Table of Contents
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
Rule 405 of Regulation
submit such files). ☒
| ☒ |
Accelerated filer | ☐ | ||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||
| Emerging growth company | ||||||
Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
2
Table of Contents
Item 1. |
Interim Consolidated Financial Statements (Unaudited) |
September 30, 2022 |
December 31, 2021 |
|||||||||||
(In thousands of U.S. dollars, except share data) |
||||||||||||
Assets |
||||||||||||
| Current assets |
||||||||||||
| Cash and cash equivalents |
$ | $ |
||||||||||
| Accounts receivable, net |
||||||||||||
| Inventories, net |
||||||||||||
| Other receivables (Note 16) |
||||||||||||
| Prepaid expenses |
||||||||||||
| Hedge collateral (Note 7) |
||||||||||||
| Other current assets (Note 17) |
||||||||||||
| |
|
|
|
|
|
|||||||
| Total current assets |
||||||||||||
| Property, plant and equipment, net |
||||||||||||
| Operating lease right-of-use |
||||||||||||
| Intangible assets, net |
||||||||||||
| Long-term prepaid expenses |
||||||||||||
| Deferred income taxes |
||||||||||||
| Other non-current assets |
||||||||||||
| |
|
|
|
|
|
|||||||
| Total assets |
$ | $ |
||||||||||
| |
|
|
|
|
|
|||||||
| Liabilities and Stockholders’ Equity |
||||||||||||
| Current liabilities |
||||||||||||
| Accounts payable |
$ | $ |
||||||||||
| Other accounts payable |
||||||||||||
| Accrued expenses (Note 6) |
||||||||||||
| Accrued income taxes |
||||||||||||
| Operating lease liabilities |
||||||||||||
| Other current liabilities (Notes 7 and 8) |
||||||||||||
| |
|
|
|
|
|
|||||||
| Total current liabilities |
||||||||||||
| Accrued severance benefits, net |
||||||||||||
| Non-current operating lease liabilities |
||||||||||||
| Other non-current liabilities |
||||||||||||
| |
|
|
|
|
|
|||||||
| Total liabilities |
||||||||||||
| |
|
|
|
|
|
|||||||
| Commitments and contingencies (Note 17) |
||||||||||||
| Stockholders’ equity |
||||||||||||
| Common stock, $ and |
||||||||||||
| Additional paid-in capital |
||||||||||||
| Retained earnings |
||||||||||||
| Treasury stock, |
( |
) |
( |
) | ||||||||
| Accumulated other comprehensive loss |
( |
) |
( |
) | ||||||||
| |
|
|
|
|
|
|||||||
| Total stockholders’ equity |
||||||||||||
| |
|
|
|
|
|
|||||||
| Total liabilities and stockholders’ equity |
$ | $ |
||||||||||
| |
|
|
|
|
|
|||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2022 |
September 30, 2021 |
September 30, 2022 |
September 30, 2021 |
|||||||||||||
(In thousands of U.S. dollars, except share data) |
||||||||||||||||
| Revenues: |
||||||||||||||||
| Net sales – standard products business |
$ | $ | $ | $ | ||||||||||||
| Net sales – transitional Fab 3 foundry services |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total revenues |
||||||||||||||||
| Cost of sales: |
||||||||||||||||
| Cost of sales – standard products business |
||||||||||||||||
| Cost of sales – transitional Fab 3 foundry services |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total cost of sales |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Gross profit |
||||||||||||||||
| Operating expenses: |
||||||||||||||||
| Selling, general and administrative expenses |
||||||||||||||||
| Research and development expenses |
||||||||||||||||
| Merger-related costs |
||||||||||||||||
| Other charges, net |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Operating income (loss) |
( |
) | ||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Foreign currency loss, net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other income, net |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Income (loss) before income tax expense |
( |
) | ( |
) | ||||||||||||
| Income tax expense (benefit) |
( |
) | ( |
) | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net income (loss) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Basic earnings (loss) per common share— |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Diluted earnings (loss) per common share— |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Weighted average number of shares— |
||||||||||||||||
| Basic |
||||||||||||||||
| Diluted |
||||||||||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2022 |
September 30, 2021 |
September 30, 2022 |
September 30, 2021 |
|||||||||||||
(In thousands of U.S. dollars) |
||||||||||||||||
| Net income (loss) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Other comprehensive income (loss) |
||||||||||||||||
| Foreign currency translation adjustments |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Derivative adjustments |
||||||||||||||||
| Fair valuation of derivatives |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Reclassification adjustment for loss (gain) on derivatives included in net income (loss) |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total other comprehensive loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total comprehensive income (loss) |
$ | ( |
) | $ | $ | ( |
) | $ | ( |
) | ||||||
| |
|
|
|
|
|
|
|
|||||||||
Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Loss |
Total |
|||||||||||||||||||||||
| (In thousands of U.S. dollars, except share data) |
Shares |
Amount |
||||||||||||||||||||||||||
| Three Months Ended September 30, 2022: |
||||||||||||||||||||||||||||
| Balance at June 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
| Settlement of restricted stock units |
— | — | ( |
) | — | — | — | ( |
) | |||||||||||||||||||
| Acquisition of treasury stock |
( |
) | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
| Other comprehensive loss, net |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
| Net loss |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance at September 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Three Months Ended September 30, 2021: |
||||||||||||||||||||||||||||
| Balance at June 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
| Exercise of stock options |
— | — | — | |||||||||||||||||||||||||
| Settlement of restricted stock units |
( |
) | — | — | — | — | ||||||||||||||||||||||
| Other comprehensive loss, net |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
| Net income |
— | — | — | — | — | |||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance at September 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Common Stock |
Additional Paid-In |
Retained Earnings |
Treasury |
Accumulated Other Comprehensive |
||||||||||||||||||||||||
| (In thousands of U.S. dollars, except share data) |
Shares |
Amount |
Capital |
Stock |
Income (Loss) |
Total |
||||||||||||||||||||||
| Nine Months Ended September 30, 2022: |
||||||||||||||||||||||||||||
| Balance at December 31, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
| Exercise of stock options |
— | — | — | |||||||||||||||||||||||||
| Settlement of restricted stock units |
( |
) | — | — | — | ( |
) | |||||||||||||||||||||
| Acquisition of treasury stock |
( |
) | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
| Accelerated stock repurchase |
( |
) | — | — | ( |
) | — | — | ||||||||||||||||||||
| Other comprehensive loss, net |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
| Net loss |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance at September 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Nine Months Ended September 30, 2021: |
||||||||||||||||||||||||||||
| Balance at December 31, 2020 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
| Exchange of exchangeable senior note |
— | — | — | |||||||||||||||||||||||||
| Exercise of stock options |
— | — | — | |||||||||||||||||||||||||
| Settlement of restricted stock units |
( |
) | — | — | — | — | ||||||||||||||||||||||
| Acquisition of treasury stock |
( |
) | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
| Other comprehensive loss, net |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
| Net income |
— | — | — | — | — | |||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance at September 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Nine Months Ended |
||||||||
September 30, 2022 |
September 30, 2021 |
|||||||
(In thousands of U.S. dollars) |
||||||||
| Cash flows from operating activities |
||||||||
| Net income (loss) |
$ | ( |
) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities |
||||||||
| Depreciation and amortization |
||||||||
| Provision for severance benefits |
||||||||
| Amortization of debt issuance costs and original issue discount |
— | |||||||
| Loss on foreign currency, net |
||||||||
| Provision for inventory reserves |
||||||||
| Stock-based compensation |
||||||||
| Other, net |
||||||||
| Changes in operating assets and liabilities |
||||||||
| Accounts receivable, net |
||||||||
| Inventories |
( |
) | ( |
) | ||||
| Other receivables |
( |
) | ||||||
| Other current assets |
( |
) | ||||||
| Accounts payable |
( |
) | ( |
) | ||||
| Other accounts payable |
( |
) | ( |
) | ||||
| Accrued expenses |
( |
) | ||||||
| Accrued income taxes |
( |
) | ( |
) | ||||
| Other current liabilities |
( |
) | ||||||
| Other non-current liabilities |
( |
) | ||||||
| Payment of severance benefits |
( |
) | ( |
) | ||||
| Other, net |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Net cash provided by operating activities |
||||||||
| Cash flows from investing activities |
||||||||
| Proceeds from settlement of hedge collateral |
||||||||
| Payment of hedge collateral |
( |
) | ( |
) | ||||
| Purchase of property, plant and equipment |
( |
) | ( |
) | ||||
| Payment for intellectual property registration |
( |
) | ( |
) | ||||
| Collection of guarantee deposits |
— | |||||||
| Payment of guarantee deposits |
( |
) | ( |
) | ||||
| Other, net |
( |
) | ||||||
| |
|
|
|
|||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities |
||||||||
| Proceeds from exercise of stock options |
||||||||
| Acquisition of treasury stock |
( |
) | ( |
) | ||||
| Repayment of financing related to water treatment facility arrangement |
( |
) | ( |
) | ||||
| Repayment of principal portion of finance lease liabilities |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Net cash provided by (used in) financing activities |
( |
) | ||||||
| Effect of exchange rates on cash and cash equivalents |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Net decrease in cash and cash equivalents |
( |
) | ( |
) | ||||
| Cash and cash equivalents |
||||||||
| Beginning of the period |
||||||||
| |
|
|
|
|||||
| End of the period |
$ | $ | ||||||
| |
|
|
|
|||||
| Supplemental cash flow information |
||||||||
| Cash paid for interest |
$ | — | $ | |||||
| Cash paid for income taxes |
$ | $ | ||||||
| Non-cash investing activities |
||||||||
| Property, plant and equipment additions in other accounts payable |
$ | $ | ||||||
| Non-cash financing activities |
||||||||
| Exchange of exchangeable senior notes into common stock |
$ | — | $ | |||||
| Unsettled common stock repurchases |
$ | ( |
) | $ | — | |||
September 30, 2022 |
December 31, 2021 |
|||||||
| Finished goods |
$ | $ | ||||||
| Semi-finished goods and work-in-process |
||||||||
| Raw materials |
||||||||
| Materials in-transit |
||||||||
| Less: inventory reserve |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Inventories, net |
$ | $ | |
|||||
| |
|
|
|
|||||
Three Months Ended |
Nine Months Ended |
Three Months Ended |
Nine Months Ended |
|||||||||||||
September 30, 2022 |
September 30, 2021 |
|||||||||||||||
| Beginning balance |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Change in reserve |
||||||||||||||||
| Inventory reserve charged to costs of sales |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Sale of previously reserved inventory |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| ( |
) | ( |
) | ( |
) | |||||||||||
| Write off |
||||||||||||||||
| Translation adjustments |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Ending balance |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| |
|
|
|
|
|
|
|
|||||||||
September 30, 2022 |
December 31, 2021 |
|||||||
| Buildings and related structures |
$ | $ | ||||||
| Machinery and equipment |
||||||||
| Finance lease right-of-use |
||||||||
| Others |
||||||||
| |
|
|
|
|||||
| Less: accumulated depreciation |
( |
) | ( |
) | ||||
| Land |
||||||||
| Construction in progress |
||||||||
| |
|
|
|
|||||
| Property, plant and equipment, net |
$ | $ | |
|||||
| |
|
|
|
|||||
September 30, 2022 |
||||||||||||
Gross amount |
