Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2011

or

 

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

For the transition period from              to              .

Commission File Number: 001-34791

 

 

MagnaChip Semiconductor Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   83-0406195

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

c/o MagnaChip Semiconductor S.A.

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

Luxembourg R.C.S.

Luxembourg B97483

(352) 45-62-62

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

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

As of June 30, 2011, the registrant had 39,357,471 shares of common stock outstanding.

 

 

 


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

              Page No.  

PART I FINANCIAL INFORMATION

     4   
 

Item 1.

  

Interim Consolidated Financial Statements (Unaudited)

     4   
    

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

     4   
    

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010

     5   
    

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

     6   
    

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010

     8   
    

MagnaChip Semiconductor Corporation and Subsidiaries Notes to Consolidated Financial Statements

     9   
 

Item 2.

  

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

     30   
 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     51   
 

Item 4.

  

Controls and Procedures

     51   

PART II OTHER INFORMATION

     52   
 

Item 1A.

  

Risk Factors

     52   
 

Item 6.

  

Exhibits

     67   
SIGNATURES      68   

 

2


Table of Contents

FORWARD LOOKING STATEMENTS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All statements other than statements of historical facts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements.

These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in this section and in “Part II: Item 1A. Risk Factors” in this report.

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

Statements made in this Quarterly Report on Form 10-Q, unless the context otherwise requires, include the use of the terms “we,” “us,” “our” and “MagnaChip” refer to MagnaChip Semiconductor Corporation and its consolidated subsidiaries. The term “Korea” refers to the Republic of Korea or South Korea.

 

3


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

 

     June 30,
2011
    December 31,
2010
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 177,764      $ 172,172   

Accounts receivable, net

     123,792        119,054   

Inventories, net

     86,826        68,435   

Other receivables

     4,217        2,919   

Prepaid expenses

     9,257        8,207   

Other current assets

     10,724        18,920   
                

Total current assets

     412,580        389,707   
                

Property, plant and equipment, net

     191,133        179,012   

Intangible assets, net

     24,177        27,538   

Long-term prepaid expenses

     6,103        8,235   

Other non-current assets

     21,260        21,252   
                

Total assets

   $ 655,253      $ 625,744   
                

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 73,906      $ 58,264   

Other accounts payable

     23,098        14,645   

Accrued expenses

     41,780        32,635   

Current portion of capital lease obligations

     6,149        5,557   

Other current liabilities

     4,747        5,048   
                

Total current liabilities

     149,680        116,149   
                

Long-term borrowings, net

     212,441        246,882   

Long-term obligations under capital lease

     123        3,105   

Accrued severance benefits, net

     97,417        87,778   

Other non-current liabilities

     5,778        8,979   
                

Total liabilities

     465,439        462,893   
                

Commitments and contingencies (Note 15)

    

Stockholders’ equity

    

Common stock, $0.01 par value, 150,000,000 shares authorized, 39,357,471 and 38,401,985 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively

     394        384   

Additional paid-in capital

     97,987        95,585   

Retained earnings

     126,255        72,157   

Accumulated other comprehensive loss

     (34,822     (5,275
                

Total stockholders’ equity

     189,814        162,851   
                

Total liabilities and stockholders’ equity

   $ 655,253      $ 625,744   
                

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

 

4


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     Three Months
Ended
    Six Months
Ended
 
     June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  

Net sales

   $ 203,679      $ 194,700      $ 391,600      $ 374,185   

Cost of sales

     137,497        130,166        268,944        260,293   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     66,182        64,534        122,656        113,892   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     17,458        15,964        32,859        33,872   

Research and development expenses

     20,614        20,543        39,112        41,074   

Restructuring and impairment charges

     2,475        267        2,475        603   

Special expense for IPO incentive

     —          —          12,146        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     25,635        27,760        36,064        38,343   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses)

        

Interest expense, net

     (6,369     (6,557     (13,480     (8,606

Foreign currency gain (loss), net

     18,234        (48,273     39,593        (26,657

Loss on early extinguishment of senior notes

     (4,103     —          (4,103     —     

Other

     203        (950     369        (1,002
  

 

 

   

 

 

   

 

 

   

 

 

 
     7,965        (55,780     22,379        (36,265
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     33,600        (28,020     58,443        2,078   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     1,970        2,727        4,345        1,724   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 31,630      $ (30,747   $ 54,098      $ 354   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share—

        

Basic

   $ 0.81      $ (0.81   $ 1.40      $ 0.01   

Diluted

   $ 0.78      $ (0.81   $ 1.35      $ 0.01   

Weighted average number of shares—

        

Basic

     39,066,303        37,819,820        38,701,553        37,812,672   

Diluted

     40,294,902        37,819,820        39,925,275        39,060,047   

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

 

5


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

 

     Common Stock     

Additional

Paid-In

   

Retained

Earnings

(Accumulated

    

Accumulated

Other

Comprehensive

       
     Shares      Amount      Capital     deficit)      Income (loss)     Total  

Three Months Ended June 30, 2011

               

Balance at April 1, 2011

     39,356,749       $ 394       $ 97,812      $ 94,625       $ (20,944   $ 171,887   

Stock-based compensation

     —           —           386        —           —          386   

Issuance of new stock

     —           —           (215     —           —          (215

Exercise of stock options

     722         —           4        —           —          4   

Comprehensive income:

