10-Q 1 d417855d10q.htm FORM 10-Q 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 September 30, 2012

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   ¨
Non-accelerated filer   x  (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 October 31, 2012, the registrant had 35,963,725 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 September  30, 2012 and December 31, 2011

     4   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011

     5   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011

     6   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2012 and 2011

     7   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011

     9   
     

MagnaChip Semiconductor Corporation and Subsidiaries Notes to Consolidated Financial Statements

     10   
   Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     31   
   Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     51   
   Item 4.   

Controls and Procedures

     51   

PART II OTHER INFORMATION

     51   
   Item 1A.   

Risk Factors

     51   
   Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     64   
   Item 6.   

Exhibits

     65   

SIGNATURES

     66   

 

 

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, 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


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PART I—FINANCIAL INFORMATION

 

Item 1. Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

 

     September 30,
2012
    December 31,
2011
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 165,658      $ 162,111   

Restricted cash

     136        6,830   

Accounts receivable, net

     148,537        125,922   

Inventories, net

     75,020        62,836   

Other receivables

     2,097        256   

Prepaid expenses

     9,120        6,032   

Other current assets

     19,270        15,909   
  

 

 

   

 

 

 

Total current assets

     419,838        379,896   
  

 

 

   

 

 

 

Property, plant and equipment, net

     229,632        182,663   

Intangible assets, net

     16,684        16,787   

Long-term prepaid expenses

     9,575        4,790   

Other non-current assets

     17,044        18,539   
  

 

 

   

 

 

 

Total assets

   $ 692,773      $ 602,675   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 97,386      $ 77,848   

Other accounts payable

     19,049        13,452   

Accrued expenses

     40,483        31,723   

Current portion of capital lease obligations

     —          2,852   

Derivative liabilities

     1,818        9,757   

Other current liabilities

     8,460        2,007   
  

 

 

   

 

 

 

Total current liabilities

     167,196        137,639   
  

 

 

   

 

 

 

Long-term borrowings, net

     201,586        201,389   

Accrued severance benefits, net

     105,051        90,755   

Other non-current liabilities

     11,556        6,222   
  

 

 

   

 

 

 

Total liabilities

     485,389        436,005   
  

 

 

   

 

 

 

Stockholders’ equity

    

Common stock, $0.01 par value, 150,000,000 shares authorized 39,513,351 shares issued and 35,954,925 outstanding at September 30, 2012 and 39,439,115 shares issued and 37,907,575 outstanding at December 31, 2011

     395        394   

Additional paid-in capital

     100,834        98,929   

Retained earnings

     161,965        93,950   

Treasury stock, 3,558,426 and 1,531,540 shares at September 30, 2012 and December 31, 2011, respectively

     (34,730     (11,793

Accumulated other comprehensive loss

     (21,080     (14,810
  

 

 

   

 

 

 

Total stockholders’ equity

     207,384        166,670   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 692,773      $ 602,675   
  

 

 

   

 

 

 

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

 

4


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     Three Months Ended     Nine Months Ended  
     September 30,
2012
    September 30,
2011
    September 30,
2012
    September 30,
2011
 

Net sales

   $ 221,872      $ 200,405      $ 601,508      $ 592,005   

Cost of sales

     145,432        140,284        412,295        409,228   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     76,440        60,121        189,213        182,777   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     21,388        17,881        59,690        50,740   

Research and development expenses

     19,470        19,003        59,063        58,115   

Restructuring and impairment charges

     —          1,621        —          4,096   

Special expense for IPO incentive

     —          —          —          12,146   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     35,582        21,616        70,460        57,680   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses)

        

Interest expense, net

     (5,746     (5,860     (16,945     (19,340

Foreign currency gain (loss), net

     21,782        (68,058     22,305        (28,465

Loss on early extinguishment of senior notes

     —          (1,357     —          (5,460

Others

     695        (558     1,485        (189
  

 

 

   

 

 

   

 

 

   

 

 

 
     16,731        (75,833     6,845        (53,454
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     52,313        (54,217     77,305        4,226   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     3,901        1,793        9,290        6,138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 48,412      $ (56,010   $ 68,015      $ (1,912
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share—

        

Basic

   $ 1.34      $ (1.43   $ 1.85      $ (0.05

Diluted

   $ 1.30      $ (1.43   $ 1.80      $ (0.05

Weighted average number of shares—

        

Basic

     36,199,655        39,064,071        36,810,214        38,823,720   

Diluted

     37,324,787        39,064,071        37,692,608        38,823,720   

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     Nine Months Ended  
     September 30,
2012
    September 30,
2011
    September 30,
2012
    September 30,
2011
 

Net income (loss)

   $ 48,412      $ (56,010   $ 68,015      $ (1,912

Other comprehensive income (loss)

        

