capital lease

     11,732        12,181   
  

 

 

   

 

 

 
     350,797        331,073   

Less: accumulated depreciation

     (108,382     (106,271

accumulated depreciation on equipment under capital lease

     (3,789     (3,697

Land

     16,518        17,151   
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 255,144      $ 238,256   
  

 

 

   

 

 

 

6. Intangible Assets

Intangible assets as of March 31, 2013 and December 31, 2012 are as follows:

 

     March 31,
2013
    December 31,
2012
 

Technology

   $ 21,235      $ 25,011   

Customer relationships

     27,941        29,010   

Intellectual property assets

     7,039        7,145   

Less: accumulated amortization

     (47,283     (49,266

Goodwill

     3,237        3,360   
  

 

 

   

 

 

 

Intangible assets, net

   $ 12,169      $ 15,260   
  

 

 

   

 

 

 

 

11


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

7. Derivative Financial Instruments

The Company’s Korean subsidiary, MagnaChip Semiconductor, Ltd., 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 March 31, 2013 are as follows:

 

Date of transaction

  

Type of derivative

   Total notional amount     

Month of settlement

May 18, 2012

   Zero cost collar    $ 54,000       April to June 2013

December 14, 2012

   Zero cost collar    $ 54,000       July to September 2013

December 27, 2012

   Zero cost collar    $ 54,000       October to December 2013

January 25, 2013

   Zero cost collar    $ 54,000       January to March 2014

March 8, 2013

   Zero cost collar    $ 54,000       April to June 2014

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.”

The fair values of the Company’s outstanding zero cost collar contracts recorded as assets and liabilities as of March 31, 2013 and December 31, 2012 are as follows:

 

Derivatives designated as hedging instruments:

   March 31,
2013
     December 31,
2012
 

Asset Derivatives:

        

Zero cost collars

   Other current assets    $ 66       $ 514   

Liability Derivatives:

        

Zero cost collars

   Derivative liabilities    $ 4,619       $  —    

Zero cost collars

   Other non- current liabilities      849         —    

Offsetting of derivative assets and derivative liabilities as of March 31, 2013 and December 31, 2012 is as follows:

 

As of March 31, 2013

   Gross amounts of
recognized
assets/liabilities
     Gross amounts
offset in the
balance sheets
     Net amounts of
assets/liabilities
presented in the
balance sheets
     Gross amounts not offset in the balance
sheets
     Net amount  
            Financial instruments     Cash collateral
received/pledged
    

Asset Derivatives:

                

Zero cost collars

   $ 66       $ —        $ 66      $ (66 )   $  —        $ —    

Liability Derivatives:

                

Zero cost collars

   $ 5,468       $  —        $ 5,468      $ (66 )   $  —        $ 5,402  

As of December 31, 2012

   Gross amounts of
recognized
assets/liabilities
     Gross amounts
offset in the
balance sheets
     Net amounts of
assets/liabilities
presented in the
balance sheets
     Gross amounts not offset in the balance
sheets
     Net amount  
            Financial instruments     Cash collateral
received/pledged
    

Asset Derivatives:

                

Zero cost collars

   $ 514       $  —        $ 514      $  —       $  —        $ 514  

Liability Derivatives:

                

Zero cost collars

   $ —         $  —        $ —        $ —        $  —        $ —    

 

 

12


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

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 March 31, 2013 and 2012:

 

Derivatives in ASC 815

Cash Flow Hedging

Relationships

   Amount of Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective Portion)
     Location of Gain (Loss)
Reclassified from
AOCI into
Statement of
Income
(Effective Portion)
     Amount of Gain (Loss)
Reclassified from
AOCI into
Statement of
Income
(Effective Portion)
   

Location of

Gain (Loss)

Recognized in

Statement of

Income on

Derivative

(Ineffective

Portion and

Amount

Excluded from

Effectiveness

Testing)

   Amount of Gain
(Loss)
Recognized in
Statement of
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 
     1Q, 2013     1Q, 2012             1Q, 2013      1Q, 2012          1Q, 2013     1Q, 2012  

Forward

   $ —        $ 1,167         Net sales       $  —         $  —       Other income (expenses) — Others    $ —        $ (16

Zero cost collars

     (4,207     375         Net sales         304         (32   Other income (expenses) — Others      (267     101   
  

 

 

   

 

 

       

 

 

    

 

 

      

 

 

   

 

 

 

Total

   $ (4,207   $ 1,542          $ 304       $ (32      $ (267   $ 85   
  

 

 

   

 

 

       

 

 

    

 

 

      

 

 

   

 

 

 

The estimated net loss as of March 31, 2013 that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings within the next twelve months is $3,417 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 two financial institutions, the counterparties to the option, forward and zero cost collar contracts, for any exposure in excess of $5 million for each financial institution. No cash collateral was required as of March 31, 2013.

 

13


Table of Contents

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 and liabilities measured at fair value on a recurring basis as of March 31, 2013, 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

   $ 894       $ 894       $ 894       $ —        $  —    

Other current assets

     66         66         —          66         —    

Liabilities:

              

Derivative liabilities

     5,468         5,468         —          5,468         —    

As of March 31, 2013, the total carrying value and estimated fair value of the senior notes which are not measured at fair value on a recurring basis were $201,727 thousand and 227,370 thousand, respectively. The estimated fair value is based on Level 2 inputs.

 

14


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

9. Accrued Severance Benefits

The majority of accrued severance benefits is for employees in the Company’s Korean subsidiary, MagnaChip Semiconductor Ltd. 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 March 31, 2013, 98.5% of employees of the Company were eligible for severance benefits.

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

 

     Three Months Ended  
     March 31,
2013
    March 31,
2012
 

Beginning balance

   $ 113,624      $ 91,882   

Provisions

     4,228        4,703   

Severance payments

     (627     (2,323

Translation adjustments

     (4,286     1,209   
  

 

 

   

 

 

 
     112,939        95,471   
  

 

 

   

 

 

 

Less: Cumulative contributions to the National Pension Fund

     (379     (393

Group Severance insurance plan

     (754     (726
  

 

 

   

 

 

 

Accrued severance benefits, net

   $ 111,806      $ 94,352   
  

 

 

   

 

 

 

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.