               

Net Income

     —           —           —          31,630         —          31,630   

Fair valuation of derivatives

     —           —           —          —           3,740        3,740   

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

     —           —           —          —           (5,649     (5,649

Foreign currency translation adjustments

     —           —           —          —           (11,451     (11,451

Unrealized gains on investments

     —           —           —          —           (518     (518
               

 

 

 

Total comprehensive income

                  17,752   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2011

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

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Six Months Ended June 30, 2011

               

Balance at January 1, 2011

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

Stock-based compensation

     —           —           817        —           —          817   

Issuance of new stock

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

Exercise of stock options

     5,486         —           32        —           —          32   

Comprehensive income:

               

Net income

     —           —           —          54,098         —          54,098   

Fair valuation of derivatives

     —           —           —          —           6,076        6,076   

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

     —           —           —          —           (9,942     (9,942

Foreign currency translation adjustments

     —           —           —          —           (25,718     (25,718

Unrealized gains on investments

     —           —           —          —           37        37   
               

 

 

 

Total comprehensive income

                  24,551   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2011

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

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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

 

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Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

 

     Common Stock     

Additional

Paid-In

   

Retained

Earnings

(Accumulated

   

Accumulated

Other

Comprehensive

       
     Shares      Amount      Capital     deficit)     Income (loss)     Total  

Three Months Ended June 30, 2010

              

Balance at April 1, 2010

     38,404,294       $ 384       $ 224,334      $ 29,138      $ (22,411   $ 231,445   

Stock-based compensation

     —           —           656        —          —          656   

Distribution to stockholders

     —           —           (130,697     —          —          (130,697

Comprehensive income:

              

Net loss

     —           —           —          (30,747     —          (30,747

Fair valuation of derivatives

     —           —           —          —          (3,349     (3,349

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

     —           —           —          —          1,259        1,259   

Foreign currency translation adjustments

     —           —           —          —          33,329        33,329   

Unrealized gains on investments

     —           —           —          —          24        24   
              

 

 

 

Total comprehensive income

                 516   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2010

     38,404,294       $ 384       $ 94,293      $ (1,609   $ 8,852      $ 101,920   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2010

              

Balance at January 1, 2010

     38,385,544       $ 384       $ 223,451      $ (1,963   $ (6,182   $ 215,690   

Stock-based compensation

     18,750         —           1,539        —          —          1,539   

Distribution to stockholders

     —           —           (130,697     —          —          (130,697

Comprehensive income:

              

Net income

     —           —           —          354        —          354   

Fair valuation of derivatives

     —           —           —          —          (5,402     (5,402

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

     —           —           —          —          1,878        1,878   

Foreign currency translation adjustments

     —           —           —          —          18,422        18,422   

Unrealized gains on investments

     —           —           —          —          136        136   
              

 

 

 

Total comprehensive income

                 15,388   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2010

     38,404,294       $ 384       $ 94,293      $ (1,609   $ 8,852      $ 101,920   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

 

7


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands of US dollars)

 

     Six Months Ended  
     June 30,
2011
    June 30,
2010
 

Cash flows from operating activities

    

Net income

   $ 54,098      $ 354   

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

    

Depreciation and amortization

     29,315        29,985   

Provision for severance benefits

     8,396        9,380   

Amortization of debt issuance costs and original issue discount

     491        449   

Loss (gain) on foreign currency translation, net

     (44,109     29,975   

Gain on disposal of property, plant and equipment, net

     (11     (9

Loss on disposal of intangible assets, net

     8        7   

Restructuring and impairment charges

     2,475        603   

Stock-based compensation

     1,246        2,752   

Cash used for reorganization items

     —          1,475   

Loss on early extinguishment of senior notes

     4,103        —     

Other

     1,104        740   

Changes in operating assets and liabilities

    

Accounts receivable

     2,103        (45,243

Inventories

     (14,300     1,342   

Other receivables

     (1,309     119   

Other current assets

     (884     (92

Deferred tax assets

     824        618   

Accounts payable

     12,139        7,542   

Other accounts payable

     13,800        11,330   

Accrued expenses

     3,141        7,841   

Other current liabilities

     (1,155     (1,172

Payment of severance benefits

     (3,745     (2,760

Other non-current liabilities

     (232     (2,855
  

 

 

   

 

 

 

Net cash provided by operating activities before reorganization items

     67,498        52,381   
  

 

 

   

 

 

 

Cash used for reorganization items

     —          (1,475
  

 

 

   

 

 

 

Net cash provided by operating activities

     67,498        50,906   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from disposal of plant, property and equipment

     23        13   

Purchase of plant, property and equipment

     (26,926     (20,509

Payment for intellectual property registration

     (324     (245

Decrease in short-term financial instruments

     —          329   

Collection of guarantee deposits

     979        999   

Payment of guarantee deposits

     (1,483     (769

Other

     (402     (9
  

 

 

   

 

 

 

Net cash used in investing activities

     (28,133     (20,191
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from issuance of common stock

     8,818        —     

Proceeds from issuance of senior notes

     —          246,685   

Debt issuance costs paid

     —          (8,313

Distribution to stockholders

     —          (130,697

Repayment of long-term borrowings

     —          (61,750

Repurchase of senior notes

     (38,150     —     

Repayment of obligations under capital lease

     (3,182     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (32,514     45,925   