Unrealized gain (loss) on investments

     88        (156     61        (119

Derivative adjustments

     6,802        (17,825     7,686        (21,691

Foreign currency translation adjustments

     (13,271     43,081        (14,017     18,083   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 42,031      $ (30,190   $ 61,745      $ (5,639
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS’ EQUITY

(Unaudited; in thousands of US dollars)

 

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

Three Months Ended September 30, 2012

                 

Balance at July 1, 2012

     36,353,545      $ 395       $ 100,027       $ 113,553       $ (28,728   $ (14,699   $ 170,548   

Stock-based compensation

     —          —           535         —           —          —          535   

Issuance of new stock

     2,031        —           20         —           —          —          20   

Exercise of stock options

     42,982        —           252         —           —          —          252   

Acquisitions of treasury stock

     (443,633     —           —           —           (6,002     —          (6,002

Comprehensive income:

                 

Net income

     —          —           —           48,412         —          —          48,412   

Fair valuation of derivatives

     —          —           —           —           —          4,019        4,019   

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

     —          —           —           —           —          2,783        2,783   

Foreign currency translation adjustments

     —          —           —           —           —          (13,271     (13,271

Unrealized gains on investments

     —          —           —           —           —          88        88   
                 

 

 

 

Total comprehensive income

                    42,031   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

     35,954,925      $ 395       $ 100,834       $ 161,965       $ (34,730   $ (21,080   $ 207,384   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2012

                 

Balance at January 1, 2012

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

Stock-based compensation

     —          —           1,450         —           —          —          1,450   

Issuance of new stock

     4,499        —           46         —           —          —          46   

Exercise of stock options

     69,737        1         409         —           —          —          410   

Acquisition of treasury stock

     (2,026,886     —           —           —           (22,937     —          (22,937

Comprehensive income:

                 

Net income

     —          —           —           68,015         —          —          68,015   

Fair valuation of derivatives

     —          —           —           —           —          3,374        3,374   

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

     —          —           —           —           —          4,312        4,312   

Foreign currency translation adjustments

     —          —           —           —           —          (14,017     (14,017

Unrealized gains on investments

     —          —           —           —           —          61        61   
                 

 

 

 

Total comprehensive income

                    61,745   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

     35,954,925      $ 395       $ 100,834       $ 161,965       $ (34,730   $ (21,080   $ 207,384   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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

 

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MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

 

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

Three Months Ended September 30, 2011

              

Balance at July 1, 2011

     39,357,471      $ 394       $ 97,987       $ 126,255      $ (34,822   $ 189,814   

Forfeiture of restricted units

     (3,465     —           —           —          —          —     

Stock-based compensation

     —          —           323         —          —          323   

Comprehensive loss:

              

Net loss

     —          —           —           (56,010     —          (56,010

Fair valuation of derivatives

     —          —           —           —          (16,289     (16,289

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

     —          —           —           —          (1,536     (1,536

Foreign currency translation adjustments

     —          —           —           —          43,801        43,801   

Unrealized loss on investments

     —          —           —           —          (156     (156
              

 

 

 

Total comprehensive loss

                 (30,190
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

     39,354,006      $ 394       $ 98,310       $ 70,245      $ (9,002   $ 159,947   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2011

              

Balance at January 1, 2011

     38,401,985      $ 384       $ 95,585       $ 72,157      $ (5,275   $ 162,851   

Forfeiture of restricted units

     (3,465     —           —           —          —          —     

Stock-based compensation

     —          —           1,140         —          —          1,140   

Issuance of new stock

     950,000        10         1,553         —          —          1,563   

Exercise of stock options

     5,486        —           32         —          —          32   

Comprehensive loss:

              

Net loss

     —          —           —           (1,912     —          (1,912

Fair valuation of derivatives

     —          —           —           —          (10,213     (10,213

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

     —          —           —           —          (11,478     (11,478

Foreign currency translation adjustments

     —          —           —           —          18,083        18,083   

Unrealized loss on investments

     —          —           —           —          (119     (119
              

 

 

 

Total comprehensive loss

                 (5,639
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

     39,354,006      $ 394       $ 98,310       $ 70,245      $ (9,002   $ 159,947   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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

 

8


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands of US dollars)

 

     Nine Months Ended  
     September 30,
2012
    September 30,
2011
 

Cash flows from operating activities

    

Net income (loss)

   $ 68,015      $ (1,912

Adjustments to reconcile net income to net cash provided by operating activities

    

Depreciation and amortization

     23,840        42,368   

Provision for severance benefits

     16,779        13,137   

Amortization of debt issuance costs and original issue discount

     753        728   

(Gain) loss on foreign currency translation, net

     (25,304     33,220   

Gain on disposal of property, plant and equipment, net

     (174     (15

Loss on disposal of intangible assets, net

     26        17   

Restructuring and impairment charges

     —          4,096   

Stock-based compensation

     1,450        1,798   

Loss on early extinguishment of senior notes

     —          5,460   

Other

     (332     651   

Changes in operating assets and liabilities

    

