Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2012

or

 

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

For the transition period from              to             .

Commission File Number: 001-34791

 

 

MagnaChip Semiconductor Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   83-0406195

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

c/o MagnaChip Semiconductor S.A.

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

Luxembourg R.C.S.

Luxembourg B97483

(352) 45-62-62

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

 

 

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

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

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

 

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

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

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

As of May 8, 2012, the registrant had 36,889,431 shares of common stock outstanding.

 

 

 


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

               Page No.  
PART I FINANCIAL INFORMATION      4   
   Item 1.    Interim Consolidated Financial Statements (Unaudited)      4   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

     4   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and March 31, 2011

     5   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2012 and March 31, 2011

     7   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and March 31, 2011

     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      26   
   Item 3.    Quantitative and Qualitative Disclosures About Market Risk      44   
   Item 4.    Controls and Procedures      44   
PART II OTHER INFORMATION      45   
   Item 1A.    Risk Factors      45   
   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      57   
   Item 6.    Exhibits      58   
SIGNATURES      59   

 

2


Table of Contents

FORWARD LOOKING STATEMENTS

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

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

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

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

 

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Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

 

     March 31,
2012
    December 31,
2011
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 156,623      $ 162,111   

Restricted cash

     3,934        6,830   

Accounts receivable, net

     127,332        125,922   

Inventories, net

     68,105        62,836   

Other receivables

     4,343        256   

Prepaid expenses

     8,112        6,032   

Other current assets

     5,578        15,909   
  

 

 

   

 

 

 

Total current assets

     374,027        379,896   
  

 

 

   

 

 

 

Property, plant and equipment, net

     206,206        182,663   

Intangible assets, net

     20,348        16,787   

Long-term prepaid expenses

     4,107        4,790   

Other non-current assets

     17,972        18,539   
  

 

 

   

 

 

 

Total assets

   $ 622,660      $ 602,675   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 90,902      $ 77,848   

Other accounts payable

     13,772        13,452   

Accrued expenses

     39,649        31,723   

Current portion of capital lease obligations

     1,458        2,852   

Derivative liabilities

     8,308        9,757   

Other current liabilities

     3,266        2,007   
  

 

 

   

 

 

 

Total current liabilities

     157,355        137,639   
  

 

 

   

 

 

 

Long-term borrowings, net

     201,452        201,389   

Accrued severance benefits, net

     94,352        90,755   

Other non-current liabilities

     5,596        6,222   
  

 

 

   

 

 

 

Total liabilities

     458,755        436,005   
  

 

 

   

 

 

 

Stockholders’ equity

    

Common stock, $0.01 par value, 150,000,000 shares authorized, 39,457,063 shares issued and 36,880,879 outstanding at March 31, 2012 and 39,439,115 shares issued and 37,907,575 outstanding at December 31, 2011

     394        394   

Additional paid-in capital

     99,495        98,929   

Retained earnings

     109,213        93,950   

Treasury stock, 2,576,184 and 1,531,540 shares at March 31, 2012 and December 31, 2011, respectively

     (23,728     (11,793

Accumulated other comprehensive loss

     (21,469     (14,810
  

 

 

   

 

 

 

Total stockholders’ equity

     163,905        166,670   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 622,660      $ 602,675   
  

 

 

   

 

 

 

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

 

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Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Net sales

   $ 177,002      $ 187,921   

Cost of sales

     127,087        131,447   
  

 

 

   

 

 

 

Gross profit

     49,915        56,474   
  

 

 

   

 

 

 

Selling, general and administrative expenses

     18,209        15,401   

Research and development expenses

     19,831        18,498   

IPO incentive

     —          12,146   
  

 

 

   

 

 

 

Operating income

     11,875        10,429   
  

 

 

   

 

 

 

Other income (expenses)

    

Interest expense, net

     (5,580     (7,111

Foreign currency gain, net

     11,109        21,359   

Other

     89        166   
  

 

 

   

 

 

 
     5,618        14,414   
  

 

 

   

 

 

 

Income before income taxes

     17,493        24,843   
  

 