Effect of exchange rates on cash and cash equivalents

     (1,259     (255
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     5,592        76,385   
  

 

 

   

 

 

 

Cash and cash equivalents

    

Beginning of the period

     172,172        64,925   
  

 

 

   

 

 

 

End of the period

   $ 177,764      $ 141,310   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for interest

   $ 13,468      $ 3,333   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 1,207      $ (270
  

 

 

   

 

 

 

Noncash transactions

    

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

   $ 7,269      $ —    
  

 

 

   

 

 

 

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

 

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Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

1. General

The Company

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

2. Significant Accounting Policies

Basis of Presentation

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

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

Recent Accounting Pronouncements

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

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

3. Completion of Initial Public Offering

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

 

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Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

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

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

 

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Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

4. Inventories

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

 

     June 30,
2011
    December 31,
2010
 

Finished goods

   $ 11,505      $ 13,529   

Semi-finished goods and work-in-process

     58,965        50,542   

Raw materials

     17,281        9,762   

Materials in-transit

     1,120        1,643   

Less: inventory reserve

     (2,045     (7,041
  

 

 

   

 

 

 

Inventories, net

   $ 86,826      $ 68,435   
  

 

 

   

 

 

 

5. Property, Plant and Equipment

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

 

     June 30,
2011
    December 31,
2010
 

Buildings and related structures

   $ 78,114      $ 73,945   

Machinery and equipment

     139,819        112,398   

Vehicles and others

     9,678        8,007   

Equipment under capital lease

     12,128        11,457   
  

 

 

   

 

 

 
     239,739        205,807   

Less: accumulated depreciation

     (67,595     (41,440

accumulated depreciation on equipment under capital lease

     (2,185     (836

Land

     16,354        15,481   

Construction in progress

     4,820        —     
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 191,133      $ 179,012   
  

 

 

   

 

 

 

6. Intangible Assets

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

 

     June 30,
2011
    December 31,
2010
 

Technology

   $ 22,005      $ 19,969   

Customer relationships

     28,644        27,115   

Intellectual property assets

     6,022        5,444   

In-process research and development

     2,258        3,418   

Less: accumulated amortization

     (34,752     (28,408
  

 

 

   

 

 

 

Intangible assets, net

   $ 24,177      $ 27,538   
  

 

 

   

 

 

 

 

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Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

7. Derivative Financial Instruments

The Company’s Korean subsidiary entered into option, forward and zero cost collar contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues.

Details of derivative contracts as of June 30, 2011 are as follows:

 

Date of transaction

   Type of derivative    Total notional amount      Month of settlement

August 12, 2010

   Zero cost collar    $ 108,000       July to December 2011

January 17, 2011

   Zero cost collar      60,000       January to June 2012

March 16, 2011

   Zero cost collar      24,000       January to March 2012

The option, forward and zero cost collar contracts qualify as cash flow hedges under ASC 815, “Derivatives and Hedging,” (“ASC 815”), since at both the inception of the contracts and on an ongoing basis, the hedging relationship was and is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the contracts. The Company is utilizing the “hypothetical derivative” method to measure the effectiveness by comparing the changes in value of the actual derivative versus the change in fair value of the “hypothetical derivative.”

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

 

Derivatives designated as hedging instruments:

        June 30,
2011
     December 31,
2010
 

Asset Derivatives:

        

Options

   Other current assets    $ —        $ 104   

Forward

   Other current assets    $ —        $ 6,674   

Zero cost collars

   Other current assets    $ 5,176       $ 1,544   

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

 

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Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

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

 

Derivatives in Cash Flow

Hedging Relationships

   Amount of
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective Portion)
    Location of
Gain (Loss)
Reclassified from
AOCI into
Statement of
Operations
(Effective Portion)
   Amount of Gain
(Loss)
Reclassified from
AOCI into
Statement of
Operations
(Effective Portion)
    Location of
Gain (Loss)
Recognized in
Statement of
Operations  on
Derivative
(Ineffective
Portion and
Amount
Excluded  from
Effectiveness
Testing)
  Amount of Gain
(Loss)
Recognized in
Statement of
Operations on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 

Options

   $ (14   Net sales    $ (496   Other income
(expenses) — Others
  $ (7

Forward

     897      Net sales      6,145      Other income
(expenses) — Others
    85   

Zero cost collars

     2,857      Net sales      —        Other income
(expenses) — Others
    125   
  

 

 

      

 

 

     

 

 

 

Total

   $ 3,740         $ 5,649        $ 203   
  

 

 

      

 

 

     

 

 

 

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

 

Derivatives in Cash Flow

Hedging Relationships

   Amount of Loss
Recognized in
AOCI on
Derivatives
(Effective Portion)
    Location of
Loss
Reclassified from
AOCI into
Statement of
Operations
(Effective Portion)
   Amount of Loss
Reclassified from
AOCI into
Statement of
Operations
(Effective Portion)
    Location of Loss
Recognized  in
Statement of
Operations  on
Derivative
(Ineffective
Portion and
Amount
Excluded  from
Effectiveness
Testing)
  Amount of Loss
Recognized in
Statement of
Operations on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 