Accumulated amortization |
Net amount |
||||||||||
| Intellectual property assets |
$ | $ | ( |
) | $ | |||||||
| |
|
|
|
|
|
|||||||
| Intangible assets |
$ | $ | ( |
) | $ | |||||||
| |
|
|
|
|
|
|||||||
December 31, 2021 |
||||||||||||
Gross amount |
Accumulated amortization |
Net amount |
||||||||||
| Intellectual property assets |
$ | $ | ( |
) | $ | |||||||
| |
|
|
|
|
|
|||||||
| Intangible assets |
$ | $ | ( |
) | $ | |||||||
| |
|
|
|
|
|
|||||||
Leases |
Classification |
September 30, 2022 |
December 31, 2021 |
|||||||||
| Assets |
|
|
||||||||||
| Operating lease |
|
Operating lease right-of-use assets |
|
$ | |
$ | |
|||||
| Finance lease |
|
Property, plant and equipment, net | |
|||||||||
| |
|
|
|
|
|
|||||||
| Total lease assets |
|
|
$ | $ | ||||||||
| |
|
|
|
|
|
|||||||
| Liabilities |
|
|
||||||||||
| Current |
|
|
||||||||||
| Operating |
|
Operating lease liabilities | |
$ | $ | |||||||
| Finance |
|
liabilities | |
|||||||||
| Non-current |
|
|
||||||||||
| Operating |
|
Non-current operating lease liabilities |
|
|||||||||
| Finance |
|
-current liabilities |
|
|||||||||
| |
|
|
|
|
|
|||||||
| Total lease liabilities |
|
|
$ | $ | ||||||||
| |
|
|
|
|
|
|||||||
September 30, 2022 |
December 31, 2021 |
|||||||
| Weighted average remaining lease term |
||||||||
| Operating leases |
||||||||
| Finance leases |
||||||||
| Weighted average discount rate |
||||||||
| Operating leases |
% | % | ||||||
| Finance leases |
% | % | ||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2022 |
September 30, 2021 |
September 30, 2022 |
September 30, 2021 |
|||||||||||||
| Operating lease cost |
$ | |
$ | |
$ | |
$ | |
||||||||
| Finance lease cost |
||||||||||||||||
| Amortization of right-of-use |
||||||||||||||||
| Interest on lease liabilities |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total lease cost |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2022 |
September 30, 2021 |
September 30, 2022 |
September 30, 2021 |
|||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities |
||||||||||||||||
| Operating cash flows from operating leases |
$ | |
$ | |
$ | |
$ | |
||||||||
| Operating cash flows from finance leases |
||||||||||||||||
| Financing cash flows from finance leases |
||||||||||||||||
Operating Leases |
Finance Leases |
|||||||
| Remainder of 2022 |
$ | $ | ||||||
| 2023 |
||||||||
| 2024 |
||||||||
| 2025 |
||||||||
| 2026 |
||||||||
| 2027 |
||||||||
| |
|
|
|
|||||
| Total future lease payments |
||||||||
| Less: Imputed interest |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Present value of future payments |
$ | |
$ | |
||||
| |
|
|
|
|||||
September 30, 2022 |
December 31, 2021 |
|||||||
| Payroll, benefits and related taxes, excluding severance benefits |
$ | |
$ | |||||
| Withholding tax attributable to intercompany interest income |
||||||||
| Outside service fees |
||||||||
| Merger-related costs |
||||||||
| Others |
||||||||
| |
|
|
|
|||||
| Accrued expenses |
$ | $ | |
|||||
| |
|
|
|
|||||
| Date of transaction |
Total notional amount |
Month of settlement | ||||
| |
$ | October 202 2 | ||||
| |
$ | |||||
| |
$ | |||||
| |
$ | |||||
| Date of transaction |
Total notional amount |
Month of settlement | ||||
| |
$ | |||||
| |
$ | |||||
| Derivatives designated as hedging instruments: |
September 30, 2022 |
December 31, 2021 |
||||||||||
| Liability Derivatives: |
||||||||||||
| Zero cost collars |
Other current liabilities | $ | $ | |||||||||
| Zero cost collars |
Other non-current liabilities |
$ | $ | |||||||||
| As of September 30, 2022 |
Gross amounts of recognized liabilities |
Gross amounts offset in the balance sheets |
Net amounts of liabilities presented in the balance sheets |
Gross amounts not offset in the balance sheets |
Net amount |
|||||||||||||||||||
Financial instruments |
Cash collateral pledged |
|||||||||||||||||||||||
| Liability Derivatives: |
||||||||||||||||||||||||
| Zero cost collars |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
| As of December 31, 2021 |
Gross amounts of recognized liabilities |
Gross amounts offset in the balance sheets |
Net amounts of liabilities presented in the balance sheets |
Gross amounts not offset in the balance sheets |
Net amount |
|||||||||||||||||||
Financial instruments |
Cash collateral pledged |
|||||||||||||||||||||||
| Liability Derivatives: |
||||||||||||||||||||||||
| Zero cost collars |
$ | $ | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||
| Derivatives in ASC 815 Cash Flow Hedging Relationships |
Amount of Loss Recognized in AOCI on Derivatives |
Location/Amount of Loss Reclassified from AOCI Into Statement of Operations |
Location/Amount of Gain Recognized in Statement of Operations on Derivatives |
|||||||||||||||||||||||||||||
Three Months Ended September 30, |
Three Months Ended September 30, |
Three Months Ended September 30, |
||||||||||||||||||||||||||||||
2022 |
2021 |
2022 |
2021 |
2022 |
2021 |
|||||||||||||||||||||||||||
| Zero cost collars |
$ | ( |
) | $ | ( |
) | Net sales | $ | ( |
$ | ( |
Other income, net | $ | $ | ||||||||||||||||||
| Derivatives in ASC 815 Cash Flow Hedging Relationships |
Amount of Loss Recognized in AOCI on Derivatives |
Location/Amount of Gain (Loss) Reclassified from AOCI Into Statement of Operations |
Location/Amount of Gain Recognized in Statement of Operations on Derivatives |
|||||||||||||||||||||||||||||
Nine Months Ended September 30, |
Nine Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||||||||||||||||||
2022 |
2021 |
2022 |
2021 |
2022 |
2021 |
|||||||||||||||||||||||||||
| Zero cost collars |
$ | ( |
) | $ | ( |
) | Net sales | $ | ( |
$ | Other income, net | $ | $ | |||||||||||||||||||
| Counterparties |
September 30, 2022 |
December 31, 2021 |
||||||
| SC |
$ | $ | ||||||
Carrying Value September 30, 2022 |
Fair Value Measurement September 30, 2022 |
Quoted Prices in Active Markets for Identical Liability (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||||||
| Liabilities: |
||||||||||||||||||||
| Derivative liabilities (other current liabilities) |
$ | $ | — | $ | — | |||||||||||||||
| Derivative liabilities (other non-current liabilities) |
$ | $ | — | $ | — | |||||||||||||||
Carrying Value December 31, 2021 |
Fair Value Measurement December 31, 2021 |
Quoted Prices in Active Markets for Identical Liability (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||||||
| Liabilities: |
||||||||||||||||||||
| Derivative liabilities (other current liabilities) |
$ | $ | — | $ | — | |||||||||||||||
Three Months Ended |
Nine Months Ended |
Three Months Ended |
Nine Months Ended |
|||||||||||||
September 30, 2022 |
September 30, 2021 |
|||||||||||||||
| Beginning balance |
$ | $ | $ | $ | ||||||||||||
| Provisions |
||||||||||||||||
| Severance payments |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Translation adjustments |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Less: Cumulative contributions to severance insurance deposit accounts |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| The National Pension Fund |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Group severance insurance plan |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Accrued severance benefits, |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance benefit |
||||
| Remainder of 2022 |
$ | |||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| 2027 |
||||
| 2028 – 2032 |
||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2022 |
September 30, 2021 |
September 30, 2022 |
September 30, 2021 |
|||||||||||||
| Revenues |
||||||||||||||||
| Standard products business |
||||||||||||||||
| Display Solutions |
$ | $ | $ | $ | |
|||||||||||
| Power Solutions |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total standard products business |
||||||||||||||||
| Transitional Fab 3 foundry services |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total revenues |
$ | |
$ | |
$ | |
$ | |||||||||
| |
|
|
|
|
|
|
|
|||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2022 |
September 30, 2021 |
September 30, 2022 |
September 30, 2021 |
|||||||||||||
| Gross Profit |
||||||||||||||||
| Standard products business |
$ | |
$ | |
$ | |
$ | |
||||||||
| Transitional Fab 3 foundry services |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total gross profit |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2022 |
September 30, 2021 |
September 30, 2022 |
September 30, 2021 |
|||||||||||||
| Korea |
$ | |
$ | $ | $ | |||||||||||
| Asia Pacific (other than Korea) |
||||||||||||||||
| United States |
||||||||||||||||
| Europe |
||||||||||||||||
| Others |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | $ | |
$ | |
$ | |
|||||||||
| |
|
|
|
|
|
|
|
|||||||||
September 30, 2022 |
December 31, 2021 |
|||||||
| Foreign currency translation adjustments |
$ | ( |
) | $ | ( |
) | ||
| Derivative adjustments |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total |
$ | ( |
) | $ | ( |
) | ||
| |
|
|
|
|||||
| Three Months Ended September 30, 2022 |
Foreign currency translation adjustments |
Derivative adjustments |
Total |
|||||||||
| Beginning balance |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| |
|
|
|
|
|
|||||||
| Other comprehensive loss before reclassifications |
( |
) | ( |
) | ( |
) | ||||||
| Amounts reclassified from accumulated other comprehensive loss |
— | |||||||||||
| |
|
|
|
|
|
|||||||
| Net current-period other comprehensive loss |
( |
) | ( |
) | ( |
) | ||||||
| |
|
|
|
|
|
|||||||
| Ending balance |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| |
|
|
|
|
|
|||||||
| Three Months Ended September 30, 2021 |
Foreign currency translation adjustments |
Derivative adjustments |
Total |
|||||||||
| Beginning balance |
$ | $ | ( |
) | $ | ( |
) | |||||
| |
|
|
|
|
|
|||||||
| Other comprehensive loss before reclassifications |
( |
) | ( |
) | ( |
) | ||||||
| Amounts reclassified from accumulated other comprehensive loss |
— | |||||||||||
| |
|
|
|
|
|
|||||||
| Net current-period other comprehensive loss |
( |
) | ( |
) | ( |
) | ||||||
| |
|
|
|
|
|
|||||||
| Ending balance |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| |
|
|
|
|
|
|||||||
| Nine Months Ended September 30, 2022 |
Foreign currency translation adjustments |
Derivative adjustments |
Total |
|||||||||
| Beginning balance |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| |
|
|
|
|
|
|||||||
| Other comprehensive loss before reclassifications |
( |
) | ( |
) | ( |
) | ||||||
| Amounts reclassified from accumulated other comprehensive loss |
— | |||||||||||
| |
|
|
|
|
|
|||||||
| Net current-period other comprehensive loss |
( |
) | ( |
) | ( |
) | ||||||
| |
|
|
|
|
|
|||||||
| Ending balance |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| |
|
|
|
|
|
|||||||
| Nine Months Ended September 30, 2021 |
Foreign currency translation adjustments |
Derivative adjustments |
Total |
|||||||||
| Beginning balance |
$ | $ | $ | |||||||||
| |
|
|
|
|
|
|||||||
| Other comprehensive loss before reclassifications |
( |
) | ( |
) | ( |
) | ||||||
| Amounts reclassified from accumulated other comprehensive income |
— | ( |
) | ( |
) | |||||||
| |
|
|
|
|
|
|||||||
| Net current-period other comprehensive loss |
( |
) | ( |
) | ( |
) | ||||||
| |
|
|
|
|
|
|||||||
| Ending balance |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| |
|
|
|
|
|
|||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2022 |
September 30, 2021 |
September 30, 2022 |
September 30, 2021 |
|||||||||||||
(In thousands of U.S. dollars, except share data) |
||||||||||||||||
Basic earnings (loss) per share |
||||||||||||||||
Net income (loss) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
Basic weighted average common stock outstanding |
||||||||||||||||
Basic earnings (loss) per common share |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
Diluted earnings (loss) per share |
||||||||||||||||
Net income (loss) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
Basic weighted average common stock outstanding |
||||||||||||||||
Net effect of dilutive equity awards |
||||||||||||||||
Diluted weighted average common stock outstanding |
||||||||||||||||
Diluted earnings (loss) per share |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2022 |
September 30, 2021 |
September 30, 2022 |
September 30, 2021 |
|||||||||||||
Options |
||||||||||||||||
Restricted Stock Units |
||||||||||||||||
to
secures a deferred fee of $
due on or before October 31, 2022.