Accounts receivable

     (18,168     (4,400

Inventories

     (8,526     (4,400

Other receivables

     (1,787     836   

Other current assets

     (662     (3,196

Deferred tax assets

     1,514        1,483   

Accounts payable

     17,472        15,072   

Other accounts payable

     (700     7,157   

Accrued expenses

     13,761        (18,278

Other current liabilities

     9,450        (1,209

Payment of severance benefits

     (5,569     (6,549

Other

     (2,239     141   
  

 

 

   

 

 

 

Net cash provided by operating activities

     89,599        86,205   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Decrease (increase) in restricted cash

     6,774        (9,711

Proceeds from disposal of plant, property and equipment

     937        29   

Purchase of plant, property and equipment

     (56,745     (42,945

Payment for intellectual property registration

     (752     (521

Payment for purchase of Dawin, net of cash acquired

     (8,642     —     

Decrease in short-term financial instruments

     173        —     

Collection of guarantee deposits

     72        984   

Payment of guarantee deposits

     (311     (2,489

Other

     (50     (625
  

 

 

   

 

 

 

Net cash used in investing activities

     (58,544     (55,278
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from issuance of common stock

     436        8,835   

Repurchase of senior notes

     —          (50,307

Repayment of obligations under capital lease

     (2,968     (4,831

Acquisition of treasury stock

     (22,937     —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (25,469     (46,303

Effect of exchange rates on cash and cash equivalents

     (2,039     2,672   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     3,547        (12,704
  

 

 

   

 

 

 

Cash and cash equivalents

    

Beginning of the period

     162,111        172,172   
  

 

 

   

 

 

 

End of the period

   $ 165,658      $ 159,468   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for interest

   $ 10,921      $ 14,004   
  

 

 

   

 

 

 

Cash paid (refunded) for income taxes

   $ (599   $ 1,776   
  

 

 

   

 

 

 

Noncash transactions

    

Deferred offering costs reclassified as reduction of additional paid-in capital

   $ —        $ 7,236   
  

 

 

   

 

 

 

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

 

9


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 all adjustments consisting only of normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair presentation of financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with ASC 270, “Interim Reporting,” (“ASC 270”) and, accordingly, do not include all of the information and note disclosures required by US GAAP for complete financial statements. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for a full year or for any other periods.

The December 31, 2011 balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP.

Recent Accounting Pronouncements

In July 2012, the FASB issued ASU 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 allows 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 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 adoption of ASU 2012-02 is not expected to have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”) which requires an entity to disclose information about offsetting and related arrangements to ensure that the users of the Company’s financial statements can understand the effect that offsetting has on the Company’s financial position. ASU 2001-11 is effective for annual periods beginning on or after January 1, 2013. Retrospective application is required for all comparative periods presented. The adoption of ASU 2011-11 is not expected to have a material impact on the Company’s consolidated financial statements.

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 plans to adopt the applicable requirements of ASU 2011-08 in the fourth quarter of fiscal 2012. The Company does not expect the provisions of ASU 2011-08 to have a material effect on its financial position, results of operations or cash flows.

 

10


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (“ASU 2011-05”) which amends current comprehensive income guidance. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, it requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (“OCI”). ASU 2011-05 does not change the items that must be reported in OCI.

However, in December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”), which deferred the guidance on whether to require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-05 and did not change the effective date for ASU 2011-05. For public entities, the amendments in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. The adoption of ASU 2011-12 is not expected to have a material impact on the Company’s consolidated financial statements.

3. Completion of acquisition

On March 2, 2012, the Company’s Korean subsidiary, MagnaChip Semiconductor, Ltd., completed the acquisition of Dawin Electronics (“the acquired company”), a privately-held semiconductor company that designs and manufactures IGBT, Fast Recovery Diode and MOSFET modules.

The acquisition was accounted for as a business purchase pursuant to Accounting Standards Codification (ASC) 805, Business Combinations (“ASC 805”). As required by ASC 805-20, the Company allocated the purchase price to assets and liabilities based on their estimated fair value at the effective date of acquisition, March 2, 2012. The total consideration paid for the acquisition, amounted to $9,291 thousand. As a result of the acquisition, the Company expects to build up IGBT and FRD business position and improve IGBT module cost structure using Dawin’s developed technology and engineering know-how. The acquisition will be synergistic to the Company’s Power Solution business and be accretive to its revenue which was reflected as goodwill in the amount of $3,163 thousand at the completion of the acquisition.

4. 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 interests 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 $21,931 thousand for the nine month period ended September 30, 2012 and these sales resulted in a pre-tax loss of $35 thousand for the nine month period ended September 30, 2012, which is included in selling, general and administrative expenses in the consolidated Statements of Operations. Net proceeds of these accounts receivable sale program are recognized in the Consolidated Statements of Cash Flows as part of operating cash flows.