Options

   $ (789   Net sales    $ (167   Other income
(expenses) — Others
  $ (28

Forward

     (2,560   Net sales      (1,092   Other income
(expenses) — Others
    (922
  

 

 

      

 

 

     

 

 

 

Total

   $ (3,349      $ (1,259     $ (950
  

 

 

      

 

 

     

 

 

 

 

13


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

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

 

Derivatives in Cash Flow

Hedging Relationships

   Amount of
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective Portion)
    Location of
Gain (Loss)
Reclassified from
AOCI into
Statement of
Operations
(Effective Portion)
   Amount of Gain
(Loss)
Reclassified from
AOCI into
Statement of
Operations
(Effective Portion)
    Location of
Gain (Loss)
Recognized in
Statement of
Operations  on
Derivative
(Ineffective
Portion and
Amount
Excluded  from
Effectiveness
Testing)
  Amount of Gain
(Loss)
Recognized in
Statement of
Operations on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 

Options

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

Forward

     2,707      Net sales      10,771      Other income
(expenses) — Others
    263   

Zero cost collars

     3,454      Net sales      —       Other income
(expenses) — Others
    116   
  

 

 

      

 

 

     

 

 

 

Total

   $ 6,076         $ 9,942        $ 361   
  

 

 

      

 

 

     

 

 

 

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

 

Derivatives in Cash Flow

Hedging Relationships

   Amount of Loss
Recognized in
AOCI on
Derivatives
(Effective Portion)
    Location of
Loss
Reclassified from
AOCI into
Statement of
Operations
(Effective Portion)
   Amount of Loss
Reclassified from
AOCI into
Statement of
Operations
(Effective Portion)
    Location of Loss
Recognized  in
Statement of
Operations  on
Derivative
(Ineffective
Portion and
Amount
Excluded  from
Effectiveness
Testing)
  Amount of Loss
Recognized in
Statement of
Operations on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 
Options    $ (1,321   Net sales    $ (183   Other income
(expenses) — Others
  $ (62
Forward      (4,081   Net sales      (1,695   Other income
(expenses) — Others
    (945
  

 

 

      

 

 

     

 

 

 

Total

   $ (5,402      $ (1,878     $ (1,007
  

 

 

      

 

 

     

 

 

 

The estimated net gain as of June 30, 2011 that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings within the next twelve months is $4,974 thousand.

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

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

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

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

 

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Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

8. Fair Value Measurements

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

 

     Carrying Value      Fair Value
Measurement
     Quoted Prices in
Active Markets
for
Identical Asset
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

              

Current derivative assets

   $ 5,176       $ 5,176       $ —        $ 5,176       $ —    

Available-for-sale securities

     767         767         767         —           —     

9. Long-Term Borrowings

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

 

     June 30,
2011
    December 31,
2010
 

10.500% senior notes due April 2018

     215,000        250,000   

Discount on 10.500% senior notes due April 2018

     (2,559     (3,118
  

 

 

   

 

 

 

Long-term borrowings, net of unamortized discount

   $ 212,441      $ 246,882   
  

 

 

   

 

 

 

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

In connection with the repurchase of the senior notes, the Company recognized $4,103 thousand of loss on early extinguishment of senior notes, which consisted of $3,150 thousand from repurchase premium, $422 thousand from write-off of discounts, $237 thousand from write-off of debt issuance costs and $294 thousand from incurrence of direct legal and advisory service fees.

 

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Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

10. Capital Leases

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

 

Payable during

   Capital
Lease
 

Remainder of 2011

   $ 3,255   

2012

     3,355   

2013

     24   
        

Total future minimum lease payments

     6,634   

Less: Amount representing interest (a)

     (362
        

Present value of net minimum lease payments

     6,272   

Less: Current portion of capital lease obligations

     (6,149
        

Long-term obligations under capital lease

   $ 123   
        

 

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

 

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Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

11. Accrued Severance Benefits

The majority of accrued severance benefits is for employees in the Company’s Korean subsidiary, MagnaChip Semiconductor Ltd. (Korea). Pursuant to the Employee Retirement Benefit Security Act of Korea, most employees and executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of June 30, 2011, 98.4 % of employees of the Company were eligible for severance benefits.

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

 

     Three
Months
Ended
    Six Months
Ended
    Three
Months
Ended
    Six
Months
Ended
 
     June 30, 2011     June 30, 2010  

Beginning balance

   $ 92,715      $ 88,973      $ 78,106      $ 73,646   

Provisions

     5,542        8,396        6,214        9,380   

Severance payments

     (2,135     (3,745     (1,668     (2,760

Translation adjustments

     2,525        5,023        (5,114     (2,728
  

 

 

   

 

 

   

 

 

   

 

 

 
     98,647        98,647        77,538        77,538   

Less: Cumulative contributions to the National Pension Fund

     (466     (466     (476     (476

Group Severance insurance plan

     (764     (764     (668     (668
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued severance benefits, net

   $ 97,417      $ 97,417      $ 76,394      $ 76,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

The severance benefits are funded approximately 1.25% and 1.48 % as of June 30, 2011 and 2010, respectively, through the Company’s National Pension Fund and group severance insurance plan which will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.