the parties agreed to defer the remaining $
Table of Contents
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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, in “Part II: Item 1A. Risk Factors” herein and in “Part I: Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2021 filed on February 23, 2022 (“2021 Form 10-K”) (including that the impact of the COVID-19 pandemic may also exacerbate the risks discussed therein).
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 Report, 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.
24
Table of Contents
| 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.
Overview
We are a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, IoT applications, consumer, computing, industrial and automotive applications. We have a proven record with more than 40 years of operating history, a portfolio of approximately 1,100 registered patents and pending applications and extensive engineering and manufacturing process expertise.
Our standard products business includes our Display Solutions and Power Solutions business lines.
Our Display Solutions line of products provide flat panel display solutions to major suppliers of large and small flat panel displays. These products include source and gate drivers and timing controllers that cover a wide range of flat panel displays used in mobile communications, automobiles, entertainment devices, notebook PCs, monitors and liquid crystal display (LCD), organic light emitting diodes (OLED) and Micro light emitting diode (Micro LED) televisions. Our Display Solutions products support some of the industry’s most advanced display technologies, such as OLEDs, low temperature polysilicons thin film transistors (LTPS TFTs), as well as high-volume display technologies such as amorphous silicon thin film transistors (a-Si TFTs). Since 2007, we have designed and manufactured OLED display driver integrated circuit (IC) products. Our current portfolio of OLED solutions address a wide range of resolutions ranging from HD (High Definition) to WQHD (Wide Quadruple High Definition) for wide range of applications including smartphones, TVs, automotives and IT applications such as monitors, notebook PCs, tablet PCs as well as AR/VRs.
Our Power Solutions business line produces power management semiconductor products including discrete and integrated circuit solutions for power management in communications, consumer, computing, servers, automotive, and industrial applications. These products include metal oxide semiconductor field effect transistors (MOSFETs), insulated-gate bipolar transistors (IGBTs), AC-DC/DC-DC converters, LED drivers, regulators and power management integrated circuits (PMICs) for a range of devices, including televisions, smartphones, mobile phones, wearable devices, desktop PCs, notebooks, tablet PCs, other consumer electrics, automotive, and industrial applications such as power suppliers, e-bikes, solar inverters, LED lighting and motor drives.
Our wide variety of analog and mixed-signal semiconductor products combined with our mature technology platform allow us to address multiple high-growth end markets and rapidly develop and introduce new products and services in response to market demands. Our design center and substantial manufacturing operation in Korea place us at the core of the global electronics device 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. Certain of our OLED products are produced using external 12-inch foundries. Through a strategic cooperation with external 12-inch foundries, we are managing to ensure outsourcing wafers at competitive price and produce quality products.
To maintain and increase our profitability, we must accurately forecast trends in demand for electronics devices 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 also invest in relevant research and development activities 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 by overall demand for communications, IoT, consumer and industrial products and can be adversely affected by periods of weak consumer and enterprise spending or by market share losses by our customers. In order to mitigate the impact of market volatility on our business, we continually strive to diversify our portfolio of products, customers, and target applications. We also expect that new competitors will emerge in these markets that may place increased pressure on the pricing for our products and services. While we believe we are well positioned competitively to compete in these markets and against these new competitors as a result of our long operating history, existing manufacturing capacity and our worldwide customer base, if we are not effective in competing in these markets, our operating results may be adversely affected.
25
Table of Contents
Net sales for our standard products business are driven by design wins in which we are selected by an electronics original equipment manufacturer (OEM) or other potential customer to supply its demand for a particular product. A customer will often have more than one supplier designed into multi-source components for a particular product line. Once we have design wins and the products enter into mass production, 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.
In contrast to completely fabless semiconductor companies, our internal manufacturing capacity provides us with greater control over certain manufacturing costs and the ability to implement process and production improvements for our internally manufactured products, 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 on these internally manufactured products. However, having internal manufacturing capacity exposes us to the risk of under-utilization of manufacturing capacity that results in lower gross profit margins, particularly during downturns in the semiconductor industry.
Our standard products business requires 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. Many of 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. As a result, our manufacturing base and strategy do not require substantial investment in leading edge process equipment for those products, allowing us to utilize our facilities and equipment over an extended period of time with moderate required capital investments. In addition, we are less likely to experience significant industry overcapacity, which can cause product prices to decline significantly. In general, we seek to invest in manufacturing capacity that can be used for multiple high-value applications over an extended period of time. In addition, we outsource manufacturing of those products which do require advanced technology and 12-inch and 8-inch wafer capacity, such as organic light emitting diodes (OLED). We believe this balanced capital investment strategy enables us to optimize our capital investments and facilitates more diversified product and service offerings.
Since 2007, we had designed and manufactured OLED display driver ICs in our internal manufacturing facilities. As we expanded our design capabilities to products that require lower geometries unavailable at our existing manufacturing facilities, we began outsourcing manufacturing of certain OLED display driver ICs to external 12-inch foundries starting in the second half of 2015 and we have started outsourcing 8-inch wafer for OLED TV IC after the sale of our fabrication facility located in Cheongju in 2020. This additional source of manufacturing is an increasingly important part of our supply chain management. By outsourcing manufacturing of OLED products to external foundries, we are able to adapt dynamically to changing customer requirements and address growing markets without substantial capital investments by us. However, relying on external foundries exposes us to the risk of being unable to secure manufacturing capacity, particularly under the current global shortage of foundry services. Although we are working strategically with external foundries to ensure long-term wafer capacity, if these efforts are unsuccessful, our ability to deliver products to our customers may be negatively impacted, which would adversely affect our relationship with customers and opportunities to secure new design-wins.
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 awareness of new product opportunities, market and technology trends and improve our ability to adapt and grow successfully.
26
Table of Contents
Recent Developments
Expanded Stock Repurchase Program
On August 31, 2022, our Board of Directors authorized an expansion of the previously announced stock repurchase program from $75.0 million to $87.5 million of our common stock. We have already repurchased shares worth $37.5 million under the program through an accelerated stock repurchase agreement on December 21, 2021 with JPMorgan Chase Bank, National Association. The remaining $50.0 million of the expanded $87.5 million program will be repurchased in the open market or through privately negotiated transactions. In connection with the repurchase program, we have established a stock trading plan with Oppenheimer & Co. Inc. in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934.
In September 2022, we repurchased 324,643 shares of our common stock in the open market for an aggregate purchase price of $3.6 million and a price per share of $11.21 under the stock repurchase program.
Global Semiconductor Industry Trends
Increases in demand for semiconductor products resulted in a global shortage of manufacturing capacity in recent periods. As a result, we may experience increased costs to manufacture our products and may not be able to manufacture and deliver all of the orders placed by our customers. Specifically, if we are unable to secure manufacturing capacity from the external foundries we rely on, our ability to deliver products to our customers may be negatively impacted. Also, shortage of manufacturing capacity may lead to an increase in our manufacturing costs. Our principal pricing strategy is to pass on the increased manufacturing costs to our customers; however, we may not be fully able to do this in all cases. Total revenues for the three and nine months ended September 30, 2022 were severely impacted by these persisting supply shortages, in particular for 28nm 12-inch OLED wafers, which impacted design-in projects from our large panel customer in Korea that are typically given 9 to 12 months in advance.
In an effort to minimize the potential adverse impact of the supply shortage, we are working strategically with certain external foundries to help ensure long-term wafer capacity. If these efforts are unsuccessful, however, such shortage could limit our ability to meet demand for our products in the future, which would adversely affect our reputation and competitive position, resulting in a negative impact on results of operations.
We are not able to foresee when the shortage of manufacturing capacity will subside, but we are beginning to see some indicators of improvement of such supply shortage situation. However, the global shortage for semiconductor products over the prior two years has led to overbooking backordered demand and oversupply. As a result, the current global macroeconomic conditions, including COVID-19 lockdowns in China, higher inflation and interest rates and uncertainty caused by the Russian-Ukraine war, have led to weaker end-market demand and an oversupply of inventory. We continue to monitor these trends and uncertainties, and any decline in end-market demand and increase in inventory levels could negatively impact our financial condition and results of operations.
COVID-19 Pandemic
In December 2019, a strain of coronavirus causing a disease known as COVID-19 surfaced in Wuhan, China, resulting in significant disruptions among Chinese manufacturing and other facilities and travel throughout China. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Governmental authorities throughout the world have implemented numerous containment measures, including travel bans and restrictions, quarantines, shelter-in-place orders, and business restrictions and shutdowns, resulting in rapidly changing market and economic conditions. Although some of these restrictions and other containment measures have since been lifted or scaled back, ongoing surges of COVID-19 have, in some cases, resulted in the re-imposition of certain restrictions and containment measures, and may continue to lead to other restrictions being re-implemented in the foreseeable future in response to efforts to reduce the rapid spread of COVID-19.
We experienced some minor disruption in our Power Solutions business line from assembly and test subcontractors located in China in the first quarter of 2020 as a result of the COVID-19 pandemic. To date, our external Display Solutions business line contractors and sub-contractors have not been materially impacted by the COVID-19 pandemic. We are, however, unable to accurately predict the full impact that the COVID-19 pandemic will have on future results of operations due to numerous uncertainties. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which, despite progress in vaccination efforts, are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the COVID-19 pandemic, such as new strains of the virus, including the Delta and Omicron variants and any future variants that may emerge, which may impact rates of infection and vaccination efforts, developments or perceptions regarding the safety of vaccines and the extent and effectiveness of actions to contain the COVID-19 pandemic or treat its impact, including vaccination campaigns and lockdown measures, among others. In addition, recurrences or additional waves of COVID-19 cases could cause other widespread or more
27
Table of Contents
severe impacts depending on where infection rates are highest. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions, but if we or any of our customers and suppliers were to experience prolonged business shutdowns or other disruptions, our ability to conduct our business could be materially and negatively affected, which could have a material adverse impact on our business, results of operations and financial condition.