5. Inventories

Inventories as of September 30, 2012 and December 31, 2011 consist of the following:

 

     September 30,
2012
    December 31,
2011
 

Merchandise

   $ 6      $ —     

Finished goods

     11,254        7,140   

Semi-finished goods and work-in-process

     56,530        46,562   

Raw materials

     13,328        9,933   

Materials in-transit

     661        1,471   

Less: inventory reserve

     (6,759     (2,270
  

 

 

   

 

 

 

Inventories, net

   $ 75,020      $ 62,836   
  

 

 

   

 

 

 

 

11


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

6. Property, Plant and Equipment

Property, plant and equipment as of September 30, 2012 and December 31, 2011 comprise the following:

 

     September 30,
2012
    December 31,
2011
 

Buildings and related structures

   $ 76,310      $ 73,021   

Machinery and equipment

     209,313        151,100   

Vehicles and others

     15,087        11,998   

Equipment under capital lease

     11,664        11,160   
  

 

 

   

 

 

 
     312,374        242,279   

Less: accumulated depreciation

     (95,927     (78,130

accumulated depreciation on equipment under capital lease

     (3,312     (2,414

Land

     16,422        15,928   

Construction in progress

     75        —     
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 229,632      $ 182,663   
  

 

 

   

 

 

 

7. Intangible Assets

Intangible assets as of September 30, 2012 and December 31, 2011 are as follows:

 

     September 30,
2012
    December 31,
2011
 

Technology

   $ 23,949      $ 21,126   

Customer relationships

     27,778        26,777   

Intellectual property assets

     6,742        5,868   

Less: accumulated amortization

     (45,003     (36,984

Goodwill

     3,218        —     
  

 

 

   

 

 

 

Intangible assets, net

   $ 16,684      $ 16,787   
  

 

 

   

 

 

 

 

12


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

8. 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 September 30, 2012 are as follows:

 

Date of transaction

  

Type of derivative

   Total notional amount     

Month of settlement

August 19, 2011

   Forward    $ 54,000       October to December 2012

March 23, 2012

   Zero cost collar    $ 54,000       January to March 2013

May 18, 2012

   Zero cost collar    $ 54,000       April to June 2013

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 forward and zero cost collar contracts recorded as assets and liabilities as of September 30, 2012 and December 31, 2011 are as follows:

 

Derivatives designated as hedging instruments:

   September 30,
2012
     December 31,
2011
 

Asset Derivatives:

        

Zero cost collars

   Other current assets    $ 74       $ —     

Liability Derivatives:

        

Forward

   Derivative liabilities    $ 1,818       $ 6,801   

Zero cost collars

   Derivative liabilities    $ —         $ 2,956   

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.

 

13


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the three months ended September 30, 2012 and 2011:

 

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)
 
     3Q, 2012      3Q, 2011            3Q, 2012     3Q, 2011           3Q, 2012      3Q, 2011  

Forward

   $ 2,338      $ (8,044 )     Net sales       $ (2,783 )   $ —         Other income (expenses) — Others    $ 619      $ 171  

Zero cost collars

     1,681         (8,245     Net sales         —          1,536       Other income (expenses) — Others      76         (729
  

 

 

    

 

 

      

 

 

   

 

 

       

 

 

    

 

 

 

Total

   $ 4,019       $ (16,289      $ (2,783   $ 1,536          $ 695       $ (558
  

 

 

    

 

 

      

 

 

   

 

 

       

 

 

    

 

 

 

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the nine months ended September 30, 2012 and 2011:

 

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)
 
     9M, 2012      9M, 2011            9M, 2012     9M, 2011          9M, 2012      9M, 2011  

Options

   $ —         $ (85     Net sales       $ —        $ (829   Other income (expenses) — Others    $ —         $ (18

Forward

     1,953         (5,337     Net sales         (2,783 )     10,771      Other income (expenses) — Others      1,132         435   

Zero cost collars

     1,421         (4,791     Net sales         (1,529     1,536      Other income (expenses) — Others      349         (614
  

 

 

    

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 

Total

   $ 3,374       $ (10,213      $ (4,312   $ 11,478         $ 1,481       $ (197
  

 

 

    

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 

 

14


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

The estimated net loss as of September 30, 2012 that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings within the next twelve months is $1,714 thousand.

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

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

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

In addition, the Company is required to deposit cash collateral with Goldman Sachs International Bank (“GS”), the counterparty to the option, forward and zero cost collar contracts, for any exposure in excess of $5 million.

9. Fair Value Measurements

The Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2012, 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

   $ 649       $ 649       $ 649       $ —         $ —     

Other current assets

     74         74         —           74         —     

Liabilities:

              

Derivative liabilities

     1,818         1,818         —           1,818         —     

As of September 30, 2012, the total carrying value and estimated fair value of the senior notes which are not measured at fair value on a recurring basis were $201,586 thousand and $230,171 thousand, respectively. The estimated fair value is based on Level 2 inputs.