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

 

     Severance benefit  

Remainder of 2013

   $ —     

2014

     343   

2015

     353   

2016

     1,263   

2017

     1,695   

2018

     2,913   

2019 – 2023

     20,218   

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.

 

15


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

10. Foreign Currency Gain (Loss), Net

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

11. Restructuring and Impairment Charges

The Company recognized $1,829 thousand of restructuring charges for the three months ended March 31, 2013 from restructuring one of the Company’s fabrication facilities and $617 thousand of impairment charges from certain existing technology.

12. Income Taxes

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

MagnaChip Semiconductor Ltd. (Korea) is the principal operating entity within the consolidated Company. For the three months ended March 31, 2013, income tax benefit for MagnaChip Semiconductor, Ltd. (Korea) was recorded due to the adjustment of valuation allowance for deferred net assets. 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.

Income tax expense recorded for the three month period ended March 31, 2013 and 2012 was $1,662 thousand and $2,230 thousand, respectively.

13. Geographic and Segment Information

The following sets forth information relating to the reportable segments:

 

     Three Months Ended  
     March 31,
2013
     March 31,
2012
 

Net Sales

     

Display Solutions

   $ 70,323       $ 83,225   

Semiconductor Manufacturing Services

     104,138         67,863   

Power Solutions

     30,184         25,253   

All other

     653         661   
  

 

 

    

 

 

 

Total segment net sales

   $ 205,298       $ 177,002   
  

 

 

    

 

 

 

 

16


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

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

 

     Three Months Ended  
     March 31,
2013
     March 31,
2012
 

Korea

   $ 94,502       $ 97,951   

Asia Pacific

     69,736         59,235   

U.S.A.

     28,384         13,353   

Europe

     11,729         5,565   

Other

     947         898   
  

 

 

    

 

 

 

Total

   $ 205,298       $ 177,002   
  

 

 

    

 

 

 

Net sales from the Company’s top ten largest customers accounted for 68.8% and 63.7% for the three months ended March 31, 2013 and 2012, respectively.

For the three months ended March 31, 2013, we had three customers which represented 12.6%, 10.5% and 10.3% of the Company’s net sales, respectively.

For the three months ended March 31, 2012, we had two customers which represented 13.8% and 13.5% of the Company’s net sales, respectively.

Over 99% of the Company’s property, plant and equipment are located in Korea as of March 31, 2013.

14. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of the following as of March 31, 2013 and December 31, 2012, respectively:

 

     Year Ended
March 31,
2013
    Year Ended
December 31,
2012
 

Foreign currency translation adjustments

   $ (32,320   $ (41,454

Derivative adjustments

     (2,438     2,074   

Unrealized gain on investments

     303        75   
  

 

 

   

 

 

 

Total

   $ (34,455   $ (39,305
  

 

 

   

 

 

 

Changes in accumulated other comprehensive loss for the three months ended March 31, 2013 and 2012 is as follows:

 

As of March 31, 2013

   Derivative
adjustments
    Unrealized
gain on
investments
     Foreign
currency
translation
adjustments
    Total  

Beginning balance

   $ 2,074      $ 75       $ (41,454   $ (39,305
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications

     (4,207     228         9,133        5,154   

Amounts reclassified from accumulated other comprehensive income

     (304     —           —          (304
  

 

 

   

 

 

    

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (4,511     228         9,133        4,850   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ (2,437   $ 303       $ (32,321   $ (34,455
  

 

 

   

 

 

    

 

 

   

 

 

 

 

17


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

As of March 31, 2012

   Derivative
adjustments
    Unrealized
gain on
investments
     Foreign
currency
translation
adjustments
    Total  

Beginning balance

   $ (7,771   $ 90       $ (7,129   $ (14,810
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications

     1,542        79         (8,312     (6,691

Amounts reclassified from accumulated other comprehensive loss

     32        —           —          32   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     1,574        79         (8,312     (6,659
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ (6,197   $ 169       $ (15,441   $ (21,469
  

 

 

   

 

 

    

 

 

   

 

 

 

Income tax impact related to changes in accumulated other comprehensive loss for the three months ended March 31, 2013 is $1,275 thousand.

15. Earnings per Share

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

 

     Three Months Ended  
     March 31,
2013
    March 31,
2012
 

Net income (loss)

   $ (7,405   $ 15,263   

Weighted average common stock outstanding—

    

Basic

     35,539,413        37,524,127   

Diluted

     35,539,413        38,298,336   

Earnings (loss) per share—

    

Basic

   $ (0.21   $ 0.41   

Diluted

   $ (0.21   $ 0.40   

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

 

     Three Months Ended  
     March 31,
2013
     March 31,
2012
 

Options

     3,033,021         248,399   

Warrants

     1,874,230         1,875,028   

 

18


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

16. Condensed Consolidating Financial Information

The Company’s $203.7 million senior notes are guaranteed by the Company and all of its subsidiaries, except for MagnaChip Semiconductor, Ltd. (Korea), MagnaChip Semiconductor, Ltd. (U.K.) and MagnaChip Semiconductor (Shanghai) Company Limited. These guarantees are full and unconditional, subject to certain customary release provisions, as well as joint and several subject to release under certain customary circumstances, including (1) the sale or other disposition of the capital stock of a Guarantor, or all or substantially all of its assets, to a third party, so long as the proceeds of such sale are used in accordance with the “Asset Sale” and other covenants of the Indenture; (2) the declaration of such Guarantor as an “Unrestricted Subsidiary” under the Indenture; and (3) upon legal defeasance, covenant defeasance or in accordance with the satisfaction and discharge provisions of the Indenture.

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 March 31, 2013 and December 31, 2012, condensed consolidating statements of comprehensive income for the three months ended March 31, 2013 and 2012 and condensed consolidating statements of cash flows for the three months ended March 31, 2013 and 2012 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.