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

 

     Severance benefit  

Remainder of 2011

   $ —    

2012

     163   

2013

     —     

2014

     331   

2015

     366   

2016

     1,252   

2017 – 2021

     14,038   

The above amounts were determined based on the non-executive employees’ current salary rates and the number of service years that will be accumulated upon their retirement dates. These amounts do not include amounts that might be paid to non-executive employees that will cease working with the Company before their normal retirement ages.

 

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Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

12. Restructuring and Impairment Charges

The Company recognized $267 and $603 thousand of impairment charges for the three and six months ended June 30, 2010 from two and four abandoned in-process research and development projects. The Company recognized $889 thousand of impairment charges for the three months ended June 30, 2011, which consisted of $406 thousand from three abandoned in-process research and development projects and one dropped existing technology, $393 thousand from one abandoned system project and $90 thousand from impairment of tangible and intangible assets caused by the closure of our research and development center in Japan.

The Company recognized $1,586 thousand of restructuring charges for the three months ended June 30, 2011, which were incurred by the closure of our research and development center in Japan.

13. Income Taxes

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

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

MagnaChip Semiconductor Ltd. (Korea) is the principal operating entity within the consolidated Company. For the three and six months ended June 30, 2011 and 2010, no income tax expense for MagnaChip Semiconductor, Ltd. (Korea) was recorded due to net operating loss carry-forwards that were available to offset taxable income. The net deferred tax assets of MagnaChip Semiconductor Ltd., which include net operating carry-forwards, have a valuation allowance against them at June 30, 2011. The Company periodically assesses whether it is more likely than not that the deferred tax assets existing at the period-end will be realized in future periods.

Income tax expense recorded for the six month period ended June 30, 2011 principally relates to withholding taxes of $3.1 million mostly accrued on intercompany interest payments, income tax effect of $0.8 million resulting from the change of deferred tax assets and a $0.2 million increase in liability related to uncertain tax positions.

14. Geographic and Segment Information

The following sets forth information relating to the reportable segments:

 

     Three Months Ended  
     June 30,
2011
     June 30,
2010
 

Net Sales

     

Display Solutions

   $ 82,719       $ 80,584   

Semiconductor Manufacturing Services

     96,458         101,564   

Power Solutions

     23,739         12,040   

All other

     763         512   
  

 

 

    

 

 

 

Total segment net sales

   $ 203,679       $ 194,700   
  

 

 

    

 

 

 

Gross Profit

     

Display Solutions

   $ 24,695       $ 22,122   

Semiconductor Manufacturing Services

     35,109         39,452   

Power Solutions

     5,615         2,448   

All other

     763         512   
  

 

 

    

 

 

 

Total segment gross profit

   $ 66,182       $ 64,534   
  

 

 

    

 

 

 

 

18


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

     Six Months Ended  
     June 30,
2011
     June 30,
2010
 

Net Sales

     

Display Solutions

   $ 157,183       $ 157,314   

Semiconductor Manufacturing Services

     188,724         194,765   

Power Solutions

     44,151         21,074   

All other

     1,542         1,032   
  

 

 

    

 

 

 

Total segment net sales

   $ 391,600       $ 374,185   
  

 

 

    

 

 

 

Gross Profit

     

Display Solutions

   $ 44,539       $ 36,553   

Semiconductor Manufacturing Services

     68,396         72,296   

Power Solutions

     8,179         4,011   

All other

     1,542         1,032   
  

 

 

    

 

 

 

Total segment gross profit

   $ 122,656       $ 113,892   
  

 

 

    

 

 

 

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

 

     Three Months Ended  
     June 30,
2011
     June 30,
2010
 

Korea

   $ 99,298       $ 101,310   

Asia Pacific

     59,585         52,687   

Japan

     18,451         12,796   

North America

     20,715         23,686   

Europe

     5,029         4,003   

Africa

     601         218  
  

 

 

    

 

 

 

Total

   $ 203,679       $ 194,700   
  

 

 

    

 

 

 

 

     Six Months Ended  
     June 30,
2011
     June 30,
2010
 

Korea

   $ 186,811       $ 198,970   

Asia Pacific

     116,880         101,161   

Japan

     31,790         22,991   

North America

     46,637         44,066   

Europe

     7,996         6,779   

Africa

     1,486         218   
  

 

 

    

 

 

 

Total

   $ 391,600       $ 374,185   
  

 

 

    

 

 

 

Net sales from the Company’s top ten largest customers accounted for 61.2 % and 64.3% for the three months ended June 30, 2011 and 2010, respectively, and 61.2% and 64.2% for the six months ended June 30, 2011 and 2010, respectively.

The Company recorded $ 31,427 thousand and $35,315 thousand of sales to one customer within its Display Solutions segment, which represents greater than 10% of net sales, for the three months ended June 30, 2011 and 2010, respectively, and $58,108 thousand and $70,893 thousand for the six months ended June 30, 2011 and 2010, respectively.

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

 

19


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

15. Commitments and Contingencies

The California Institute of Technology has made a claim against Samsung Fiber Optics for the infringement of certain patent rights in relation to image sensor products provided by Samsung Fiber Optics. Samsung Fiber Optics has made a claim against the Company as a provider of embedded components. The Company believes it is probable that the pending claim will have an unfavorable outcome and further believes the associated loss can be reasonably estimated according to ASC 450 “Contingencies” (“ASC 450”). The Company charged the best estimate of loss, $718 thousand, to operating expenses for the ten month period ended October 25, 2009, and the Company presents the estimated liabilities as accrued expenses as of June 30, 2011 and December 31, 2010 in the accompanying consolidated balance sheets. The estimate was based on the most recent communications with Samsung Fiber Optics. Accordingly, the Company cannot provide assurance that the estimated liabilities will be realized. The actual results could vary materially.