 

15


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

10. 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 September 30, 2012, 98.4% of employees of the Company were eligible for severance benefits.

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

 

     Three
Months
Ended
    Nine
Months
Ended
    Three
Months
Ended
    Nine
Months
Ended
 
     September 30, 2012     September 30, 2011  

Beginning balance

   $ 97,967      $ 91,882      $ 98,647      $ 88,973   

Provisions

     5,803        16,779        4,741        13,137   

Severance payments

     (753     (5,569     (2,804     (6,549

Translation adjustments

     3,148        3,073        (8,370     (3,347
  

 

 

   

 

 

   

 

 

   

 

 

 
     106,165        106,165        92,214        92,214   

Less: Cumulative contributions to the National Pension Fund

     (383     (383     (414     (414

Group Severance insurance plan

     (731     (731     (694     (694
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued severance benefits, net

   $ 105,051      $ 105,051      $ 91,106      $ 91,106   
  

 

 

   

 

 

   

 

 

   

 

 

 

The severance benefits are funded approximately 1.05% and 1.20% as of September 30, 2012 and 2011, respectively, through the Company’s National Pension Fund and group severance insurance plan which will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.

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

 

     Severance benefit  

Remainder of 2012

   $ 59   

2013

     —     

2014

     339   

2015

     350   

2016

     1,264   

2017

     1,689   

2018 – 2022

     17,507   

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.

 

16


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

11. Foreign Currency Gain (Loss), Net

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

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 and nine months ended September 30, 2012 and 2011, no income tax expense for MagnaChip Semiconductor, Ltd. (Korea) was recorded due to net operating loss carry-forwards available to offset taxable income and full allowance for deferred tax 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. In the event the Company were to determine that it would be able to realize the deferred income tax assets in the future in excess of their net recorded amount, the Company would adjust the valuation allowance, which would reduce the provision for income taxes.

Income tax expense recorded for the three month period ended September 30, 2012 and 2011 was $3,901 and $1,793, respectively, and for the nine month period ended September 30, 2012 and 2011 was $9,290 and $6,138, respectively.

13. Geographic and Segment Information

The following sets forth information relating to the reportable segments:

 

     Three Months Ended  
     September 30,
2012
     September 30,
2011
 

Net Sales

     

Display Solutions

   $ 69,415       $ 91,767   

Semiconductor Manufacturing Services

     117,978         81,571   

Power Solutions

     33,849         26,358   

All other

     630         709   
  

 

 

    

 

 

 

Total segment net sales

   $ 221,872       $ 200,405   
  

 

 

    

 

 

 

 

     Nine Months Ended  
     September 30,
2012
     September 30,
2011
 

Net Sales

     

Display Solutions

   $ 229,424       $ 248,950   

Semiconductor Manufacturing Services

     277,158         270,295   

Power Solutions

     92,801         70,509   

All other

     2,125         2,251   
  

 

 

    

 

 

 

Total segment net sales

   $ 601,508       $ 592,005   
  

 

 

    

 

 

 

 

17


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  
     September 30,
2012
     September 30,
2011
 

Korea

   $ 92,914       $ 106,698   

Asia Pacific

     68,296         52,922   

Japan

     8,250         17,123   

North America

     39,993         19,367   

Europe

     11,546         3,353   

Africa

     873         942   
  

 

 

    

 

 

 

Total

   $ 221,872       $ 200,405   
  

 

 

    

 

 

 

 

     Nine Months Ended  
     September 30,
2012
     September 30,
2011
 

Korea

   $ 285,250       $ 293,509   

Asia Pacific

     187,012         169,802   

Japan

     21,984         48,913   

North America

     79,581         66,004   

Europe

     25,496         11,349   

Africa

     2,185         2,428   
  

 

 

    

 

 

 

Total

   $ 601,508       $ 592,005   
  

 

 

    

 

 

 

Net sales from the Company’s top ten largest customers accounted for 60.4% and 61.7% for the three months ended September 30, 2012 and 2011, respectively, and 61.7% and 61.4% for the nine months ended September 30, 2012 and 2011, respectively.

For the three months ended September 30, 2012, we had two customers which represented 11.1% and 10.5% of the Company’s net sales, and for the nine months ended September 30, 2012, 12.1% and 10.5%, respectively.

For the three months and nine months ended September 30, 2011, we had one customer which represented 14.7% and 14.8% of the Company’s net sales, respectively.

Over 99% of the Company’s property, plant and equipment are located in Korea as of September 30, 2012.