 

19


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Balance Sheets

March 31, 2013

 

     MagnaChip
Semiconductor
Corporation
(Parent)
    Co-Issuers     Non-
Guarantors
    Guarantors     Eliminations     Consolidated  

Assets

            

Current assets

            

Cash and cash equivalents

   $ 771      $ 2,505      $ 176,834      $ 2,877      $ —       $ 182,987   

Restricted cash

     —         —         37        —         —         37   

Accounts receivable, net

     —         —         147,284        21,080        (22,097     146,267   

Inventories, net

     —         —         83,910        —         —         83,910   

Other receivables

     323        50,276        6,823        1,433        (55,193     3,662   

Prepaid expenses

     139        —         13,378        364        (3,480     10,401   

Current deferred income tax assets

     —         —         20,579        2,291        —         22,870   

Other current assets

     89,714        255,474        5,418        208,130        (553,414     5,322   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     90,947        308,255        454,263        236,175        (634,184     455,456   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     —         —         255,056        88        —         255,144   

Intangible assets, net

     —         —         12,084        85        —         12,169   

Long-term prepaid expenses

     —         —         19,247        —         (3,146     16,101   

Investment in subsidiaries

     (430,112     (516,426     —         (321,345     1,267,883        —    

Long-term intercompany loan

     697,125        771,128        —         620,570        (2,088,823     —    

Deferred income tax assets

     —         —         41,485        1,319        —         42,804   

Other non-current assets

     —         5,549        9,541        269        —         15,359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 357,960      $ 568,506      $ 791,676      $ 537,161      $ (1,458,270   $ 797,033   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

            

Current liabilities

            

Accounts payable

   $ —       $ —       $ 100,569      $ 610      $ (21,754   $ 79,425   

Other accounts payable

     54,206        8        29,034        2,263        (55,536     29,975   

Accrued expenses

     574        99,599        245,843        256,300        (553,048     49,268   

Derivative liabilities

     —         —         4,619        —         —         4,619   

Other current liabilities

     —         —         2,980        4,002        (3,846     3,136   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     54,780        99,607        383,045        263,175        (634,184     166,423   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term borrowings, net

     —         898,852        606,000        785,698        (2,088,823     201,727   

Accrued severance benefits, net

     —         —         111,557        249        —         111,806   

Other non-current liabilities

     —         —         11,835        5,207        (3,145     13,897   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     54,780        998,459        1,112,437        1,054,329        (2,726,152     493,853   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity

            

Common stock

     397        136,229        39,735        51,246        (227,210     397   

Additional paid-in capital

     103,310        (730,824     (534,460     (728,738     1,994,022        103,310   

Retained earnings

     279,846        199,097        204,039        194,977        (598,113     279,846   

Treasury stock

     (45,918     —         —         —         —         (45,918

Accumulated other comprehensive loss

     (34,455     (34,455     (30,075     (34,653     99,183        (34,455
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     303,180        (429,953     (320,761     (517,168     1,267,882        303,180   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 357,960      $ 568,506      $ 791,676      $ 537,161      $ (1,458,270   $ 797,033   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

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, 2012

 

     MagnaChip
Semiconductor
Corporation
(Parent)
    Co-Issuers     Non-
Guarantors
    Guarantors     Eliminations     Consolidated  

Assets

            

Current assets

            

Cash and cash equivalents

   $ 2,193      $ 10,539      $ 168,176      $ 1,330      $ —       $ 182,238   

Restricted cash

     —         —         133        —         —         133   

Accounts receivable, net

     —         —         143,514        23,143        (23,326     143,331   

Inventories, net

     —         —         89,363        —         —         89,363   

Other receivables

     363        42,276        3,288        183        (44,681     1,429   

Prepaid expenses

     36        —         10,544        201        (2,897     7,884   

Current deferred income tax assets

     —         —         20,177        2,591        —         22,768   

Other current assets

     84,045        243,989        8,918        199,034        (526,306     9,680   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     86,637        296,804        444,113        226,482        (597,210     456,826   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     —         —         238,157        99        —         238,256   

Intangible assets, net

     —         —         15,138        122        —         15,260   

Long-term prepaid expenses

     —         —         21,382        —         (3,334     18,048   

Deferred income tax assets

     —         —         44,927        1,783        —         46,710   

Investment in subsidiaries

     (422,475     (513,236     —         (317,612     1,253,323        —    

Long-term intercompany loan

     697,125        776,369        —         621,992        (2,095,486     —    

Other non-current assets

     —         5,760        8,818        288        —         14,866   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 361,287      $ 565,967      $ 772,535      $ 533,154      $ (1,442,707   $ 789,966   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

            

Current liabilities

            

Accounts payable

   $ —       $ —       $ 101,877      $ 360      $ (23,001   $ 79,236   

Other accounts payable

     44,438        —         15,490        679        (45,007     15,600   

Accrued expenses

     308        89,095        235,921        244,467        (526,305     43,486   

Other current liabilities

     6,232        —         3,507        3,131        (2,897     9,973   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     50,978        89,095        356,795        248,637        (597,210     148,295   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term borrowings

     —         898,778        606,000        792,361        (2,095,486     201,653   

Accrued severance benefits, net

     —         —         112,210        236        —         112,446   

Other non-current liabilities

     —         —         15,071        5,525        (3,333     17,263   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     50,978        987,873        1,090,076        1,046,759        (2,696,029     479,657   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity

            

Common stock

     396        136,229        39,005        51,976        (227,210     396   

Additional paid-in capital

     101,885        (731,240     (534,819     (729,213     1,995,272        101,885   

Retained earnings

     287,251        212,140        217,341        203,133        (632,614     287,251   

Treasury stock

     (39,918     —         —         —         —         (39,918

Accumulated other comprehensive loss

     (39,305     (39,305     (39,068     (39,501     117,874        (39,305
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     310,309        (422,176     (317,541     (513,605     1,253,322        310,309   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 361,287      $ 565,697      $ 772,535      $ 533,154      $ (1,442,707   $ 789,966   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Statements of Comprehensive Income