 

   

 

 

 

Income tax expenses

     2,230        2,375   
  

 

 

   

 

 

 

Net income

   $ 15,263      $ 22,468   
  

 

 

   

 

 

 

Earnings per common share—

    

Basic

   $ 0.41      $ 0.59   

Diluted

   $ 0.40      $ 0.57   

Weighted average number of shares—

    

Basic

     37,524,127        38,332,750   

Diluted

     38,298,336        39,570,522   

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 COMPREHENSIVE INCOME

(Unaudited; in thousands of US dollars)

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Net income

   $ 15,263      $ 22,468   

Other comprehensive loss

    

Unrealized holding gain of equity security

     79        555   

Derivative adjustments

     1,574        (1,957

Foreign currency translation adjustments

     (8,312     (14,267
  

 

 

   

 

 

 

Total comprehensive income

   $ 8,604      $ 6,799   
  

 

 

   

 

 

 

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

 

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MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

 

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

Three Months Ended March 31, 2012

                 

Balance at January 1, 2012

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

Stock-based compensation

     —          —           458         —           —          —          458   

Issuance of new stock

     818        —           8         —           —          —          8   

Exercise of stock options

     17,130        —           100         —           —          —          100   

Acquisitions of treasury stock

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

Comprehensive income:

                 

Net income

     —          —           —           15,263         —          —          15,263   

Fair valuation of derivatives

     —          —           —           —           —          1,542        1,542   

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

     —          —           —           —           —          32        32   

Foreign currency translation adjustments

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

Unrealized gains on investments

     —          —           —           —           —          79        79   
                 

 

 

 

Total comprehensive income

                    8,604   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

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

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2011

                 

Balance at January 1, 2011

     38,401,989      $ 384       $ 95,585       $ 72,157       $ —        $ (5,275   $ 162,851   

Stock-based compensation

     —          —           431         —           —          —          431   

Issuance of new stock

     950,000        10         1,768         —           —          —          1,778   

Exercise of stock options

     4,760        —           28         —           —          —          28   

Comprehensive income:

                 

Net income

     —          —           —           22,468         —          —          22,468   

Fair valuation of derivatives

     —          —           —           —           —          2,336        2,336   

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

     —          —           —           —           —          (4,293     (4,293

Foreign currency translation adjustments

     —          —           —           —           —          (14,267     (14,267

Unrealized gains on investments

     —          —           —           —           —          555        555   
                 

 

 

 

Total comprehensive income

                    6,799   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

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

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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

 

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MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands of US dollars)

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Cash flows from operating activities

    

Net income

   $ 15,263      $ 22,468   

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

    

Depreciation and amortization

     7,474        13,903   

Provision for severance benefits

     4,703        2,854   

Amortization of debt issuance costs and original issue discount

     242        246   

Gain on foreign currency translation, net

     (12,824     (23,684

Gain on disposal of property, plant and equipment, net

     (269     —     

Loss on disposal of intangible assets, net

     11        4   

Stock-based compensation

     458        641   

Other

     123        549   

Changes in operating assets and liabilities

    

Accounts receivable

     1,339        (9,250

Inventories

     (2,860     (3,467

Other receivables

     (4,024     (1,041

Other current assets

     8,536        (1,449

Deferred tax assets

     871        548   

Accounts payable

     12,581        14,289   

Other accounts payable

     (298     (1,348

Accrued expenses

     9,886        7,153   

Other current liabilities

     2,225        (1,518

Payment of severance benefits

     (2,323     (1,610

Other

     (1,261     (72
  

 

 

   

 

 

 

Net cash provided by operating activities

     39,853        19,216   

Cash flows from investing activities

    

Decrease in restricted cash

     2,995        —     

Proceeds from disposal of plant, property and equipment

     273        —     

Purchase of plant, property and equipment

     (24,758     (6,779

Payment for intellectual property registration

     (190     (165

Payment for purchase of Dawin, net of cash acquired

     (8,642     —     

Decrease in short-term financial instruments

     173        —     

Collection of guarantee deposits

     31        979   

Payment of guarantee deposits

     (178     (1,004

Other

     (48     (44
  

 