 

18


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

14. Earnings per Share

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

 

     Three Months Ended  
     September 30,
2012
     September 30,
2011
 

Net income (loss)

   $ 48,412       $ (56,010

Weighted average common stock outstanding—

     

Basic

     36,199,655         39,064,071   

Diluted

     37,324,787         39,064,071   

Earnings (loss) per share—

     

Basic

   $ 1.34       $ (1.43

Diluted

   $ 1.30       $ (1.43

 

     Nine Months Ended  
     September 30,
2012
     September 30,
2011
 

Net income (loss)

   $ 68,015       $ (1,912

Weighted average common stock outstanding—

     

Basic

     36,810,214         38,823,720   

Diluted

     37,692,608         38,823,720   

Earnings (loss) per share—

     

Basic

   $ 1.85       $ (0.05

Diluted

   $ 1.80       $ (0.05

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

 

     Nine Months Ended  
     September 30,
2012
     September 30,
2011
 

Options

     273,125         213,250   

Warrants

     1,875,028         1,875,018   

 

 

19


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

15. 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) and MagnaChip Semiconductor (Shanghai) Company Limited. These guarantees are full and unconditional, subject to certain customary release provisions, as well as joint and several.

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

Below are condensed consolidating balance sheets as of September 30, 2012 and December 31, 2011, condensed consolidating statements of comprehensive income for the three months and nine months ended September 30, 2012 and 2011 and condensed consolidating statements of cash flows for the nine months ended September 30, 2012 and 2011 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.

 

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

September 30, 2012

 

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

Assets

            

Current assets

            

Cash and cash equivalents

   $ 827      $ 12,253      $ 145,921      $ 6,657      $ —        $ 165,658   

Restricted cash

     —          —          136        —          —          136   

Accounts receivable, net

     —          —          149,507        22,328        (23,298     148,537   

Inventories, net

     —          —          75,020        —          —          75,020   

Other receivables

     399        36,276        7,790        364        (42,732     2,097   

Prepaid expenses

     102        —          11,580        335        (2,897     9,120   

Other current assets

     78,395        226,332        15,430        192,979        (493,866     19,270   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     79,723        274,861        405,384        222,663        (562,793     419,838   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     —          —          229,539        93        —          229,632   

Intangible assets, net

     —          —          16,524        160        —          16,684   

Long-term prepaid expenses

     —          —          13,639        —          (4,064     9,575   

Investment in subsidiaries

     (526,931     (608,299     —          (424,624     1,559,854        —     

Long-term intercompany loan

     697,125        787,364        —          638,690        (2,123,179     —     

Other non-current assets

     67        5,949        8,429        2,665        (66     17,044   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 249,984      $ 459,875      $ 673,515      $ 439,647      $ (1,130,248   $ 692,773   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

            

Current liabilities

            

Accounts payable

   $ —        $ —        $ 119,220      $ 1,143      $ (22,977   $ 97,386   

Other accounts payable

     38,386        36        19,349        4,331        (43,053     19,049   

Accrued expenses

     174        87,682        219,323        227,170        (493,866     40,483   

Derivative liabilities

     —          —          1,818        —          —          1,818   

Other current liabilities

     4,040        —          3,243        4,072        (2,895     8,460   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     42,600        87,718        362,953        236,716        (562,791     167,196   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term borrowings, net

     —          898,711        621,000        805,054        (2,123,179     201,586   

Accrued severance benefits, net

     —          —          104,867        184        —          105,051   

Other non-current liabilities

     —          —          9,261        6,426        (4,131     11,556   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     42,600        986,429        1,098,081        1,048,380        (2,690,101     485,389   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

            

Stockholders’ equity

            

Common stock

     395        136,229        39,005        51,976        (227,210     395   

Additional paid-in capital

     100,834        (731,689     (535,358     (729,663     1,996,710        100,834   

Retained earnings

     161,965        89,985        96,017        90,215        (276,217     161,965   

Treasury stock

     (34,730     —          —          —          —          (34,730

Accumulated other comprehensive loss

     (21,080     (21,079     (24,230     (21,261     66,570        (21,080
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     207,384        (526,554     (424,566     (608,733     1,559,853        207,384   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 249,984      $ 459,875      $ 673,515      $ 439,647      $ (1,130,248   $ 692,773   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 Balance Sheets

December 31, 2011

 

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

Assets

            

Current assets

            

Cash and cash equivalents

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

Restricted cash

     —          —          6,830        —          —          6,830   

Accounts receivable, net

     —          —          126,391        22,179        (22,648     125,922   

Inventories, net

     —          —          62,836        158        (158     62,836   

Other receivables

     1        11,793        7,581        399        (19,518     256   

Prepaid expenses

     34        2        8,509        384        (2,897     6,032   

Other current assets

     58,636        188,018        11,738        183,685        (426,168     15,909   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     60,348        224,932        351,003        215,002        (471,389     379,896   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     —          —          182,583        80        —          182,663   