For the three months ended March 31, 2013

 

     MagnaChip
Semiconductor
Corporation
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ —       $ 205,448      $ 4,788      $ (4,938   $ 205,298   

Cost of sales

     —         —         139,554        114        (113     139,555   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —         —         65,894        4,674        (4,825     65,743   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     1,289        24        19,283        3,144        (3,949     19,791   

Research and development expenses

     —         —         21,030        428        (876     20,582   

Restructuring and impairment charges

     —         —         2,446        —         —         2,446   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (1,289     (24     23,135        1,102        —         22,924   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     5,669        (4,561     (34,924     5,149        —         (28,667
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes, equity in earnings of related equity investment

     4,380        (4,585     (11,789     6,251        —         (5,743
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses

     —         —         228        1,434        —         1,662   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of related investment

     4,380        (4,585     (12,017     4,817        —         (7,405
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in loss of related investment

     (11,785     (7,338     —         (12,017     31,140        —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (7,405   $ (11,923   $ (12,017   $ (7,200   $ 31,140      $ (7,405
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (2,555   $ (7,073   $ (3,024   $ (2,352   $ 12,449      $ (2,555
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Statements of Comprehensive Income

For the three months ended March 31, 2012

 

     MagnaChip
Semiconductor
Corporation
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ —       $ 177,011      $ 4,824      $ (4,833   $ 177,002   

Cost of sales

     —         —         127,086        252        (251     127,087   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —         —         49,925        4,572        (4,582     49,915   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     620        44        18,010        3,086        (3,551     18,209   

Research and development expenses

     —         —         20,572        290        (1,031     19,831   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (620     (44     11,343        1,196        —         11,875   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     5,796        4,180        (462     (3,896     —         5,618   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes, equity in earnings of related equity investment

     5,176        4,136        10,881        (2,700     —         17,493   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses

     115        125        447        1,543        —         2,230   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before equity in earnings (loss) of related investment

     5,061        4,011        10,434        (4,243     —         15,263   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in earnings of related investment

     10,202        6,105        —         10,432        (26,739     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 15,263      $ 10,116      $ 10,434      $ 6,189      $ (26,739   $ 15,263   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 8,604      $ 3,457      $ 5,859      $ (471   $ (8,845   $ 8,604   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

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 three months ended March 31, 2013

 

     MagnaChip
Semiconductor
Corporation
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Cash flow from operating activities

            

Net loss

   $ (7,405   $ (11,923   $ (12,017   $ (7,200   $ 31,140      $ (7,405

Adjustments to reconcile net loss to net cash provided by (used in) operating activities

            

Depreciation and amortization

     —         —         8,475        47        —         8,522   

Provision for severance benefits

     —         —         4,195        34        —         4,229   

Amortization of debt issuance costs and original issue discount

     —         283        —         —         —         283   

Loss (gain) on foreign currency translation, net

     171        5,070        30,138        (7,099     —         28,280   

Loss on disposal of intangible assets, net

     —         —         1        —         —         1   

Restructuring and impairment charges

     —         —         618        —         —         618   

Stock-based compensation

     2        —         416        2        —         420   

Equity in loss of related investment

     11,785        7,338        —         12,017        (31,140     —    

Other

     —         —         686        (51     —         635   

Changes in operating assets and liabilities

            

Accounts receivable, net

     —         —         (7,037     1,857        (1,229     (6,409

Inventories, net

     —         —         2,022        —         —         2,022   

Other receivables

     1,159        (8,000     (3,698     (1,251     10,512        (1,278

Other current assets

     (5,942     (11,485     1,036        (9,494     27,899        2,014   

Deferred tax assets

     —         —         1,760        422        —         2,182   

Accounts payable

     —         —         794        249        1,247        2,290   

Other accounts payable

     9,769        8        8,897        1,591        (10,531     9,734   

Accrued expenses

     266        10,675        2,694        12,198        (26,958     (1,125

Other current liabilities

     (6,233     —         (415     1,761        (951     (5,838

Payment of severance benefits

     —         —         (627     —         —         (627

Other

     —         —         1,411        (2,317     (98     (1,004
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     3,572        (8,034     39,349        2,766        (109     37,544   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

            

Decrease in restricted cash

     —         —         92        —         —         92   

Purchases of plant, property and equipment

     —         —         (32,927     —         —         (32,927

Payment for intellectual property registration

     —         —         (142     —         —         (142

 

24


Table of Contents

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 three months ended March 31, 2013

 

     MagnaChip
Semiconductor
Corporation
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations      Consolidated  

Payment of guarantee deposits

     —         —         (741     —         —          (741

Other

     —         —         (9     17        —          8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) investing activities

     —         —         (33,727     17        —          (33,710
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flow from financing activities

             

Proceeds from issuance of common stock

     1,006        —         —         —         —          1,006   

Acquisition of treasury stock

     (6,000     —         —         —         —          (6,000
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     (4,994     —         —         —         —          (4,994
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of exchanges rates on cash and cash equivalents

     —         —         3,002        (1,202     109         1,909   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     (1,422     (8,034     8,624        1,581        —          749   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents

             

Beginning of the period

     2,193        10,539        168,176        1,330        —          182,238   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalent from changes of consolidated subsidiaries

     —         —         34        (34     —          —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

End of the period

   $ 771      $ 2,505      $ 176,834      $ 2,877      $  —        $ 182,987   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

25


Table of Contents

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 three months ended March 31, 2012

 

     MagnaChip
Semiconductor
Corporation
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Cash flow from operating activities

            

Net income

   $ 15,263      $ 10,116      $ 10,434      $ 6,189      $ (26,739   $ 15,263   

Adjustments to reconcile net income to net cash provided by (used in) operating activities

            