16. Earnings per Share

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

 

     Three Months Ended  
     June 30,
2011
     June 30,
2010
 

Net income

   $ 31,630       $ (30,747

Weighted average common stock outstanding—

     

Basic

     39,066,303         37,819,820   

Diluted

     40,294,902         37,819,820   

Earnings per share—

     

Basic

   $ 0.81       $ (0.81

Diluted

   $ 0.78       $ (0.81

 

     Six Months Ended  
     June 30,
2011
     June 30,
2010
 

Net income

   $ 54,098       $ 354   

Weighted average common stock outstanding—

     

Basic

     38,701,553         37,812,672   

Diluted

     39,925,275         39,060,047   

Earnings per share—

     

Basic

   $ 1.40       $ 0.01   

Diluted

   $ 1.35       $ 0.01   

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

 

     Six Months Ended  
     June 30,
2011
     June 30,
2010
 

Options

     106,500         114,250   

Warrants

     1,875,017         1,875,017   

 

20


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

17. Condensed Consolidating Financial Information

The $215.0 million senior notes are fully and unconditionally, jointly and severally, guaranteed by the Company and all of its subsidiaries, except for MagnaChip Semiconductor, Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited.

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

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

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

 

21


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

Condensed Consolidating Balance Sheets

June 30, 2011

 

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

Assets

            

Current assets

            

Cash and cash equivalents

   $ 1,560      $ 25,728      $ 142,064      $ 8,412      $ —        $ 177,764   

Accounts receivable, net

     —          —          123,923        24,341        (24,472     123,792   

Inventories, net

     —          —          86,808        176        (158     86,826   

Other receivables

     —          —          11,301        85        (7,169     4,217   

Prepaid expenses

     109        —          11,412        633        (2,897     9,257   

Other current assets

     34,325        157,473        7,414        139,335        (327,823     10,724   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     35,994        183,201        382,922        172,982        (362,519     412,580   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     —          —          190,857        276        —          191,133   

Intangible assets, net

     —          —          23,747        430        —          24,177   

Long-term prepaid expenses

     —          —          13,614        187        (7,698     6,103   

Investment in subsidiaries

     (541,417     (646,874     —          (457,255     1,645,546        —     

Long-term intercompany loan

     697,125        864,639       —          694,547        (2,256,311     —     

Other non-current assets

     1        7,229       7,912        6,118        —          21,260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

   $ 191,703      $ 408,195      $ 619,052      $ 417,285      $ (980,982   $ 655,253   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

            

Current liabilities

            

Accounts payable

   $ —        $ —        $ 97,729      $ 555      $ (24,378 )   $ 73,906   

Other accounts payable

     1,157        563        22,247        6,300        (7,169     23,098   

Accrued expenses

     731        39,015       169,073        160,877        (327,916     41,780   

Current portion of capital lease obligations

     —          —          5,958        191        —          6,149   

Other current liabilities

     (12     —          4,461        3,196        (2,898     4,747   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,876        39,578        299,468        171,119        (362,361     149,680   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term borrowings, net

     —          909,566        677,534        881,652        (2,256,311     212,441   

Long-term obligations under capital lease

     —          —          —          123        —          123   

Accrued severance benefits, net

     —          —          96,032        1,385        —          97,417   

Other non-current liabilities

     14        —          3,196        10,267        (7,699     5,778   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     1,890        949,144        1,076,230        1,064,546        (2,626,371     465,439   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

            

Stockholders’ equity

            

Common stock

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

Additional paid-in capital

     97,987        (733,506 )     (537,114     (731,568     2,002,188        97,987   

Retained earnings

     126,255        91,151       79,160        67,194        (237,505     126,255   

Accumulated other comprehensive loss

     (34,823     (34,823 )     (38,229     (34,863     107,916        (34,822
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     189,813        (540,949     (457,178     (647,261     1,645,389        189,814   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 191,703      $ 408,195      $ 619,052      $ 417,285      $ (980,982   $ 655,253   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

Condensed Consolidating Balance Sheets

December 31, 2010

 

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

Assets

            

Current assets

            

Cash and cash equivalents

   $ 79      $ 46,595      $ 112,370      $ 13,128      $ —       $ 172,172   

Accounts receivable, net

     —          —          160,317        60,533        (101,796     119,054   

Inventories, net

     —          —          68,435        158        (158     68,435   

Other receivables

     718        718        23,111        2,969        (24,597     2,919   

Prepaid expenses

     52        2        10,957        93        (2,897     8,207   

Short-term intercompany loan

     —          95,000        —          95,000        (190,000     —     

Other current assets

     41,363        124,376        9,606        111,628        (268,053     18,920   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     42,212        266,691        384,796        283,509        (587,501     389,707   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     —          —          178,623        389        —          179,012   

Intangible assets, net

     —          —          27,009        529        —          27,538   

Long-term prepaid expenses

     —          —          17,371        —          (9,136     8,235   

Investment in subsidiaries

     (567,941     (641,799     —          (475,696     1,685,436        —     

Long-term intercompany loan

     697,125        792,846        —          621,000        (2,110,971     —     

Other non-current assets

     —          7,819        6,611        6,821        1        21,252   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