Intangible assets, net

     —          —          16,514        273        —          16,787   

Long-term prepaid expenses

     —          —          10,963        66        (6,239     4,790   

Investment in subsidiaries

     (576,642     (655,845     —          (481,478     1,713,965        —     

Long-term intercompany loan

     697,125        809,913        —          660,066        (2,167,104     —     

Other non-current assets

     —          6,505        8,170        3,864        —          18,539   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 180,831      $ 385,505      $ 569,233      $ 397,873      $ (930,767   $ 602,675   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

            

Current liabilities

            

Accounts payable

   $ —        $ —        $ 99,560      $ 842      $ (22,554   $ 77,848   

Other accounts payable

     13,659        1        13,115        6,195        (19,518     13,452   

Accrued expenses

     502        63,033        186,678        207,770        (426,260     31,723   

Current portion of capital lease obligations

     —          —          2,852        —          —          2,852   

Other current liabilities

     —          1        11,544        3,117        (2,898     11,764   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     14,161        63,035        313,749        217,924        (471,230     137,639   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term borrowings, net

     —          898,514        642,383        827,596        (2,167,104     201,389   

Accrued severance benefits, net

     —          —          90,611        144        —          90,755   

Other non-current liabilities

     —          —          3,894        8,567        (6,239     6,222   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     14,161        961,549        1,050,637        1,054,231        (2,644,573     436,005   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

            

Stockholders’ equity

            

Common stock

     394        136,229        39,005        51,976        (227,210     394   

Additional paid-in capital

     98,929        (733,223     (536,894     (731,209     2,001,326        98,929   

Retained earnings

     93,950        35,760        35,141        37,722        (108,623     93,950   

Treasury stock

     (11,793     —          —          —          —          (11,793

Accumulated other comprehensive loss

     (14,810     (14,810     (18,656     (14,847     48,313        (14,810
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     166,670        (576,044     (481,404     (656,358     1,713,806        166,670   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 180,831      $ 385,505      $ 569,233      $ 397,873      $ (930,767   $ 602,675   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 September 30, 2012

 

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

Net sales

   $ —        $ —        $ 221,971       $ 5,166      $ (5,265   $ 221,872   

Cost of sales

     —          —          145,431         449        (448     145,432   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          76,540         4,717        (4,817     76,440   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     489        65        21,569         3,031        (3,766     21,388   

Research and development expenses

     —          —          20,052         469        (1,051     19,470   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (489     (65     34,919         1,217        —          35,582   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other income (expense)

     8,100        7,892        12,301         (11,562     —          16,731   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

     7,611        7,827        47,220         (10,345     —          52,313   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income tax expenses

     1,918        —          11         1,972        —          3,901   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of related investment

     5,693        7,827        47,209         (12,317     —          48,412   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of related investment

     42,719        34,817        —           47,209        (124,745     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 48,412      $ 42,644      $ 47,209       $ 34,892      $ (124,745   $ 48,412   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 42,031      $ 36,264      $ 40,257       $ 28,507      $ (105,028   $ 42,031   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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 Comprehensive Income

For the nine months ended September 30, 2012

 

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

Net sales

   $ —        $ —        $ 601,742      $ 14,781      $ (15,015   $ 601,508   

Cost of sales

     —          —          412,292        1,050        (1,047     412,295   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          189,450        13,731        (13,968     189,213   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     2,586        118        58,681        9,171        (10,866     59,690   

Research and development expenses

     —          —          61,164        1,001        (3,102     59,063   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (2,586     (118     69,605        3,559        —          70,460   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     19,315        1,891        (8,061     (6,300     —          6,845   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     16,729        1,773        61,544        (2,741     —          77,305   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses (benefits)

     3,531        (170     288        5,641        —          9,290   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of related investment

     13,198        1,943        61,256        (8,382     —          68,015   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in earnings of related investment

     54,817        52,661        —          61,255        (168,733     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 68,015      $ 54,604      $ 61,256      $ 52,873      $ (168,733   $ 68,015   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 61,745      $ 48,335      $ 55,682      $ 46,459      $ (150,476   $ 61,745   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 Comprehensive Income

For the three months ended September 30, 2011

 

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

Net sales

   $ —        $ —        $ 200,405      $ 6,692      $ (6,692   $ 200,405   

Cost of sales

     —          —          140,291        780        (787     140,284   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          60,114        5,912        (5,905     60,121   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     354        24        17,946        3,144        (3,587     17,881   

Research and development expenses

     —          —          19,846        1,470        (2,313     19,003   

Restructuring and impairment charges

     —          —          1,610        11        —          1,621   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (354     (24     20,712        1,287        (5     21,616   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     —          (3,774     (82,121     10,062        —          (75,833
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (354     (3,798     (61,409     11,349        (5     (54,217
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses (benefits)

     (1,456     —          (661     3,910        —          1,793   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in loss of related investment

     1,102        (3,798     (60,748     7,439        (5     (56,010
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in loss of related investment

     (57,112     (53,031     —          (60,753     170,896        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ (30,190   $ (31,009   $ (35,889   $ (27,495   $ 94,393      $ (30,190
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 Comprehensive Income