We continue to closely monitor and evaluate the nature and scope of the impact of the COVID-19 pandemic to our business, consolidated results of operations, and financial condition, and may take further actions altering our business operations and managing our costs and liquidity that we deem necessary or appropriate to respond to this ongoing and uncertain global health crisis and the resulting global economic consequences.
28
Table of Contents
Explanation and Reconciliation of Non-U.S. GAAP Measures
Adjusted EBITDA, Adjusted Operating Income and Adjusted Net Income
We use the terms Adjusted EBITDA, Adjusted Operating Income and Adjusted Net Income (including on a per share basis) in this Report. Adjusted EBITDA, as we define it, is a non-U.S. GAAP measure. We define Adjusted EBITDA for the periods indicated as EBITDA (as defined below), adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss, net, (iii) derivative valuation gain, net, (iv) inventory reserve related to Huawei impact of downstream trade restrictions, (v) Merger-related costs and (vi) other charges, net. EBITDA for the periods indicated is defined as net income (loss) before interest income, net, income tax expense (benefit), and depreciation and amortization.
See the footnotes to the table below for further information regarding these items. We present Adjusted EBITDA as a supplemental measure of our performance because:
| • | we believe that Adjusted EBITDA, by eliminating the impact of a number of items that we do not consider to be indicative of our core ongoing operating performance, provides a more comparable measure of our operating performance from period-to-period and may be a better indicator of future performance; |
| • | we believe that Adjusted EBITDA is commonly requested and used by securities analysts, investors and other interested parties in the evaluation of a company as an enterprise level performance measure that eliminates the effects of financing, income taxes and the accounting effects of capital spending, as well as other one time or recurring items described above; and |
| • | we believe that Adjusted EBITDA is useful for investors, among other reasons, to assess a company’s period-to-period core operating performance and to understand and assess the manner in which management analyzes operating performance. |
We use Adjusted EBITDA in a number of ways, including:
| • | for planning purposes, including the preparation of our annual operating budget; |
| • | to evaluate the effectiveness of our enterprise level business strategies; |
| • | in communications with our Board of Directors concerning our consolidated financial performance; and |
| • | in certain of our compensation plans as a performance measure for determining incentive compensation payments. |
We encourage you to evaluate each adjustment and the reasons we consider them appropriate. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Adjusted EBITDA is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to income from continuing operations, cash flows from operating activities or net income, as determined in accordance with U.S. GAAP. A reconciliation of net income (loss) to Adjusted EBITDA is as follows:
| Three Months Ended September 30, 2022 |
Nine Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
Nine Months Ended September 30, 2021 |
|||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Net income (loss) |
$ | (17.2 | ) | $ | (11.0 | ) | $ | 10.8 | $ | 3.1 | ||||||
| Interest income, net |
(1.5 | ) | (2.7 | ) | (0.4 | ) | (0.5 | ) | ||||||||
| Income tax expense (benefit) |
(3.9 | ) | (1.4 | ) | 3.1 | 6.0 | ||||||||||
| Depreciation and amortization |
3.6 | 11.2 | 3.6 | 10.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| EBITDA |
$ | (19.0 | ) | $ | (3.8 | ) | $ | 17.1 | $ | 19.2 | ||||||
| Adjustments: |
||||||||||||||||
| Equity-based compensation expense(a) |
0.9 | 4.5 | 2.0 | 6.1 | ||||||||||||
| Foreign currency loss, net(b) |
12.8 | 20.5 | 7.6 | 12.0 | ||||||||||||
| Derivative valuation gain, net(c) |
(0.1 | ) | (0.2 | ) | (0.2 | ) | (0.1 | ) | ||||||||
| Inventory reserve related to Huawei impact of downstream trade restrictions(d) |
— | — | (1.1 | ) | (1.1 | ) | ||||||||||
| Merger-related costs(e) |
— | — | 1.6 | 13.8 | ||||||||||||
| Other charges, net(f) |
2.5 | 3.3 | (0.5 | ) | 2.6 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Adjusted EBITDA |
$ | (3.0 | ) | $ | 24.3 | $ | 26.4 | $ | 52.6 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
29
Table of Contents
| (a) | This adjustment eliminates the impact of non-cash equity-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses as supplemental information. |
| (b) | This adjustment mainly eliminates the impact of non-cash foreign currency translation associated with intercompany debt obligations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily non-cash gains or losses, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results. |
| (c) | This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in U.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance. |
| (d) | For the three and nine months ended September 31, 2021, this adjustment eliminates the impact of a partial sales of inventories for which excess and obsolete reserves were previously recognized in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, as a portion of reserved inventory was subsequently sold to certain other customers. As this adjustment meaningfully impacted our operational results and are not expected to represent an ongoing operating expense subject to our ability to foresee and control, we believe our operating performance results are more meaningfully compared if this adjustment is excluded. |
| (e) | For the three and nine months ended September 30, 2021, this adjustment eliminates professional service fees and expenses incurred in connection with the contemplated Merger transaction (see “Note 16. Merger Agreement” to our consolidated financial statements under “Item 1. Interim Consolidated Financial Statements”). As this adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is excluded. |
| (f) | For the three and nine months ended September 30, 2022, this adjustment eliminates $2.8 million of one-time employee incentives, in each period, and professional service fees and expenses of $0.2 million and $1.0 million, respectively, incurred in connection with certain strategic evaluations, both of which were offset in part by a $0.5 million gain on sale of certain legacy equipment of the closed back-end line in our fabrication facility in Gumi. For the three and nine months ended September 30, 2021, this adjustment eliminates professional service fees and expenses of $0.2 million and $3.4 million, respectively, incurred in connection with the regulatory requests, both of which were offset in part by a $0.7 million legal settlement gain related to certain expenses incurred in prior periods in connection with our legacy Fab 4 (which was sold during the year ended December 31, 2020) and awarded in the third quarter. As these adjustments meaningfully impacted our operating results and are not expected to represent ongoing operating expenses to us, we believe our operating performance results are more usefully compared if these adjustments are excluded. |
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
| • | Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
| • | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| • | Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; |
| • | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often need to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| • | Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees; |
| • | Adjusted EBITDA does not reflect the costs of holding certain assets and liabilities in foreign currencies; and |
| • | other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.
30
Table of Contents
We present Adjusted Operating Income as supplemental measures of our performance. We prepare Adjusted Operating Income by adjusting operating income (loss) to eliminate the impact of equity-based compensation expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted Operating Income is useful to investors to provide a supplemental way to understand our underlying operating performance and allows investors to monitor and understand changes in our ability to generate income from ongoing business operations.
Adjusted Operating Income is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to operating income, income from continuing operations, cash flows from operating activities or net income, as determined in accordance with U.S. GAAP. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Operating Income differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Operating Income, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Operating Income for the periods indicated as operating income adjusted to exclude (i) equity-based compensation expense (ii) inventory reserve related to Huawei impact of downstream trade restrictions, (iii) Merger-related costs and (iv) other charges, net.
The following table summarizes the adjustments to operating income that we make in order to calculate Adjusted Operating Income (Loss) for the periods indicated:
| Three Months Ended September 30, 2022 |
Nine Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
Nine Months Ended September 30, 2021 |
|||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Operating income (loss) |
$ | (10.0 | ) | $ | 4.9 | $ | 20.0 | $ | 19.5 | |||||||
| Adjustments: |
||||||||||||||||
| Equity-based compensation expense(a) |
0.9 | 4.5 | 2.0 | 6.1 | ||||||||||||
| Inventory reserve related to Huawei impact of downstream trade restrictions(b) |
— | — | (1.1 | ) | (1.1 | ) | ||||||||||
| Merger-related costs(c) |
— | — | 1.6 | 13.8 | ||||||||||||
| Other charges, net(d) |
2.5 | 3.3 | 0.2 | 3.4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Adjusted Operating Income (Loss) |
$ | (6.6 | ) | $ | 12.7 | $ | 22.7 | $ | 41.7 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) | This adjustment eliminates the impact of non-cash equity-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses as supplemental information. |
| (b) | For the three and nine months ended September 31, 2021, this adjustment eliminates the impact of a partial sales of inventories for which excess and obsolete reserves were previously recognized in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, as a portion of reserved inventory was subsequently sold to certain other customers. As this adjustment meaningfully impacted our operational results and are not expected to represent an ongoing operating expense subject to our ability to foresee and control, we believe our operating performance results are more meaningfully compared if this adjustment is excluded. |
| (c) | For the three and nine months ended September 30, 2021, this adjustment eliminates professional service fees and expenses incurred in connection with the contemplated Merger transaction (see “Note 16. Merger Agreement” to our consolidated financial statements under “Item 1. Interim Consolidated Financial Statements”). As this adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is excluded. |
| (d) | For the three and nine months ended September 30, 2022, this adjustment eliminates $2.8 million of one-time employee incentives, in each period, and professional service fees and expenses of $0.2 million and $1.0 million, respectively, incurred in connection with certain strategic evaluations, both of which were offset in part by a $0.5 million gain on sale of certain legacy equipment of the closed back-end line in our fabrication facility in Gumi. For the three and nine months ended September 30, 2021, this adjustment eliminates professional service fees and expenses of $0.2 million and $3.4 million, respectively, incurred in connection with the regulatory requests. As these adjustments meaningfully impacted our operating results and are not expected to represent ongoing operating expenses to us, we believe our operating performance results are more usefully compared if these adjustments are excluded. |
31
Table of Contents
We present Adjusted Net Income (including on a per share basis) as a further supplemental measure of our performance. We prepare Adjusted Net Income (including on a per share basis) by adjusting net income (loss) to eliminate the impact of a number of non-cash expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted Net Income (including on a per share basis) is particularly useful because it reflects the impact of our asset base and capital structure on our operating performance. We present Adjusted Net Income (including on a per share basis) for a number of reasons, including:
| • | we use Adjusted Net Income (including on a per share basis) in communications with our Board of Directors concerning our consolidated financial performance without the impact of non-cash expenses and the other items as we discussed below since we believe that it is a more consistent measure of our core operating results from period to period; and |
| • | we believe that reporting Adjusted Net Income (including on a per share basis) is useful to readers in evaluating our core operating results because it eliminates the effects of non-cash expenses as well as the other items we discuss below, such as foreign currency gains and losses, which are out of our control and can vary significantly from period to period. |
Adjusted Net Income (including on a per share basis) is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to income from continuing operations, cash flows from operating activities or net income, as determined in accordance with U.S. GAAP. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Net Income (including on a per share basis) differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Net Income (including on a per share basis), you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Net Income (including on a per share basis); for the periods indicated as net income (loss), adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss, net, (iii) derivative valuation loss (gain), net, (iv) inventory reserve related to Huawei impact of downstream trade restrictions, (v) Merger-related costs, (vi) other charges, net and (vii) income tax effect on non-GAAP adjustments.