            

Current liabilities

            

Accounts payable

   $ —       $ —       $ 118,353      $ 41,634      $ (101,723   $ 58,264   

Other accounts payable

     8,334        8,987        15,994        5,927        (24,597     14,645   

Accrued expenses

     211        39,887        134,460        126,204        (268,127     32,635   

Short-term intercompany borrowings

     —          —          95,000        95,000        (190,000     —     

Current portion of capital lease obligations

     —          —          5,373        184        —          5,557   

Other current liabilities

     —          —          3,815        4,130        (2,897     5,048   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     8,545        48,874        372,995        273,079        (587,344     116,149   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term borrowings, net

     —          944,007        621,000        792,846        (2,110,971     246,882   

Long-term obligations under capital lease

     —          —          2,888        217        —          3,105   

Accrued severance benefits, net

     —          —          86,511        1,267        —          87,778   

Other non-current liabilities

     —          —          6,653        11,462        (9,136     8,979   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

            

Stockholders’ equity

            

Common stock

     384        136,229        39,005        51,976        (227,210     384   

Additional paid-in capital

     95,585        (734,101     (537,608     (732,266     2,003,975        95,585   

Retained earnings

     72,157        35,823        31,799        43,269        (110,891     72,157   

Accumulated other comprehensive loss

     (5,275     (5,275     (8,833     (5,298     19,406        (5,275
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     162,851        (567,324     (475,637     (642,319     1,685,280        162,851   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

Condensed Consolidating Statements of Operations

For the three months ended June 30, 2011

 

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

Net sales

   $ —       $ —       $ 203,812       $ 6,131      $ (6,264   $ 203,679   

Cost of sales

     —          —          137,514         538        (555     137,497   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          66,298         5,593        (5,709     66,182   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     659        351       16,180         3,484        (3,216     17,458   

Research and development expenses

     —          —          21,391         1,709        (2,486     20,614   

Restructuring and impairment charges

     —          —          799         1,676        —          2,475   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (659     (351 )     27,928         (1,276     (7     25,635   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other income (expense)

     1        11,284       4,400         (7,720     —          7,965   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

     (658     10,933       32,328         (8,996     (7     33,600   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income tax expenses (benefits)

     (18     —          1,039         949        —          1,970   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of related investment

     (640     10,933        31,289         (9,945     (7     31,630   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of related investment

     32,270        21,334        —           31,282        (84,886     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

   $ 31,630     $ 32,267     $ 31,289       $ 21,337      $ (84,893   $ 31,630   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

Condensed Consolidating Statements of Operations

For the six months ended June 30, 2011

 

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

Net sales

   $ —        $ —        $ 391,562       $ 12,747      $ (12,709   $ 391,600   

Cost of sales

     —          —          268,959         612        (627     268,944   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          122,603         12,135        (12,082     122,656   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     1,296        586        31,794         6,587        (7,404     32,859   

Research and development expenses

     —          —          40,692         3,091        (4,671     39,112   

Restructuring and impairment charges

     —          —          799         1,676        —          2,475   

Special expense for IPO incentive

     —          —          11,355         791        —          12,146   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (1,296     (586     37,963         (10     (7     36,064   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other income (expense)

     1        32,036        10,590         (20,248     —          22,379   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

     (1,295     31,450        48,553         (20,258     (7     58,443   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income tax expenses (benefits)

     (18     —          1,193         3,170        —          4,345   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of related investment

     (1,277     31,450        47,360         (23,428     (7     54,098   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of related investment

     55,375        23,878        —           47,353        (126,606     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

   $ 54,098      $ 55,328      $ 47,360       $ 23,925      $ (126,613   $ 54,098   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

Condensed Consolidating Statements of Operations

For the three months ended June 30, 2010

 

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

Net sales

   $ —       $ —       $ 194,845      $ 6,923      $ (7,068   $ 194,700   

Cost of sales

     —         —         130,178        1,224        (1,236     130,166   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —         —         64,667        5,699        (5,832     64,534   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     615        389        15,591        2,167        (2,798     15,964   

Research and development expenses

     —         —         21,457        2,112        (3,026     20,543   

Restructuring and impairment charges

     —         —         267        —         —         267   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (615     (389     27,352        1,420        (8     27,760   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     3,734       (9,540     (64,123     14,149        —         (55,780
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     3,119        (9,929     (36,771     15,569        (8     (28,020
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses

     —         —         12        2,715        —         2,727   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in loss of related investment

     3,119        (9,929     (36,783     12,854        (8     (30,747
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss of related investment

     (33,866     (24,098     —         (36,791     94,755        —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (30,747   $ (34,027   $ (36,783   $ (23,937   $ 94,747      $ (30,747

Net loss attributable to common units

   $ (30,747   $ (34,027   $ (36,783   $ (23,937   $ 94,747      $ (30,747
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

Condensed Consolidating Statements of Operations

For the six months ended June 30, 2010

 

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

Net sales

   $ —       $ —       $ 369,659      $ 18,605      $ (14,079   $ 374,185   

Cost of sales

     —         —         256,682        6,917        (3,306     260,293   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —         —         112,977        11,688        (10,773     113,892   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     1,178        525        32,855        4,754        (5,440     33,872   