For the nine months ended September 30, 2011

 

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

Net sales

   $ —        $ —        $ 591,967      $ 19,439      $ (19,401   $ 592,005   

Cost of sales

     —          —          409,250        1,392        (1,414     409,228   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          182,717        18,047        (17,987     182,777   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     1,650        610        49,740        9,731        (10,991     50,740   

Research and development expenses

     —          —          60,538        4,561        (6,984     58,115   

Restructuring and impairment charges

     —          —          2,409        1,687        —          4,096   

IPO incentive

     —          —          11,355        791        —          12,146   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (1,650     (610     58,675        1,277        (12     57,680   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     1        28,262        (71,531     (10,186     —          (53,454
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (1,649     27,652        (12,856     (8,909     (12     4,226   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses (benefits)

     (1,474     —          532        7,080        —          6,138   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in loss of related investment

     (175     27,652        (13,388     (15,989     (12     (1,912
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in loss of related investment

     (1,737     (29,153     —          (13,400     44,290        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ (5,639   $ (5,228   $ (17,926   $ (33,136   $ 56,290      $ (5,639
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


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 nine months ended September 30, 2012

 

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

Cash flow from operating activities

            

Net income

   $ 68,015      $ 54,604      $ 61,256      $ 52,873      $ (168,733   $ 68,015   

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

            

Depreciation and amortization

     —          —          23,704        136        —          23,840   

Provision for severance benefits

     —          —          16,740        39        —          16,779   

Amortization of debt issuance costs and original issue discount

     —          753        —          —          —          753   

Loss (gain) on foreign currency translation, net

     (158     724        (25,380     (490     —          (25,304

Loss (gain) on disposal of property, plant and equipment, net

     —          —          (191     17        —          (174

Loss on disposal of intangible assets, net

     —          —          26        —          —          26   

Stock-based compensation

     (95     —          1,536        9        —          1,450   

Equity in earnings of related investment

     (54,817     (52,661     —          (61,255     168,733        —     

Other

     —          2        (340     6        —          (332

Changes in operating assets and liabilities

            

Accounts receivable, net

     —          —          (18,614     (205     651        (18,168

Inventories, net

     —          —          (8,526     —          —          (8,526

Other receivables

     1        (24,483     (549     31        23,213        (1,787

Other current assets

     (19,667     (38,313     (729     (29,003     87,050        (662

Deferred tax assets

     —          —          —          1,514        —          1,514   

Accounts payable

     —          —          17,594        301        (423     17,472   

Other accounts payable

     24,727        35        (52     (1,875     (23,535     (700

Accrued expenses

     (325     24,490        37,814        38,739        (86,957     13,761   

Other current liabilities

     4,041        —          1,390        4,019        —          9,450   

Payment of severance benefits

     —          —          (5,569     —          —          (5,569

Other

     (71     —          3,587        (6,073     318        (2,239
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     21,651        (34,849     103,697        (1,217     317        89,599   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

            

Decrease in restricted cash

     —          —          6,774        —          —          6,774   

Proceeds from disposal of plant, property and equipment

     —          —          937        —          —          937   

Purchases of plant, property and equipment

     —          —          (56,694     (51     —          (56,745

Payment for intellectual property registration

     —          —          (752     —          —          (752

 

27


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

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

Payment for purchase of Dawin, net of cash acquired

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

Decrease in short-term financial instruments

     —          —          173        —          —          173   

Collection of guarantee deposits

     —          —          42        30        —          72   

Payment of guarantee deposits

     —          —          (309     (2     —          (311

Other

     —          21,983        (41     21,373        (43,365     (50
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     —          21,983        (58,512     21,350        (43,365     (58,544
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow from financing activities

            

Proceeds from issuance of common stock

     436        —          —          —          —          436   

Repayment of long-term intercompany borrowings

     —          —          (21,746     (21,983     43,729        —     

Repayment of obligations under capital lease

     —          —          (2,968     —          —          (2,968

Acquisition of treasury stock

     (22,937     —          —          —          —          (22,937
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (22,501     —          (24,714     (21,983     43,729        (25,469
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     —          —          (1,668     310        (681     (2,039
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (850     (12,866     18,803        (1,540     —          3,547   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

            

Beginning of the period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of the period

   $ 827      $ 12,253      $ 145,921      $ 6,657      $ —        $ 165,658   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


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 nine months ended September 30, 2011

 

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

Cash flow from operating activities

            

Net loss

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

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

            

Depreciation and amortization

     —          —          42,161        207        —          42,368   

Provision for severance benefits

     —          —          12,959        178        —          13,137   

Amortization of debt issuance costs

     —          728        —          —          —          728   

Loss (gain) on foreign currency translation, net

     —          (3,696     31,387        5,529        —          33,220   

Gain on disposal of property, plant and equipment

     —