The following table summarizes the adjustments to net income (loss) that we make in order to calculate Adjusted Net Income (including on a per share basis) from continuing operations for the periods indicated:
| Three Months Ended September 30, 2022 |
Nine Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
Nine Months Ended September 30, 2021 |
|||||||||||||
| (Dollars in millions, except per share data) | ||||||||||||||||
| Net income (loss) |
$ | (17.2 | ) | $ | (11.0 | ) | $ | 10.8 | $ | 3.1 | ||||||
| Adjustments: |
||||||||||||||||
| Equity-based compensation expense(a) |
0.9 | 4.5 | 2.0 | 6.1 | ||||||||||||
| Foreign currency loss, net(b) |
12.8 | 20.5 | 7.6 | 12.0 | ||||||||||||
| Derivative valuation gain, net(c) |
(0.1 | ) | (0.2 | ) | (0.2 | ) | (0.1 | ) | ||||||||
| Inventory reserve related to Huawei impact of downstream trade restrictions(d) |
— | — | (1.1 | ) | (1.1 | ) | ||||||||||
| Merger-related costs(e) |
— | — | 1.6 | 13.8 | ||||||||||||
| Other charges, net(f) |
2.5 | 3.3 | (0.5 | ) | 2.6 | |||||||||||
| Income tax effect on non-GAAP adjustments(g) |
2.3 | 7.5 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Adjusted Net Income |
$ | 1.1 | $ | 24.6 | $ | 20.1 | $ | 36.5 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Reported earnings (loss) per share – basic |
$ | (0.38 | ) | $ | (0.24 | ) | $ | 0.23 | $ | 0.07 | ||||||
| Reported earnings (loss) per share – diluted |
$ | (0.38 | ) | $ | (0.24 | ) | $ | 0.23 | $ | 0.07 | ||||||
| Weighted average number of shares – basic |
44,865,266 | 45,119,214 | 46,449,234 | 44,377,250 | ||||||||||||
| Weighted average number of shares – diluted |
44,865,266 | 45,119,214 | 47,808,457 | 45,811,792 | ||||||||||||
| Adjusted earnings per share – basic |
$ | 0.02 | $ | 0.55 | $ | 0.43 | $ | 0.82 | ||||||||
| Adjusted earnings per share – diluted |
$ | 0.02 | $ | 0.53 | $ | 0.42 | $ | 0.78 | ||||||||
| Weighted average number of shares – basic |
44,865,266 | 45,119,214 | 46,449,234 | 44,377,250 | ||||||||||||
| Weighted average number of shares – diluted |
45,747,255 | 46,134,231 | 47,808,457 | 47,718,578 | ||||||||||||
| (a) | This adjustment eliminates the impact of non-cash equity-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses as supplemental information. |
| (b) | This adjustment mainly eliminates the impact of non-cash foreign currency translation associated with intercompany debt obligations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily non-cash gains or losses, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results. |
32
Table of Contents
| (c) | This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in U.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance. |
| (d) | For the three and nine months ended September 31, 2021, this adjustment eliminates the impact of a partial sales of inventories for which excess and obsolete reserves were previously recognized in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, as a portion of reserved inventory was subsequently sold to certain other customers. As this adjustment meaningfully impacted our operational results and are not expected to represent an ongoing operating expense subject to our ability to foresee and control, we believe our operating performance results are more meaningfully compared if this adjustment is excluded. |
| (e) | For the three and nine months ended September 30, 2021, this adjustment eliminates professional service fees and expenses incurred in connection with the contemplated Merger transaction (see “Note 16. Merger Agreement” to our consolidated financial statements under “Item 1. Interim Consolidated Financial Statements”). As this adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is excluded. |
| (f) | For the three and nine months ended September 30, 2022, this adjustment eliminates $2.8 million of one-time employee incentives, in each period, and professional service fees and expenses of $0.2 million and $1.0 million, respectively, incurred in connection with certain strategic evaluations, both of which were offset in part by a $0.5 million gain on sale of certain legacy equipment of the closed back-end line in our fabrication facility in Gumi. For the three and nine months ended September 30, 2021, this adjustment eliminates professional service fees and expenses of $0.2 million and $3.4 million, respectively, incurred in connection with the regulatory requests, both of which were offset in part by a $0.7 million legal settlement gain related to certain expenses incurred in prior periods in connection with our legacy Fab 4 (which was sold during the year ended December 31, 2020) and awarded in the third quarter. As these adjustments meaningfully impacted our operating results and are not expected to represent ongoing operating expenses to us, we believe our operating performance results are more usefully compared if these adjustments are excluded. |
| (g) | For the three and nine months ended September 30, 2022, this adjustment eliminates the income tax effect on non-GAAP adjustments of $2.3 million and $7.5 million, respectively, which mainly related to our Korean subsidiary using a calculation method that we compare the tax expense with and without the non-GAAP adjustments. |
We believe that all adjustments to net income (loss) used to calculate Adjusted Net Income was applied consistently to the periods presented.
Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
| • | Adjusted Net Income does not reflect changes in, or cash requirements for, our working capital needs; |
| • | Adjusted Net Income does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees; |
| • | Adjusted Net Income does not reflect the costs of holding certain assets and liabilities in foreign currencies; and |
| • | other companies in our industry may calculate Adjusted Net Income differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted Net Income should not be considered as a measure of profitability of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted Net Income only as a supplement.
33
Table of Contents
Factors Affecting Our Results of Operations
Net Sales. We derive substantially all of our sales (net of sales returns and allowances) from our standard products business. We outsource manufacturing of mobile OLED products to external 12-inch foundries. 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 offices near concentrations of major customers. Our sales offices are located in Korea, Japan, Taiwan and Greater China. Our network of authorized agents and distributors is in the United States, Europe and the Asia Pacific region.
We recognize revenue when a customer obtains control of the product, which is generally upon product shipment, delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement. For the nine months ended September 30, 2022 and 2021, we sold products to 169 and 175 customers, respectively, and our net sales to our ten largest customers represented 70% and 81% of our net sales—standard products business, respectively.
We will provide the Transitional Fab 3 Foundry Services up to September 1, 2023 at an agreed upon cost plus a mark-up.
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 facility and the yields achieved by our manufacturing operations, changes in material, labor and other manufacturing costs including outsourced manufacturing expenses, 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.
Material Costs. Our material costs consist of costs of raw materials, such as silicon wafers, chemicals, gases and tape and packaging supplies. 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 increase significantly.
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 September 30, 2022, approximately 97% 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.
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 of our display business are material and design-related costs for OLED display driver IC product development involving 28-nanometer or finer processes. The majority of research and development expenses of our power business are certain equipment, material and design-related costs for power discrete products and material and design-related costs for power IC products. Power IC uses standard BCD process technologies which can be sourced from multiple foundries.
34
Table of Contents
Impact of Foreign Currency Exchange Rates on Reported Results of Operations. Historically, a portion of our revenues and cost of sales and greater than the majority of our operating expenses 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 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. Moreover, our foreign currency gain or loss would be affected by changes in the exchange rate between the Korean won and the U.S. dollar as a substantial portion of non-cash translation gain or loss is associated with the intercompany long-term loans to our Korean subsidiary, which is denominated in U.S. dollars. As of September 30, 2022, the outstanding intercompany loan balance including accrued interest between our Korean subsidiary and our Dutch subsidiary was $356.7 million. 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 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. Obligations under these foreign currency zero cost collar contracts must be cash collateralized if our exposure exceeds certain specified thresholds. These zero cost collar contracts may be terminated by a counterparty in a number of circumstances, including if our total cash and cash equivalents is less than $30.0 million at the end of a fiscal quarter unless a waiver is obtained from the counterparty. We cannot assure 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. See “Note 7. Derivative Financial Instruments” to our consolidated financial statements under “Item 1. Interim Consolidated Financial Statements” for additional information regarding our foreign exchange hedging activities.
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 foreign currency gain (loss), net in our statements of operations. 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 basis 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 we 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.
We are subject to income- or non-income-based tax examinations by tax authorities of the U.S., Korea and multiple other foreign jurisdictions for all open tax years. Significant estimates and judgments are required in determining our worldwide provision for income- or non-income based 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 primarily invest in manufacturing equipment, software design tools and other tangible assets mainly for fabrication facility maintenance, capacity expansion and technology improvement. Capacity expansions and technology improvements typically occur in anticipation of increases in demand. We typically pay for capital expenditures in partial installments with portions due on order, delivery and final acceptance. Our capital expenditures mainly include our payments for the purchase of property, plant and equipment.
35
Table of Contents
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.
36
Table of Contents
Results of Operations – Comparison of Three Months Ended September 30, 2022 and 2021
The following table sets forth consolidated results of operations for the three months ended September 30, 2022 and 2021:
| Three Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
|||||||||||||||||||
| Amount | % of Total revenues |
Amount | % of Total revenues |
Change Amount |
||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Revenues |
||||||||||||||||||||
| Net sales – standard products business |
$ | 62.8 | 88.2 | % | $ | 117.4 | 92.5 | % | $ | (54.6 | ) | |||||||||
| Net sales – transitional Fab 3 foundry services |
8.4 | 11.8 | 9.6 | 7.5 | (1.2 | ) | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total revenues |
71.2 | 100.0 | 127.0 | 100.0 | (55.8 | ) | ||||||||||||||
| Cost of sales |
||||||||||||||||||||
| Cost of sales – standard products business |
45.5 | 63.9 | 71.6 | 56.4 | (26.1 | ) | ||||||||||||||
| Cost of sales – transitional Fab 3 foundry services |
8.5 | 11.9 | 8.8 | 6.9 | (0.3 | ) | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total cost of sales |
54.0 | 75.8 | 80.4 | 63.3 | (26.4 | ) | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Gross profit |
17.2 | 24.2 | 46.6 | 36.7 | (29.4 | ) | ||||||||||||||
| Selling, general and administrative expenses |
11.4 | 16.0 | 12.6 | 9.9 | (1.1 | ) | ||||||||||||||
| Research and development expenses |
13.3 | 18.7 | 12.3 | 9.7 | 1.1 | |||||||||||||||
| Merger-related costs |
— | — | 1.6 | 1.2 | (1.6 | ) | ||||||||||||||
| Other charges, net |
2.5 | 3.5 | 0.2 | 0.2 | 2.3 | |||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Operating income (loss) |
(10.0 | ) | (14.1 | ) | 20.0 | 15.7 | (30.0 | ) | ||||||||||||
| Interest expense |
(0.3 | ) | (0.4 | ) | (0.1 | ) | (0.1 | ) | (0.2 | ) | ||||||||||
| Foreign currency loss, net |
(12.8 | ) | (18.0 | ) | (7.6 | ) | (6.0 | ) | (5.2 | ) | ||||||||||
| Others, net |
2.0 | 2.8 | 1.6 | 1.3 | 0.4 | |||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| (11.1 | ) | (15.6 | ) | (6.1 | ) | (4.8 | ) | (5.0 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Income (loss) before income tax expense |
(21.1 | ) | (29.7 | ) | 13.9 | 11.0 | (35.1 | ) | ||||||||||||
| Income tax expense (benefit) |
(3.9 | ) | (5.5 | ) | 3.1 | 2.5 | (7.1 | ) | ||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Net income (loss) |
$ | (17.2 | ) | (24.2 | ) | $ | 10.8 | 8.5 | $ | (28.0 | ) | |||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Three Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
|||||||||||||||||||
| Amount | % of Total revenues |
Amount | % of Total revenues |
Change Amount |
||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Revenues |
||||||||||||||||||||
| Net sales – standard products business |
||||||||||||||||||||
| Display Solutions |
$ | 6.4 | 8.9 | % | $ | 58.5 | 46.1 | % | $ | (52.2 | ) | |||||||||
| Power Solutions |
56.4 | 79.2 | 58.9 | 46.4 | (2.5 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total standard products business |
62.8 | 88.2 | 117.4 | 92.5 | (54.6 | ) | ||||||||||||||
| Net sales – transitional Fab 3 foundry services |
8.4 | 11.8 | 9.6 | 7.5 | (1.2 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total revenues |
$ | 71.2 | 100.0 | % | $ | 127.0 | 100.0 | % | $ | (55.8 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Three Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
|||||||||||||||||||
| Amount | % of Net sales |
Amount | % of Net sales |
Change Amount |
||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Gross Profit |
||||||||||||||||||||
| Gross profit – standard products business |
$ | 17.3 | 27.5 | % | $ | 45.8 | 39.0 | % | $ | (28.5 | ) | |||||||||
| Gross profit – transitional Fab 3 foundry services |
(0.0 | ) | (0.6 | ) | 0.8 | 8.5 | (0.9 | ) | ||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total gross profit |
$ | 17.2 | 24.2 | % | $ | 46.6 | 36.7 | % | $ | (29.4 | ) | |||||||||
|
|
|
|
|
|
|
|||||||||||||||
37
Table of Contents
Revenues
Total revenues were $71.2 million for the three months ended September 30, 2022, a $55.8 million, or 43.9%, decrease compared to $127.0 million for the three months ended September 30, 2021. This decrease was primarily due to a decrease in revenue related to our standard products business as described below.