 

   

 

 

 

Net cash used in investing activities

     (30,344     (7,013
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from issuance of common stock

     108        11,425   

Repayment of obligations under capital lease

     (1,510     (1,562

Acquisition of treasury stock

     (11,935     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (13,337     9,863   

Effect of exchange rates on cash and cash equivalents

     (1,660     (59
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (5,488     22,007   
  

 

 

   

 

 

 

Cash and cash equivalents

    

Beginning of the period

     162,111        172,172   
  

 

 

   

 

 

 

End of the period

   $ 156,623      $ 194,179   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for interest

   $ 25      $ 5,625   
  

 

 

   

 

 

 

Cash paid (refunded) for income taxes

   $ (416   $ 2,004   
  

 

 

   

 

 

 

Noncash transactions

    

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

   $ —        $ 9,619   
  

 

 

   

 

 

 

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

 

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MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

1. General

The Company

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

2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). These interim consolidated financial statements include all adjustments consisting only of normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair presentation of financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with ASC 270, “Interim Reporting” (“ASC 270”), and, accordingly, do not include all of the information and note disclosures required by US GAAP for complete financial statements. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for a full year or for any other periods.

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

Recent Accounting Pronouncements

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

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

 

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MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

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

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

 

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MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

3. Completion of Acquisition

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

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

4. Sales of Accounts Receivable

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

 

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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)

 

5. Inventories

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

 

     March 31,
2012
    December 31,
2011
 

Merchandise

   $ 90      $ —     

Finished goods

     9,119        7,140   

Semi-finished goods and work-in-process

     50,728        46,562   

Raw materials

     12,515        9,933   

Materials in-transit

     361        1,471   

Less: inventory reserve

     (4,708     (2,270
  

 

 

   

 

 

 

Inventories, net

   $ 68,105      $ 62,836   
  

 

 

   

 

 

 

6. Property, Plant and Equipment

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

 

     March 31,
2012
    December 31,
2011
 

Buildings and related structures

   $ 75,383      $ 73,021   

Machinery and equipment

     174,935        151,100   

Vehicles and others

     13,192        11,998   

Equipment under capital lease

     11,452        11,160   
  

 

 

   

 

 

 
     274,962        247,279   

Less: accumulated depreciation

     (82,854     (78,130

accumulated depreciation on equipment under capital lease

     (2,810     (2,414

Land

     16,360        15,928   

Construction in-progress

     548        —     
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 206,206      $ 182,663   
  

 

 

   

 

 

 

7. Intangible Assets

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

 

     March 31,
2012
    December 31,
2011
 

Technology

   $ 23,545      $ 21,126   

Customer relationships

     27,310        26,777   

Intellectual property assets

     6,105        5,868   

Less: accumulated amortization

     (39,775     (36,984

Goodwill

     3,163        —     
  

 

 

   

 

 

 

Intangible assets, net

   $ 20,348      $ 16,787   
  

 

 

   

 

 

 

 

12


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

8. Derivative Financial Instruments

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

Details of derivative contracts as of March 31, 2012 are as follows:

 

Date of transaction

  

Type of derivative

   Total notional amount     

Month of settlement

January 17, 2011

   Zero cost collar    $ 30,000       April to June 2012

August 2, 2011

   Zero cost collar      24,000       April to June 2012

August 8, 2011

   Forward      54,000       July to September 2012

August 19, 2011

   Forward      54,000       October to December 2012

March 23, 2012

   Zero cost collar      54,000       January to March 2013

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

The fair values of the Company’s outstanding forward and zero cost collar contracts recorded as assets and liabilities as of March 31, 2012 and December 31, 2011 are as follows:

 

Derivatives designated as hedging instruments:

   March 31,
2012
     December 31,
2011
 

Liability Derivatives:

        

Forward

   Derivative liabilities    $ 5,771       $ 6,801  

Zero cost collars

   Derivative liabilities      2,537         2,956  

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

 