Depreciation and amortization

     —         —         7,430        44        —         7,474   

Provision for severance benefits

     —         —         4,694        9        —         4,703   

Amortization of debt issuance costs and original issue discount

     —         242        —         —         —         242   

Loss (gain) on foreign currency translation, net

     —         (4,456     (11,903     3,535        —         (12,824

Gain on disposal of property, plant and equipment, net

     —         —         (269     —         —         (269

Loss on disposal of intangible assets, net

     —         —         11        —         —         11   

Stock-based compensation

     (34     —         484        8        —         458   

Equity in earnings of related investment

     (10,202     (6,105     —         (10,432     26,739        —    

Other

     1        1        95        27        (1     123   

Changes in operating assets and liabilities

            

Accounts receivable, net

     —         —         1,888        (3     (546     1,339   

Inventories, net

     —         —         (2,860     —         —         (2,860

Other receivables

     1        (11,032     1,367        29        5,611        (4,024

Other current assets

     (5,913     (11,197     8,590        (29,369     46,425        8,536   

Deferred tax assets

     74        81        190        526        —         871   

Accounts payable

     —         —         12,601        (570     550        12,581   

Other accounts payable

     11,170        25        (401     (5,481     (5,611     (298

Accrued expenses

     (13     11,135        14,010        31,183        (46,429     9,886   

Other current liabilities

     243        266        705        1,011        —         2,225   

Payment of severance benefits

     —         —         (2,323     —         —         (2,323

Other

     (121     (133     982        (1,989     —         (1,261
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     10,469        (11,057     45,725        (5,283     (1     39,853   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

            

Decrease in restricted cash

     —         —         2,995        —         —         2,995   

Proceeds from disposal of plant, property and equipment

     —         —         273        —         —         273   

Purchases of plant, property and equipment

     —         —         (24,743     (15     —         (24,758

 

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Table of Contents

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 three months ended March 31, 2012

 

     MagnaChip
Semiconductor
Corporation
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Payment for intellectual property registration

     —         —         (190     —         —         (190

Payment for purchase of Dawin, net of cash acquired

     —         —         (8,642     —         —         (8,642

Decrease in short-term financial instruments

     —         —         173        —         —         173   

Collection of guarantee deposits

     —         —         14        17        —         31   

Payment of guarantee deposits

     —         —         (176     (2     —         (178

Other

     —         11,032        (34     11,017        (22,063     (48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     —         11,032        (30,330     11,017        (22,063     (30,344
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow from financing activities

            

Proceeds from issuance of common stock

     108        —         —         —         —         108   

Repayment of long-term intercompany borrowings

     —         —         (11,321     (11,032     22,353        —    

Repayment of obligations under capital lease

     —         —         (1,510     —         —         (1,510

Acquisition of treasury stock

     (11,935     —         —         —         —         (11,935
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (11,827     —         (12,831     (11,032     22,353        (13,337
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchanges rates on cash and cash equivalents

     —         —         (956     (415     (289     (1,660
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (1,358     (25     1,608        (5,713     —         (5,488
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

            

Beginning of the period

     1,677        25,119        127,118        8,197        —         162,111   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of the period

   $ 319      $ 25,094      $ 128,726      $ 2,484      $ —       $ 156,623   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the related notes included elsewhere in this report. This discussion and analysis contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” and elsewhere in this report.

Overview

We are a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer applications. We believe we have one of the broadest and deepest analog and mixed-signal semiconductor technology platforms in the industry, supported by our 30-year operating history, large portfolio of approximately 3,200 registered novel patents and 120 pending novel patent applications, and extensive engineering and manufacturing process expertise. Our business is comprised of three key segments: Display Solutions, Power Solutions and Semiconductor Manufacturing Services. Our Display Solutions products include display drivers that cover a wide range of flat panel displays and multimedia devices. Our Power Solutions products include discrete and integrated circuit solutions for power management in high-volume consumer applications. Our 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.

Our wide variety of analog and mixed-signal semiconductor products and manufacturing services combined with our deep technology platform allows us to address multiple high-growth end markets and to rapidly develop and introduce new products and services in response to market demands. Our substantial manufacturing operations in Korea and design center in Korea place us at the core of the global consumer electronics supply chain. We believe this enables us to quickly and efficiently respond to our customers’ needs and allows us to better serve and capture additional demand from existing and new customers.

To maintain and increase our profitability, we must accurately forecast trends in demand for consumer electronics products that incorporate semiconductor products we produce. We must understand our customers’ needs as well as the likely end market trends and demand in the markets they serve. We must balance the likely manufacturing utilization demand of our product businesses and foundry business to optimize the utilization of our facilities. We must also invest in relevant research and development activities and manufacturing capacity and purchase necessary materials on a timely basis to meet our customers’ demand while maintaining our target margins and cash flow.

The semiconductor markets in which we participate are highly competitive. The prices of our products tend to decrease regularly over their useful lives, and such price decreases can be significant as new generations of products are introduced by us or our competitors. We strive to offset the impact of declining selling prices for existing products through cost reductions and the introduction of new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to mitigate the risk of losses from product obsolescence.

Demand for our products and services is driven primarily by overall demand for consumer electronics products and can be adversely affected by periods of weak consumer spending or by market share losses by our customers. To mitigate the impact of market volatility on our business, we seek to address market segments and geographies with higher growth rates than the overall consumer electronics industry. We expect to derive a meaningful portion of our growth from growing demand in such markets. We also expect that new competitors will emerge in these markets that may place increased pressure on the pricing for our products and services, but we believe that we will be able to successfully compete based upon our higher quality products and services and that the impact from the increased competition will be more than offset by increased demand arising from such markets. Further, we believe we are well-positioned competitively as a result of our long operating history, existing manufacturing capacity and our Korea-based operations.

Within our Display Solutions and Power Solutions segments, net sales are driven by design wins in which we or another company is selected by an electronics original equipment manufacturer, or OEM, or other potential customer to supply its demand for a particular product. A customer will often have more than one supplier designed in to multi-source components for a particular product line. Once designed in, we often specify the pricing of a particular product for a set period of time, with periodic discussions and renegotiations of pricing with our customers. In any given period, our net sales depend heavily upon the end-market demand for the goods in which our products are used, the inventory levels maintained by our customers and in some cases, allocation of demand for components for a particular product among selected qualified suppliers.