The standard products business. Net sales from our standard products business were $62.8 million for the three months ended September 30, 2022, a $54.6 million, or 46.5%, decrease compared to $117.4 million for the three months ended September 30, 2021. The significant decrease in net sales from our Display Solutions business line was primarily attributable to a decrease in revenue from our mobile OLED display driver ICs stemming from a lower customer demand resulting from a slowdown in the Chinese smartphone market, and a lack of secured manufacturing capacity (in particular for 28nm 12-inch OLED wafers) at external 12-inch foundries, which was offset in part by a higher demand for our auto-LCD display driver ICs and OLED TV display driver ICs. The decrease in net sales from our Power Solutions business line was attributable to a lower demand for MOSFETs primarily for smartphone and e-bikes, which was affected by COVID-19 lockdowns in China. This decrease was almost offset by a strong demand for IGBTs mainly for solar inverters.
The transitional Fab 3 foundry services. Net sales from the transitional Fab 3 foundry services were $8.4 million and $9.6 million for the three months ended September 30, 2022 and 2021, respectively.
Gross Profit
Total gross profit was $17.2 million for the three months ended September 30, 2022 compared to $46.6 million for the three months ended September 30, 2021, a $29.4 million, or 63.0%, decrease. Gross profit as a percentage of net sales for the three months ended September 30, 2022 decreased to 24.2% compared to 36.7% for the three months ended September 30, 2021. The decrease in both gross profit and gross profit as a percentage of net sales was primarily due to our standard products business as further described below.
The standard products business. Gross profit from our standard products business was $17.3 million for the three months ended September 30, 2022, which represented a $28.5 million, or 62.3%, decrease from gross profit of $45.8 million for the three months ended September 30, 2021. The decrease in gross profit was primarily attributable to a significant decrease in net sales from our Display Solutions business line as explained above. Gross profit as a percentage of net sales for the three months ended September 30, 2022 decreased to 27.5% compared to 39.0% for the three months ended September 30, 2021. The decrease in gross profit as a percentage of net sales was primarily attributable to certain inventory reserve and scrap cost related to 12-inch display products resulted from lower demand for China smartphones and a lower utilization rate of our internal fabrication facility. For the three months ended September 30, 2021, a partial sales of inventories for which excess and obsolete reserves were previously recognized in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, favorably affected both gross profit and gross profit as a percentage of net sales, as such reserved inventory was subsequently sold to certain other customers in the third quarter of 2021.
38
Table of Contents
Net Sales – Standard Products Business by Geographic Region
We report net sales – standard products business by geographic region based on the location to which the products are billed. The following table sets forth our net sales—standard products business by geographic region and the percentage of total net sales—standard products business represented by each geographic region for the three months ended September 30, 2022 and 2021:
| Three Months Ended September 30, 2022 |
Three Months Ended September 30, 2021 |
|||||||||||||||||||
| Amount | % of Net sales – standard products business |
Amount | % of Net sales – standard products business |
Change Amount |
||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Korea |
$ | 23.9 | 38.0 | % | $ | 29.7 | 25.3 | % | $ | (5.8 | ) | |||||||||
| Asia Pacific (other than Korea) |
34.6 | 55.1 | 84.2 | 71.7 | (49.6 | ) | ||||||||||||||
| United States |
2.7 | 4.3 | 1.8 | 1.5 | 1.0 | |||||||||||||||
| Europe |
1.6 | 2.5 | 1.4 | 1.2 | 0.2 | |||||||||||||||
| Others |
— | — | 0.4 | 0.3 | (0.4 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 62.8 | 100.0 | % | $ | 117.4 | 100.0 | % | $ | (54.6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net sales – standard products business in Korea for the three months ended September 30, 2022 decreased from $29.7 million to $23.9 million compared to the three months ended September 30, 2021, or by $5.8 million, or 19.5%, primarily due to a decrease in revenue from our mobile OLED display driver ICs and weaker demand for power products such as MOSFETs, including high-end MOSFETs, primarily for TVs and smartphone applications, which was offset in part by higher demand for OLED TV display driver ICs.
Net sales – standard products business in Asia Pacific (other than Korea) for the three months ended September 30, 2022 decreased to $34.6 million from $84.2 million in the three months ended September 30, 2021, or by $49.6 million, or 58.9%, primarily due to a decrease in revenue from our mobile OLED display driver ICs stemming from a lower customer demand resulting from a slowdown in the Chinese smartphone market, and a lack of secured manufacturing capacity (in particular for 28nm 12-inch OLED wafers) at external 12-inch foundries, which was offset in part by a higher demand for power products such as IGBTs mainly for solar inverters. The increased demand for our auto-LCD display driver ICs also favorably affected in this quarter.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $11.4 million, or 16.0% of total revenues, for the three months ended September 30, 2022, compared to $12.6 million, or 9.9% of total revenues, for the three months ended September 30, 2021. The decrease of $1.1 million, or 9.1%, was primarily attributable to a decrease in estimated employee compensation reflecting the current year’s financial performance.
Research and Development Expenses. Research and development expenses were $13.3 million, or 18.7% of total revenues, for the three months ended September 30, 2022, compared to $12.3 million, or 9.7% of total revenues, for the three months ended September 30, 2021. The increase of $1.1 million, or 8.6%, was primarily attributable to increase in outside service fees, including those for software design tools, and variable overhead expenses.
Merger-related Costs. For the three months ended September 30, 2021, we recorded $1.6 million of professional service fees and expenses incurred in connection with the contemplated Merger transaction.
Other Charges, Net. For the three months ended September 30, 2022, we recorded $2.8 million of one-time employee incentives and $0.2 million of professional service fees and expenses incurred in connection with certain strategic evaluations, which was offset in part by a $0.5 million gain on sale of certain legacy equipment of the closed back-end line in our fabrication facility in Gumi. For the three months ended September 30, 2021, we recorded $0.2 million of non-recurring professional service fees and expenses incurred in connection with the regulatory requests.
39
Table of Contents
Operating Income (Loss)
As a result of the foregoing, operating loss was $10.0 million for the three months ended September 30, 2022 compared to operating income of $20.0 million the three months ended September 30, 2021. As discussed above, the decrease in operating income of $30.0 million resulted primarily from a $29.4 million decrease in gross profit, a $2.3 million increase in other charge, net, and a $1.1 million increase in research and development expenses. This increase was offset in part by a $1.6 million decrease in Merger-related costs and a $1.1 million decrease in selling, general and administrative expenses.
40
Table of Contents
Other Income (Expense)
Interest Expense. Interest expenses was $0.3 million and $0.1 million for the three months ended September 30, 2022 and September 30, 2021, respectively.
Foreign Currency Loss, Net. Net foreign currency loss for the three months ended September 30, 2022 was $12.8 million compared to net foreign currency loss of $7.6 million for the three months ended September 30, 2021. The net foreign currency loss for the three months ended September 30, 2022 and September 30, 2021 was due to the depreciation in value of the Korean won relative to the U.S. dollar during the period.
A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss associated with intercompany long-term loans to our Korean subsidiary, which are denominated in U.S. dollars, and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of September 30, 2022 and September 30, 2021, the outstanding intercompany loan balances, including accrued interest between our Korean subsidiary and our Dutch subsidiary, were $357 million and $393 million, respectively. Foreign currency translation gain or loss from intercompany balances were included in determining our consolidated net income since the intercompany balances were not considered long-term investments in nature because management intended to settle these intercompany balances at their respective maturity dates.
Others, Net. Others were primarily comprised of interest income, rental income, and gains and losses from valuation of derivatives which were designated as hedging instruments. Others for the three months ended September 30, 2022 and September 30, 2021 was $2.0 million and $1.6 million, respectively. In the third quarter of 2021, others, net included a $0.7 million legal settlement gain related to certain expenses incurred in prior periods in connection with our legacy Fab 4 (which was sold during the year ended December 31, 2020) and awarded in the current quarter.
Income Tax Expense (Benefit)
Income tax benefit was $3.9 million for the three months ended September 30, 2022, which was primarily attributable to the decrease in the pre-tax income due to foreign currency translation losses associated with intercompany long-term loans in our Korean subsidiary for the respective period.
Income tax expense was $3.1 million for the three months ended September 30, 2021, which was primarily attributable to interest on intercompany loan balances and the estimated taxable income for the respective period in our Korean subsidiary, combined with its ability to utilize net operating loss carryforwards up to 60%.
Net Income (Loss)
As a result of the foregoing, a net loss of $17.2 million was recorded for the three months ended September 30, 2022 compared to a net income of $10.8 million for the three months ended September 30, 2021. As discussed above, the $28.0 million decrease in net income was primarily attributable to a $30.0 million decrease in operating income and $5.2 million increase in net foreign currency loss, which was offset in part by a $7.1 million decrease in income tax expense.