Research and development expenses

     —         —         42,857        4,282        (6,065     41,074   

Restructuring and impairment charges

     —         —         603        —         —         603   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (1,178     (525     36,662        2,652        732        38,343   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

     3,734       (8,117     (56,746     24,864        —         (36,265
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     2,556        (8,642     (20,084     27,516        732        2,078   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses (benefits)

     —         —         (1,947     3,671        —         1,724   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings (loss) of related investment

     2,556        (8,642     (18,137     23,845        732        354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity (loss) of related investment

     (2,202     6,409        —         (17,851     13,644        —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 354      $ (2,233   $ (18,137   $ 5,994      $ 14,376      $ 354   

Net income (loss) attributable to common units

   $ 354      $ (2,233   $ (18,137   $ 5,994      $ 14,376      $ 354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

Condensed Consolidating Statements of Cash Flows

For the six months ended June 30, 2011

 

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

Cash flow from operating activities

            

Net income

   $ 54,098      $ 55,328      $ 47,360      $ 23,925      $ (126,613   $ 54,098   

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

            

Depreciation and amortization

     —         —          29,171        144        —          29,315   

Provision for severance benefits

     —         —          8,280        116        —          8,396   

Amortization of debt issuance costs and original issue discount

     —         491        —          —          —          491   

Loss (gain) on foreign currency translation, net

     —         (15,260     (45,375     16,526        —          (44,109

Gain on disposal of property, plant and equipment, net

     —         —          (11     —          —          (11

Loss on disposal of intangible assets, net

     —         —          8        —          —          8   

Restructuring and Impairment charges

     —         —          800        1,676        (1     2,475   

Stock-based compensation

     119       —          1,047        404        (324     1,246   

Equity in earnings of related investment

     (55,375     (23,878     —          (47,353     126,606        —     

Other

     (18     4,102        1,286        8        (171     5,207   

Changes in operating assets and liabilities

            

Accounts receivable, net

     —         —          43,302        36,124        (77,323     2,103   

Inventories, net

     —         —          (14,308     —          8        (14,300

Other receivables

     718       718        11,991        2,691        (17,427     (1,309

Other current assets

     176        (33,094     516        (29,136     60,654        (884

Deferred tax assets

     —         —          —          824        —          824   

Accounts payable

     —         —          (23,338     (41,868     77,345        12,139   

Other accounts payable

     (7,247     (8,552     11,819        353        17,427        13,800   

Accrued expenses

     192        (1,038     30,902        33,760        (60,675     3,141   

Other current liabilities

     —         —          (232     (923     —          (1,155

Long term other payable

     —         —          —          221        199        420   

Payment of severance benefits

     —         —          (3,733     (12     —          (3,745

Other

     —         —          1,514        (2,166     —          (652
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (7,337     (21,183     100,999        (4,686     (295     67,498   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

            

Decrease in short-term loans

     —         38,466        17        38,450        (76,933     —     

Proceeds from disposal of plant, property and equipment

     —         —          23        —          —          23   

Purchases of plant, property and equipment

     —         —          (26,898     (28     —          (26,926

Payment for intellectual property registration

     —         —          (324     —          —          (324

Collection of guarantee deposits

     —         —          979        —          —          979   

Payment of guarantee deposits

     —         —          (1,461     (22     —          (1,483

Other

     —         —          (402     —          —          (402
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —         38,466        (28,066     38,400        (76,933     (28,133
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow from financing activities

            

Proceeds from issuance of common stock

     8,818       —          —          —          —          8,818   

Repayment of long-term borrowings

     —         (38,150     (40,436     (38,466     78,902        (38,150

Repayment of obligations under capital lease

     —         —          (3,087     (95     —          (3,182
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     8,818       (38,150     (43,523     (38,561     78,902        (32,514
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     —         —          284        131        (1,674     (1,259
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     1,481       (20,867     29,694        (4,716     —          5,592   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

            

Beginning of the period

     79       46,595        112,370        13,128        —          172,172   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of the period

   $ 1,560      $ 25,728      $ 142,064      $ 8,412      $ —        $ 177,764   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

Condensed Consolidating Statements of Cash Flows

For the six months ended June 30, 2010

 

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

Cash flow from operating activities

            

Net income

   $ 354      $ (2,233   $ (18,137   $ 5,994      $ 14,376      $ 354   

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

            

Depreciation and amortization

     —         —         29,846        139        —         29,985   

Provision for severance benefits

     —         —         9,225        155        —         9,380   

Amortization of debt issuance costs

     —         449        —         —         —         449   

Loss (gain) on foreign currency translation, net

     —         27,659        29,510        (27,194     —         29,975   

Gain on disposal of property, plant and equipment

     —         —         (9     —         —         (9

Loss on disposal of intangible assets, net

     —         —         7        —         —         7   

Restructuring and impairment charges

     —         —         603        —         —         603   

Stock-based compensation

     407        —         2,010        335        —         2,752   

Cash used for reorganization items

     —         —         51        1,424        —         1,475   

Loss (earnings) of related investment

     2,202        (6,409     —         17,851        (13,644     —    

Other

     13        (11     757        (19     —         740   

Changes in operating assets and liabilities