Within the Semiconductor Manufacturing Services business, net sales are driven by customers’ decisions on which manufacturing services provider to use for a particular product. Most of our Semiconductor Manufacturing Services customers are fabless and depend upon service providers like us to manufacture their products. A customer will often have more than one supplier of manufacturing services; however, they tend to allocate a majority of manufacturing volume to one of their suppliers. We strive to be the primary supplier of manufacturing services to our customers. Once selected as a primary supplier, we often specify the pricing of a

 

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particular service on a per wafer basis for a set period of time, with periodic discussions and renegotiations of pricing with our customers. In any given period, our net sales depend heavily upon the end-market demand for the goods in which the products we manufacture for customers are used, the inventory levels maintained by our customers and, in some cases, allocation of demand for manufacturing services among selected qualified suppliers.

In contrast to fabless semiconductor companies, our internal manufacturing capacity provides us with greater control over manufacturing costs and the ability to implement process and production improvements which can favorably impact gross profit margins. Our internal manufacturing capacity also allows for better control over delivery schedules, improved consistency over product quality and reliability and improved ability to protect intellectual property from misappropriation. However, having internal manufacturing capacity exposes us to the risk of under-utilization of manufacturing capacity which results in lower gross profit margins, particularly during downturns in the semiconductor industry.

Our products and services require investments in capital equipment. Analog and mixed-signal manufacturing facilities and processes are typically distinguished by the design and process implementation expertise rather than the use of the most advanced equipment. These processes also tend to migrate more slowly to smaller geometries due to technological barriers and increased costs. For example, some of our products use high-voltage technology that requires larger geometries and that may not migrate to smaller geometries for several years, if at all. Additionally, the performance of many of our products is not necessarily dependent on geometry. As a result, our manufacturing base and strategy does not require substantial investment in leading edge process equipment, allowing us to utilize our facilities and equipment over an extended period of time with moderate required capital investments. Generally, incremental capacity expansions in our segment of the market result in more moderate industry capacity expansion as compared to leading edge processes. As a result, this market, and we, specifically, are less likely to experience significant industry overcapacity, which can cause product prices to plunge dramatically. In general, we seek to invest in manufacturing capacity that can be used for multiple high-value applications over an extended period of time. We believe this capital investment strategy enables us to optimize our capital investments and facilitates deeper and more diversified product and service offerings.

Our success going forward will depend upon our ability to adapt to future challenges such as the emergence of new competitors for our products and services or the consolidation of current competitors. Additionally, we must innovate to remain ahead of, or at least rapidly adapt to, technological breakthroughs that may lead to a significant change in the technology necessary to deliver our products and services. We believe that our established relationships and close collaboration with leading customers enhance our visibility into new product opportunities, market and technology trends and improve our ability to meet these challenges successfully. In our Semiconductor Manufacturing Services business, we strive to maintain competitiveness and our position as a primary manufacturing services provider to our customers by offering high value added, unique processes, high flexibility and excellent service.

Recent Developments

On October 11, 2011, we announced that our board of directors adopted a stock repurchase program whereby we may, subject to prevailing market conditions and other factors, repurchase up to $35.0 million of our outstanding common stock. The stock repurchase program began on October 27, 2011. On August 13, 2012, we announced that our board of directors extended our existing stock repurchase program through October 27, 2013, and increased the total amount of common stock we may repurchase by an additional $25 million, subject to applicable legal and contractual restrictions, for a maximum aggregate repurchase amount under the program of up to $60 million. The stock repurchase program does not require that we purchase a minimum amount of shares of our common stock and may be commenced, suspended, resumed or terminated at any time without notice. As of March 31, 2013, we had purchased 4,339,901 shares of our common stock in the open market at an aggregate cost of $45.9 million.

On March 2, 2012, our Korean subsidiary, MagnaChip Semiconductor, Ltd., completed the acquisition of Dawin Electronics, a privately-held semiconductor company that designs and manufactures IGBT, Fast Recovery Diode and MOSFET modules. The total consideration paid for the acquisition, amounted to $9.3 million. As a result of the acquisition, we expect to grow our IGBT and FRD business position and improve our IGBT module cost structure using Dawin Electronic’s developed technology and engineering know-how. We expect that the acquisition will be synergistic to our Power Solutions business and be accretive to its revenue. We recorded $3.2 million in goodwill at the completion of the acquisition.

On February 8, 2013, we closed an underwritten registered public offering of 5,750,000 shares of our common stock owned by certain of our stockholders at a price per share of $14.50. We did not receive any proceeds from the sale of our common stock by the selling stockholders but paid certain expenses in connection with such secondary offering.

 

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Business Segments

We report in three separate business segments because we derive our revenues from three principal business lines: Display Solutions, Power Solutions, and Semiconductor Manufacturing Services. We have identified these segments based on how we allocate resources and assess our performance.

 

   

Display Solutions: Our Display Solutions products include source and gate drivers and timing controllers that cover a wide range of flat panel displays used in LCD televisions and LED televisions and displays, mobile PCs and mobile communications and entertainment devices. Our display solutions support the industry’s most advanced display technologies, such as LTPS and AMOLED, as well as high-volume display technologies such as TFT. Our Display Solutions business represented 34.3% and 47.0% of our net sales for the three months ended March 31, 2013 and March 31, 2012, respectively.

 

   

Power Solutions: Our Power Solutions segment produces power management semiconductor products including discrete and integrated circuit solutions for power management in high-volume consumer applications. These products include MOSFETs, LED drivers, DC-DC converters, analog switches and linear regulators, such as low-dropout regulators, or LDOs. Our power solutions products are designed for applications such as mobile phones, LCD televisions, and desktop computers, and allow electronics manufacturers to achieve specific design goals of high efficiency and low standby power consumption. Going forward, we expect to continue to expand our power management product portfolio. Our Power Solutions business represented 14.7% and 14.3% of our net sales for three months ended March 31, 2013 and March 31, 2012, respectively.