41
Table of Contents
Results of Operations – Comparison of Nine Months Ended September 30, 2022 and 2021
The following table sets forth consolidated results of operations for the nine months ended September 30, 2022 and 2021:
| Nine Months Ended September 30, 2022 |
Nine Months Ended September 30, 2021 |
|||||||||||||||||||
| Amount | % of Total revenues |
Amount | % of Total revenues |
Change Amount |
||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Revenues |
||||||||||||||||||||
| Net sales – standard products business |
$ | 248.1 | 89.7 | % | $ | 333.6 | 91.7 | % | $ | (85.5 | ) | |||||||||
| Net sales – transitional Fab 3 foundry services |
28.6 | 10.3 | 30.3 | 8.3 | (1.7 | ) | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total revenues |
276.7 | 100.0 | 363.9 | 100.0 | (87.2 | ) | ||||||||||||||
| Cost of sales |
||||||||||||||||||||
| Cost of sales – standard products business |
165.2 | 59.7 | 221.3 | 60.8 | (56.1 | ) | ||||||||||||||
| Cost of sales – transitional Fab 3 foundry services |
26.3 | 9.5 | 27.7 | 7.6 | (1.4 | ) | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total cost of sales |
191.5 | 69.2 | 249.0 | 68.4 | (57.5 | ) | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Gross profit |
85.2 | 30.8 | 114.9 | 31.6 | (29.8 | ) | ||||||||||||||
| Selling, general and administrative expenses |
38.3 | 13.8 | 39.2 | 10.8 | (0.9 | ) | ||||||||||||||
| Research and development expenses |
38.7 | 14.0 | 39.0 | 10.7 | (0.3 | ) | ||||||||||||||
| Merger-related costs |
— | — | 13.8 | 3.8 | (13.8 | ) | ||||||||||||||
| Other charges, net |
3.3 | 1.2 | 3.4 | 0.9 | (0.1 | ) | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Operating income |
4.9 | 1.8 | 19.5 | 5.4 | (14.7 | ) | ||||||||||||||
| Interest expense |
(0.9 | ) | (0.3 | ) | (1.2 | ) | (0.3 | ) | 0.4 | |||||||||||
| Foreign currency loss, net |
(20.5 | ) | (7.4 | ) | (12.0 | ) | (3.3 | ) | (8.5 | ) | ||||||||||
| Others, net |
4.2 | 1.5 | 2.8 | 0.8 | 1.3 | |||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| (17.2 | ) | (6.2 | ) | (10.4 | ) | (2.9 | ) | (6.8 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Income (loss) before income tax expense |
(12.4 | ) | 4.5 | 9.1 | 2.5 | (21.5 | ) | |||||||||||||
| Income tax expense (benefit) |
(1.4 | ) | (0.5 | ) | 6.0 | 1.7 | (7.4 | ) | ||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Net income (loss) |
$ | (11.0 | ) | (4.0 | ) | $ | 3.1 | 0.9 | $ | (14.1 | ) | |||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Nine Months Ended September 30, 2022 |
Nine Months Ended September 30, 2021 |
|||||||||||||||||||
| Amount | % of Total revenues |
Amount | % of Total revenues |
Change Amount |
||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Revenues |
||||||||||||||||||||
| Net sales – standard products business |
||||||||||||||||||||
| Display Solutions |
$ | 63.9 | 23.1 | % | $ | 164.0 | 45.1 | % | $ | (100.1 | ) | |||||||||
| Power Solutions |
184.2 | 66.6 | 169.6 | 46.6 | 14.6 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total standard products business |
248.1 | 89.7 | 333.6 | 91.7 | (85.5 | ) | ||||||||||||||
| Net sales – transitional Fab 3 foundry services |
28.6 | 10.3 | 30.3 | 8.3 | (1.7 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total revenues |
$ | 276.7 | 100.0 | % | $ | 363.9 | 100.0 | % | $ | (87.2 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Nine Months Ended September 30, 2022 |
Nine Months Ended September 30, 2021 |
|||||||||||||||||||
| Amount | % of Net sales |
Amount | % of Net sales |
Change Amount |
||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Gross Profit |
||||||||||||||||||||
| Gross profit – standard products business |
$ | 82.9 | 33.4 | % | $ | 112.3 | 33.7 | % | $ | (29.4 | ) | |||||||||
| Gross profit – transitional Fab 3 foundry services |
2.3 | 8.0 | 2.6 | 8.7 | (0.4 | ) | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total gross profit |
$ | 85.2 | 30.8 | % | $ | 114.9 | 31.6 | % | $ | (29.8 | ) | |||||||||
|
|
|
|
|
|
|
|||||||||||||||
42
Table of Contents
Revenues
Total revenues were $276.7 million for the nine months ended September 30, 2022, a $87.2 million, or 24.0%, decrease compared to $363.9 million for the nine months ended September 30, 2021. This decrease was primarily due to a decrease in revenue related to our standard products business as described below.
The standard products business. Net sales from our standard products business were $248.1 million for the nine months ended September 30, 2022, an $85.5 million, or 25.6%, decrease compared to $333.6 million for the nine months ended September 30, 2021. The significant decrease in net sales from our Display Solutions business line was primarily attributable to a decrease in revenue from our mobile OLED display driver ICs stemming from a lower customer demand resulting from a slowdown in the Chinese smartphone market, and a lack of secured manufacturing capacity (in particular for 28nm 12-inch OLED wafers) at external 12-inch foundries, which was offset in part by a higher demand for our OLED TV display driver ICs and auto-LCD display driver ICs. The increase in net sales from our Power Solutions business line was attributable to a strong demand for power products such as MOSFETs, including high-end MOSFETs, primarily for TVs and e-bikes, and IGBTs mainly for solar inverters.
The transitional Fab 3 foundry services. Net sales from the transitional Fab 3 foundry services were $28.6 million and $30.3 million for the nine months ended September 30, 2022 and 2021, respectively.
Gross Profit
Total gross profit was $85.2 million for the nine months ended September 30, 2022 compared to $114.9 million for the nine months ended September 30, 2021, a $29.8 million, or 25.9%, decrease. Gross profit as a percentage of net sales for the nine months ended September 30, 2022 decreased to 30.8% compared to 31.6% for the nine months ended September 30, 2021. The decrease in both gross profit and gross profit as a percentage of net sales was primarily due to our standard products business as further described below.
The standard products business. Gross profit from our standard products business was $82.9 million for the nine months ended September 30, 2022, which represented a $29.4 million, or 26.2%, decrease from gross profit of $112.3 million for the nine months ended September 30, 2021. The decrease in gross profit was primarily attributable to a significant decrease in net sales from our Display Solutions business line as explained above. Gross profit as a percentage of net sales for the nine months ended September 30, 2022 decreased slightly to 33.4% compared to 33.7% for the nine months ended September 30, 2021. The decrease in gross profit as a percentage of net sales was primarily attributable to certain inventory reserve and scrap cost related to 12-inch display products resulted from lower demand for China smartphones, which was offset in part by an improved product mix and an increase in average selling price benefited from the favorable pricing environment, primarily for our Power Solutions business line.
43
Table of Contents
Net Sales – Standard Products Business by Geographic Region
We report net sales – standard products business by geographic region based on the location to which the products are billed. The following table sets forth our net sales—standard products business by geographic region and the percentage of total net sales—standard products business represented by each geographic region for the nine months ended September 30, 2022 and 2021:
| Nine Months Ended September 30, 2022 |
Nine Months Ended September 30, 2021 |
|||||||||||||||||||
| Amount | % of Net sales – standard products business |
Amount | % of Net sales – standard products business |
Change Amount |
||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Korea |
$ | 86.1 | 34.7 | % | $ | 87.0 | 26.1 | % | $ | (0.9 | ) | |||||||||
| Asia Pacific (other than Korea) |
148.9 | 60.0 | 237.3 | 71.1 | (88.4 | ) | ||||||||||||||
| United States |
8.1 | 3.3 | 4.4 | 1.3 | 3.7 | |||||||||||||||
| Europe |
5.0 | 2.0 | 3.8 | 1.2 | 1.1 | |||||||||||||||
| Others |
— | — | 1.1 | 0.3 | (1.1 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 248.1 | 100.0 | % | $ | 333.6 | 100.0 | % | $ | (85.5 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net sales – standard products business in Korea for the nine months ended September 30, 2022 decreased from $87.0 million to $86.1 million compared to the nine months ended September 30, 2021, or by $0.9 million, or 1.0%, primarily due to weaker demand for power products such as high-end MOSFETs primarily for TVs and decrease in revenue from our mobile OLED display driver ICs, which was offset in part by an increase in revenue from OLED TV display driver ICs.
Net sales – standard products business in Asia Pacific (other than Korea) for the nine months ended September 30, 2022 decreased to $148.9 million from $237.3 million in the nine months ended September 30, 2021, or by $88.4 million, or 37.2%, primarily due to a significant decrease in revenue from our mobile OLED display driver ICs stemming from a lower customer demand resulting from a slowdown in the Chinese smartphone market, and a lack of secured manufacturing capacity (in particular for 28nm 12-inch OLED wafers) at external 12-inch foundries, which was offset in part by a higher demand for power products such as MOSFETs, including high-end MOSFETs, primarily for TVs and e-bike, and IGBTs mainly for solar inverters. The increased demand for our auto-LCD display driver ICs also favorably affected in this year.
Net sales – standard products business in the United States for the nine months ended September 30, 2022 increased to $8.1 million from $4.4 million compared to the nine months ended September 30, 2021, or by $3.7 million, or 83.8%, primarily due to a change in billing location of a global customer who offers lighting solutions combined with the increase of high-end MOSFET design wins with the customer.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $38.3 million, or 13.8% of total revenues, for the nine months ended September 30, 2022, compared to $39.2 million, or 10.8% of total revenues, for the nine months ended September 30, 2021. The decrease of $0.9 million, or 2.2%, was primarily attributable to a decrease in running royalties recognized based on the revenue of certain mobile OLED display driver ICs.
Research and Development Expenses. Research and development expenses were $38.7 million, or 14.0% of total revenues, for the nine months ended September 30, 2022, which remained almost flat, compared to $39.0 million, or 10.7% of total revenues, for the nine months ended September 30, 2021.
Merger-related Costs. For the nine months ended September 30, 2021, we recorded $13.8 million of professional service fees and expenses incurred in connection with the contemplated Merger transaction.
Other Charges, Net. For the nine months ended September 30, 2022, we recorded $2.8 million of one-time employee incentives and $1.0 million of professional service fees and expenses incurred in connection with certain strategic evaluations, which was offset in part by a $0.5 million gain on sale of certain legacy equipment of the closed back-end line in our fabrication facility in Gumi. For the nine months ended September 30, 2021, we recorded $3.4 million of non-recurring professional service fees and expenses incurred in connection with the regulatory requests.
44
Table of Contents
Operating Income
As a result of the foregoing, operating income was $4.9 million for the nine months ended September 30, 2022 compared to operating income of $19.5 million the nine months ended September 30, 2021. As discussed above, the decrease in operating income of $14.7 million resulted primarily from a $29.8 million decrease in gross profit, which was offset in part by a $13.8 million decrease in Merger-related costs, a $0.9 million decrease in selling, general and administrative expenses and a $0.3 million decrease in research and development expenses.
45
Table of Contents
Other Income (Expense)
Interest Expense. Interest expenses was $0.9 million and $1.2 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.
Foreign Currency Loss, Net. Net foreign currency loss for the nine months ended September 30, 2022 was $20.5 million compared to net foreign currency loss of $12.0 million for the nine months ended September 30, 2021. The net foreign currency loss for the nine months ended September 30, 2022 and September 30, 2021 was due to the depreciation in value of the Korean won relative to the U.S. dollar during the period.
A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss associated with intercompany long-term loans to our Korean subsidiary, which are denominated in U.S. dollars, and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of September 30, 2022 and September 30, 2021, the outstanding intercompany loan balances, including accrued interest between our Korean subsidiary and our Dutch subsidiary, were $357 million and $393 million, respectively. Foreign currency translation gain or loss from intercompany balances were included in determining our consolidated net income since the intercompany balances were not considered long-term investments in nature because management intended to settle these intercompany balances at their respective maturity dates.
Others, Net. Others were primarily comprised of interest income, rental income and gains and losses from valuation of derivatives which were designated as hedging instruments. Others for the nine months ended September 30, 2022 and September 30, 2021 was $4.2 million and $2.8 million, respectively. In the third quarter of 2021, others, net included a $0.7 million legal settlement gain related to certain expenses incurred in prior periods in connection with our legacy Fab 4 (which was sold during the year ended December 31, 2020) and awarded in the current quarter
Income Tax Expense (Benefit)
Income tax benefit was $1.4 million for the nine months ended September 30, 2022, which was primarily attributable to the decrease in the pre-tax income due to foreign currency translation losses associated with intercompany long-term loans in our Korean subsidiary for the respective period.
Income tax expense was $6.0 million for the nine months ended September 30, 2021, which was primarily attributable to interest on intercompany loan balances and the estimated taxable income for the respective period in our Korean subsidiary, combined with its ability to utilize net operating loss carryforwards up to 60%.
Net Income (Loss)
As a result of the foregoing, a net loss of $11.0 million was recorded for the nine months ended September 30, 2022 compared to a net income of $3.1 million for the nine months ended September 30, 2021. As discussed above, the $14.1 million decrease in net income was primarily attributable to a $14.7 million decrease in operating income and an $8.5 million increase in net foreign currency loss, which was offset in part by a $7.4 million decrease in income tax expense.
46
Table of Contents
Liquidity and Capital Resources
Our principal capital requirements are to fund sales and marketing, invest in research and development and capital equipment, and to fund working capital needs. We calculate working capital as current assets less current liabilities.
Our principal sources of liquidity are our cash, cash equivalents, cash flows from operations and financing activities. Our ability to manage cash and cash equivalents may be limited, as our primary cash flows are dictated by the terms of our sales and supply agreements, contractual obligations, debt instruments and legal and regulatory requirements. From time to time, we may sell accounts receivable to third parties under factoring agreements or engage in accounts receivable discounting to facilitate the collection of cash. In addition, from time to time, we may make payments to our vendors on extended terms with their consent. As of September 30, 2022, we did not have any accounts payable on extended terms or payment deferment with our vendors.
As of June 29, 2018, our Korean subsidiary entered into an arrangement whereby it (i) acquired a water treatment facility from SK hynix for $4.2 million to support our fabrication facility in Gumi, Korea, and (ii) subsequently sold the water treatment facility for $4.2 million to a third party management company that we engaged to run the facility for a 10-year term beginning July 1, 2018. As of September 30, 2022, the outstanding obligation of this arrangement is approximately $22.7 million for remaining service term through 2028.
As of September 30, 2022, cash and cash equivalents held by our Korean subsidiary were $241.3 million, which represents 96% of our total cash and cash equivalents on a consolidated basis. We currently believe that we will have sufficient cash reserves from cash on hand and expected cash from operations to fund our operations as well as capital expenditures for the next 12 months and the foreseeable future.
Working Capital
Our working capital balance as of September 30, 2022 was $304.7 million compared to $323.6 million as of December 31, 2021. The $19.0 million decrease was primarily attributable to a $28.7 million decrease in cash and cash equivalents and a $17.6 million decrease in other receivable mainly resulted from receipt of reverse termination fee, which was offset in part by a $11.0 million decrease in account payables, a $12.3 million net increase in hedge collateral and a $7.8 million increase in advance payments to certain suppliers, including external foundries to meet our planned production.
Cash Flows from Operating Activities
Cash inflow provided by operating activities totaled $50.2 million for the nine months ended September 30, 2022, compared to $30.0 million of cash inflow provided by operating activities for the nine months ended September 30, 2021. The net operating cash inflow for the nine months ended September 30, 2022 reflects our net loss of $11.0 million, as adjusted favorably by $95.6 million, which mainly consisted of depreciation and amortization, provision for severance benefits, stock-based compensation and net foreign currency loss, and net unfavorable impact of $34.3 million from changes of operating assets and liabilities.
Cash Flows from Investing Activities
Cash outflow used in investing activities totaled $25.9 million for the nine months ended September 30, 2022, compared to $14.4 million of cash outflow used in investing activities for the nine months ended September 30, 2021. The $11.4 million increase in cash outflow was primarily attributable to a $13.7 million net increase in hedge collateral, which was offset in part by a $1.6 million decrease in purchase of property, plant and equipment.
Cash Flows from Financing Activities
Cash outflow used in financing activities totaled $3.7 million for the nine months ended September 30, 2022, compared to $1.8 million of cash inflow provided by financing activities for the nine months ended September 30, 2021. The financing cash outflow for the nine months ended September 30, 2022 was primarily attributable to a payment of $3.2 million for the repurchases of our common stock in September 2022 pursuant to our stock repurchase program and a payment of $1.8 million for the repurchase of our common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock units, which was offset in part by $1.8 million of proceeds received from the issuance of common stock in connection with the exercise of stock options. The financing cash inflow for the nine months ended September 30, 2021 was primarily attributable to $3.9 million of proceeds received from the issuance of common stock in connection with the exercise of stock options, which was offset in part by a payment of $1.7 million for the repurchase of our common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock units.
47
Table of Contents
Capital Expenditures
We routinely make capital expenditures for fabrication facility maintenance, enhancement of our existing facility and reinforcement of our global research and development capability. For the nine months ended September 30, 2022, capital expenditures for property, plant and equipment were $11.8 million, a $1.6 million, or 11.6%, decrease from $13.4 million for the nine months ended September 30, 2021. The capital expenditures for the nine months ended September 30, 2022 and 2021 were related to meeting our customer demand and supporting technology and capacity improvement at our fabrication facility.
48
Table of Contents
Critical Accounting Policies and Estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in our consolidated financial statements and accompanying notes.
We believe that our significant accounting policies, which are described further in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for our fiscal year ended December 31, 2021, or our 2021 Form 10-K, are critical due to the fact that they involve a high degree of judgment and estimates about the effects of matters that are inherently uncertain. We base these estimates and judgments on historical experience, knowledge of current conditions and other assumptions and information that we believe to be reasonable. Estimates and assumptions about future events and their effects cannot be determined with certainty. Accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the business environment in which we operate changes.
A description of our critical accounting policies that involve significant management judgement appears in our 2021 Form 10-K, under “Management’s Discussion and Analysis of Financial Conditions and Reports of Operations—Critical Accounting Policies and Estimates.” There have been no other material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates included in our 2021 Form 10-K.
Recent Accounting Pronouncements
For a full description of new accounting pronouncements and recently adopted accounting pronouncements, please see “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 1. Business, Basis of Presentation and Significant Accounting Policies” in this Report.
49
Table of Contents
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to the market risk that the value of a financial instrument will fluctuate due to changes in market conditions, primarily from changes in foreign currency exchange rates. In the normal course of our business, we are subject to market risks associated with currency movements on our assets and liabilities.
Foreign Currency Exposures
We have exposure to foreign currency exchange rate fluctuations on net income from our subsidiaries denominated in currencies other than U.S. dollars, as our foreign subsidiaries in Korea, Taiwan, China, Japan and Hong Kong use local currency as their functional currency. From time to time these subsidiaries have cash and financial instruments in local currency. The amounts held in Japan, Taiwan, Hong Kong and China are not material in regards to foreign currency movements. However, based on the cash and financial instruments balance at September 30, 2022 for our Korean subsidiary, a 10% devaluation of the Korean won against the U.S. dollar would have resulted in a decrease of $1.2 million in our U.S. dollar financial instruments and cash balances.
See “Note 7. Derivative Financial Instruments” to our consolidated financial statements under “Item 1. Interim Consolidated Financial Statements” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Impact of Foreign Currency Exchange Rates on Reported Results of Operations” for additional information regarding our foreign exchange hedging activities.
50
Table of Contents
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In connection with the preparation of this Report, we carried out an evaluation under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, as of September 30, 2022, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
51
Table of Contents
PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
For a discussion of legal proceedings, see “Part I: Item 3. Legal Proceedings” of our 2021 Form 10-K.
See also “Item 1A. Risk Factors” in this Report and “Part I: Item 1A. Risk Factors” of our 2021 Form 10-K for additional information.
| Item 1A. | Risk Factors |
The Company is subject to risks and uncertainties, any of which could have a significant or material adverse effect on our business, financial condition, liquidity or consolidated financial statements.
In addition to the other information contained in this Report and the other reports and materials the Company files with the SEC, investors should carefully consider the risk factors disclosed in Part I, Item 1A of our 2021 Form 10-K as well as in our subsequent filings with the SEC. The risks described herein and therein are not the only ones we face.
There have been no material changes to the risk factors disclosed in Part I, Item 1A of our 2021 Form 10-K and Part II, Item 1A of our most recent Quarterly Report on Form 10-Q.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table shows the monthly activity related to our repurchases of common stock for the quarter ended September 30, 2022.
| Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) |
Approximate dollar value of Shares that may yet be Purchased under the Plans or Programs (in thousands)(1) |
||||||||||||
| July 2022 |
— | — | — | — | ||||||||||||
| August 2022 |
— | — | — | — | ||||||||||||
| September 2022 |
324,643 | $ | 11.21 | 324,643 | $ | 46,362 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
324,643 | 324,643 | $ | 46,362 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| (1) | On August 31, 2022, the Company’s Board of Directors authorized an expansion of the Company’s previously announced stock repurchase program from $75 million to $87.5 million of the Company’s common stock. The Company has already repurchased shares worth $37.5 million under the program through an accelerated stock repurchase agreement on December 21, 2021 with JPMorgan Chase Bank, National Association. The remaining $50.0 million of the expanded $87.5 million program will be repurchased in the open market or through privately negotiated transactions. In connection with the repurchase program, the Company has established a stock trading plan with Oppenheimer & Co. Inc. in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. |
| Item 3. | Defaults Upon Senior Securities |
Not applicable.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
None.
52
Table of Contents
| Item 6. | Exhibits. |
Footnotes:
| # | Filed herewith |
| † | Furnished herewith |
| ‡ | Management contract or compensatory plan or arrangement |
| + | Certain identified information in such exhibit has been omitted pursuant to Item 601(b)(10) of Regulation S-K because such information is both (i) not material and (ii) information that the registrant treats as private or confidential. The registrant hereby undertakes to furnish supplemental copies of the unredacted exhibit upon request by the SEC. |
53
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MAGNACHIP SEMICONDUCTOR CORPORATION (Registrant) | ||||||
| Dated: November 8, 2022 | By: | /s/ Young-Joon Kim | ||||
| Young-Joon Kim | ||||||
| Chief Executive Officer (Principal Executive Officer) | ||||||
| Dated: November 8, 2022 | By: | /s/ Shin Young Park | ||||
| Shin Young Park | ||||||
| Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||||
54