 

   

Semiconductor Manufacturing Services: Our Semiconductor Manufacturing Services segment provides specialty analog and mixed-signal foundry services to fabless semiconductor companies that serve the consumer, computing and wireless end markets. We manufacture wafers based on our customers’ product designs. We do not market these products directly to end customers but rather supply manufactured wafers and products to our customers to market to their end customers. We offer approximately 319 process flows to our manufacturing services customers. We also often partner with key customers to jointly develop or customize specialized processes that enable our customers to improve their products and allow us to develop unique manufacturing expertise. Our manufacturing services are targeted at customers who require differentiated, specialty analog and mixed-signal process technologies such as high voltage CMOS, embedded memory and power. These customers typically serve high-growth and high-volume applications in the consumer, computing and wireless end markets. Our Semiconductor Manufacturing Services business represented 50.7% and 38.3% of our net sales for the three months ended March 31, 2013 and March 31, 2012, respectively.

Factors Affecting Our Results of Operations

Net Sales. We derive a majority of our sales (net of sales returns and allowances) from three reportable segments: Display Solutions, Power Solutions and Semiconductor Manufacturing Services. Our product inventory is primarily located in Korea and is available for drop shipment globally. Outside of Korea, we maintain limited product inventory, and our sales representatives generally relay orders to our factories in Korea for fulfillment. We have strategically located our sales and technical support offices near concentrations of major customers. Our sales offices are located in Hong Kong, Japan, Korea, Taiwan, China and the United States. Our network of authorized agents and distributors consists of agents in the United States and Europe and distributors and agents in the Asia Pacific region. Our net sales from All other consist principally of rental income and the disposal of waste materials.

We recognize revenue when risk and reward of ownership passes to the customer either upon shipment, upon product delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement. For the three months ended March 31, 2013 and March 31, 2012, we sold products to over 202 and 190 customers, respectively, and our net sales to our ten largest customers represented 69% and 64% of our net sales. We have a combined production capacity of over 136,000 eight-inch equivalent semiconductor wafers per month. We believe our large-scale, cost-effective fabrication facilities enable us to rapidly adjust our production levels to meet shifts in demand by our end customers.

Gross Profit. Our overall gross profit generally fluctuates as a result of changes in overall sales volumes and in the average selling prices of our products and services. Other factors that influence our gross profit include changes in product mix, the introduction of new products and services and subsequent generations of existing products and services, shifts in the utilization of our manufacturing facilities and the yields achieved by our manufacturing operations, changes in material, labor and other manufacturing costs and variation in depreciation expense.

Average Selling Prices. Average selling prices for our products tend to be highest at the time of introduction of new products which utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products. We strive to offset the impact of declining selling prices for existing products through our product development activities and by introducing new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to preclude losses from product and productive capacity obsolescence.

 

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Material Costs. Our cost of sales consists of costs of raw materials, such as silicon wafers, chemicals, gases and tape, packaging supplies, equipment maintenance and depreciation expenses. We use processes that require specialized raw materials, such as silicon wafers, that are generally available from a limited number of suppliers. If demand increases or supplies decrease, the costs of our raw materials could significantly increase.

Labor Costs. A significant portion of our employees are located in Korea. Under Korean labor laws, most employees and certain executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of March 31, 2013, approximately 98.5% of our employees were eligible for severance benefits.

Depreciation Expense. We periodically evaluate the carrying values of long-lived assets, including property, plant and equipment and intangible assets, as well as the related depreciation periods. We depreciated our property, plant and equipment using the straight-line method over the estimated useful lives of our assets. Depreciation rates vary from 30-40 years on buildings to 5 to 12 years for certain equipment and assets. Our evaluation of carrying values is based on various analyses including cash flow and profitability projections. If our projections indicate that future undiscounted cash flows are not sufficient to recover the carrying values of the related long-lived assets, the carrying value of the assets is impaired and will be reduced, with the reduction charged to expense so that the carrying value is equal to fair value.

Selling Expenses. We sell our products worldwide through a direct sales force as well as a network of sales agents and representatives to OEMs, including major branded customers and contract manufacturers, and indirectly through distributors. Selling expenses consist primarily of the personnel costs for the members of our direct sales force, a network of sales representatives and other costs of distribution. Personnel costs include base salary, benefits and incentive compensation.

General and Administrative Expenses. General and administrative expenses consist of the costs of various corporate operations, including finance, legal, human resources and other administrative functions. These expenses primarily consist of payroll-related expenses, consulting and other professional fees and office facility-related expenses. Historically, our selling, general and administrative expenses have remained relatively constant as a percentage of net sales, and we expect this trend to continue in the future.

Research and Development. The rapid technological change and product obsolescence that characterize our industry require us to make continuous investments in research and development. Product development time frames vary but, in general, we incur research and development costs one to two years before generating sales from the associated new products. These expenses include personnel costs for members of our engineering workforce, cost of photomasks, silicon wafers and other non-recurring engineering charges related to product design. Additionally, we develop base-line process technology through experimentation and through the design and use of characterization wafers that help achieve commercially feasible yields for new products. The majority of research and development expenses are for process development that serves as a common technology platform for all of our product segments. Consequently, we do not allocate these expenses to individual segments.

Restructuring and Impairment Charges. We evaluate the recoverability of certain long-lived assets on a periodic basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In our efforts to improve our overall profitability in future periods, we have closed or otherwise impaired, and may in the future close or impair, facilities that are underutilized and that are no longer aligned with our long-term business goals.

Interest Expense, Net. Our interest expense was incurred primarily under our senior notes.

Impact of Foreign Currency Exchange Rates on Reported Results of Operations. Historically, a portion of our revenues and greater than the majority of our operating expenses and costs of sales have been denominated in non-U.S. currencies, principally the Korean won, and we expect that this will remain true in the future. Because we report our results of operations in U.S. dollars converted from our non-U.S. revenues and expenses based on monthly average exchange rates, changes in the exchange rate between the Korean won and the U.S. dollar could materially impact our reported results of operations and distort period to period comparisons. In particular, because of the difference in the amount of our consolidated revenues and expenses that are in U.S. dollars relative to Korean won, depreciation in the U.S. dollar relative to the Korean won could result in a material increase in reported costs relative to revenues, and therefore could cause our profit margins and operating income (loss) to appear to decline materially, particularly relative to prior periods. The converse is true if the U.S. dollar were to appreciate relative to the Korean won. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our stock could be adversely affected.

From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. Our Korean subsidiary enters into foreign currency option, forward and zero cost collar contracts in order to mitigate a portion of the impact of U.S. dollar-Korean won exchange rate fluctuations on our operating results. These foreign currency option,

 

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forward and zero cost collar contracts typically require us to sell specified notional amounts in U.S. dollars and provide us the option to sell specified notional amounts in U.S. dollars during successive months to our counterparty in exchange for Korean won at specified exchange rates. Obligations under these foreign currency option, forward and zero cost collar contracts must be cash collateralized if our exposure exceeds certain specified thresholds. These option, forward and zero cost collar contracts may be terminated by the counterparty in a number of circumstances, including if our long-term debt rating falls below B-/B3 or if our total cash and cash equivalents is less than $30.0 million at the end of a fiscal quarter. We cannot assure you that any hedging technique we implement will be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on our results of operations.

Foreign Currency Gain or Loss. Foreign currency translation gains or losses on transactions by us or our subsidiaries in a currency other than our or our subsidiaries’ functional currency are included in our statements of operations as a component of other income (expense). A substantial portion of this net foreign currency gain or loss relates to non-cash translation gain or loss related to the principal balance of intercompany balances at our Korean subsidiary that are denominated in U.S. dollars. This gain or loss results from fluctuations in the exchange rate between the Korean won and U.S. dollar.

Income Taxes. We record our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. We exercise significant management judgment in determining our provision for income taxes, deferred tax assets and liabilities. We assess whether it is more likely than not that the deferred tax assets existing at the period-end will be realized in future periods. In such assessment, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent results of operations. In the event, we were to determine that it would be able to realize the deferred income tax assets in the future in excess of their net recorded amount, we would adjust the valuation allowance, which would reduce the provision for income taxes.

Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions, including Korea. Significant estimates and judgments are required in determining our worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.

Capital Expenditures. We invest in manufacturing equipment, software design tools and other tangible and intangible assets for capacity expansion and technology improvement. Capacity expansions and technology improvements typically occur in anticipation of seasonal increases in demand. We typically pay for capital expenditures in partial installments with portions due on order, delivery and final acceptance. Our capital expenditures include our payments for the purchase of property, plant and equipment as well as payments for the registration of intellectual property rights.

Inventories. We monitor our inventory levels in light of product development changes and market expectations. We may be required to take additional charges for quantities in excess of demand, cost in excess of market value and product age. Our analysis may take into consideration historical usage, expected demand, anticipated sales price, new product development schedules, the effect new products might have on the sales of existing products, product age, customer design activity, customer concentration and other factors. These forecasts require us to estimate our ability to predict demand for current and future products and compare those estimates with our current inventory levels and inventory purchase commitments. Our forecasts for our inventory may differ from actual inventory use.

Principles of Consolidation. Our consolidated financial statements include the accounts of our company and our wholly-owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation.

Segments. We operate in three segments: Display Solutions, Power Solutions and Semiconductor Manufacturing Services. Net sales for the All other category primarily relate to certain business activities that do not constitute operating or reportable segments.

 

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Results of Operations – Comparison of Three Months Ended March 31, 2013 and 2012

The following table sets forth consolidated results of operations for the three months ended March 31, 2013 and 2012:

 

     Three Months Ended
March 31, 2013
    Three Months Ended
March 31, 2012
       
     Amount     % of
Net Sales
    Amount     % of
Net Sales
    Change
Amount
 
     (In millions)  

Net sales

   $ 205.3        100.0   $ 177.0        100.0   $ 28.3   

Cost of sales

     139.6        68.0        127.1        71.8        12.5   
  

 

 

     

 

 

     

 

 

 

Gross profit

     65.7        32.0        49.9        28.2        15.8   
  

 

 

     

 

 

     

 

 

 

Selling, general and administrative expenses

     19.8        9.6        18.2        10.3        1.6   

Research and development expenses

     20.6        10.0        19.8        11.2        0.8   

Restructuring and impairment charges

     2.4        1.2        —         —         2.4   
  

 

 

     

 

 

     

 

 

 

Operating income

     22.9        11.2        11.9        6.7        11.0   
  

 

 

     

 

 

     

 

 

 

Interest expense, net

     (5.8     (2.8     (5.6     (3.2     (0.3

Foreign currency gain (loss), net

     (22.6     (11.0     11.1        6.3        (33.7

Others

     (0.3     (0.1     0.1        0.1        (0.3
  

 

 

     

 

 

     

 

 

 
     (28.7     (14.0     5.6        3.2        (34.3
  

 

 

     

 

 

     

 

 

 

Income (loss) before income taxes

     (5.7     (2.8     17.5        9.9        (23.2

Income tax expenses

     1.7        0.8        2.2        1.3        (0.6
  

 

 

     

 

 

     

 

 

 

Net income (loss)

   $ (7.4     (3.6 )%    $ 15.3        8.6   $ (22.7
  

 

 

     

 

 

     

 

 

 

Net Sales

 

     Three Months Ended
March 31, 2013
    Three Months Ended
March 31, 2012
       
     Amount      % of
Net Sales
    Amount      % of
Net Sales
    Change
Amount
 
     (In millions)  

Display Solutions

   $ 70.3         34.3   $ 83.2         47.0   $ (12.9

Power Solutions

     30.2         14.7        25.2         14.3        4.9   

Semiconductor Manufacturing Services

     104.1         50.7        67.9         38.3        36.3   

All other

     0.7         0.3