13


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the three months ended March 31, 2012 and 2011:

 

Derivatives in ASC 815

Cash Flow Hedging

Relationships

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

Location of
Gain (Loss)
Recognized in
Statement of
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

   Amount of Gain
(Loss)
Recognized in
Statement of
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 
     1Q, 2012      1Q, 2011            1Q, 2012     1Q, 2011          1Q, 2012     1Q, 2011  

Options

   $ —         $ (71     Net sales       $ —        $ (333   Other income (expenses) — Others    $ —        $ (11

Forward

     1,167         1,810        Net sales         —          4,626      Other income (expenses) — Others      (16     178   

Zero cost collars

     375         597        Net sales         (32     —        Other income (expenses) — Others      101        (9
  

 

 

    

 

 

      

 

 

   

 

 

      

 

 

   

 

 

 

Total

   $ 1,542       $ 2,336         $ (32   $ 4,293         $ 85      $ 158   
  

 

 

    

 

 

      

 

 

   

 

 

      

 

 

   

 

 

 

The estimated net loss as of March 31, 2012 that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings within the next twelve months is $7,593 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)

 

9. Fair Value Measurements

The Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2012, and the basis for that measurement is as follows:

 

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

Assets:

              

Available-for-sale securities

   $ 658       $ 658       $ 658       $ —         $ —     

Liabilities:

              

Derivative liabilities

     8,308         8,308         —           8,308         —     

As of March 31, 2012, the total carrying value and estimated fair value of the senior notes which are not measured at fair value on a recurring basis were $201,452 thousand and $227,625 thousand, respectively. The estimated fair value is based on Level 2 inputs.

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.

 

Payable during

   Capital
Lease
 

Remainder of 2012

   $ 1,494   
  

 

 

 

Total future minimum lease payments

     1,494   

Less: Amount representing interest (a)

     (36
  

 

 

 

Present value of net minimum lease payments

   $ 1,458   
  

 

 

 

 

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

 

15


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 are for employees in the Company’s Korean subsidiary, MagnaChip Semiconductor Ltd. Pursuant to the Employee Retirement Benefit Security Act of Korea, most employees and executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of March 31, 2012, 98.5% of employees of the Company were eligible for severance benefits.

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

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 

Beginning balance

   $ 91,882      $ 88,973   

Provisions

     4,703        2,854   

Severance payments

     (2,323     (1,610

Translation adjustments

     1,209        2,498   
  

 

 

   

 

 

 
     95,471        92,715   
  

 

 

   

 

 

 

Less: Cumulative contributions to the National Pension Fund

     (393     (463

Group Severance insurance plan

     (726     (749
  

 

 

   

 

 

 

Accrued severance benefits, net

   $ 94,352      $ 91,503   
  

 

 

   

 

 

 

The severance benefits are funded approximately 1.17% and 1.31% as of March 31, 2012 and 2011, respectively, through the Company’s National Pension Fund and group severance insurance plan which will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.

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

 

     Severance benefit  

Remainder of 2012

   $ 156  

2013

     —     

2014

     320  

2015

     326   

2016

     1,195   

2017

     1,608   

2018 – 2022

     16,618   

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. Foreign Currency Gain (Loss), Net

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

13. Income Taxes

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

MagnaChip Semiconductor, Ltd. (Korea) is the principal operating entity within the consolidated Company. For the three months ended March 31, 2012 and 2011, no income tax expense for MagnaChip Semiconductor, Ltd. (Korea) was recorded due to net operating loss carry-forwards available to offset taxable income and full allowance for deferred tax assets.

Income tax expense recorded for the three month period ended March 31, 2012 and 2011 was $2,230 and $2,375, respectively.

14. Geographic and Segment Information

The following sets forth information relating to the reportable segments:

 

     Three Months Ended  
     March 31,
2012
     March 31,
2011
 

Net Sales

     

Display Solutions

   $ 83,225       $ 74,464   

Semiconductor Manufacturing Services

     67,863         92,266   

Power Solutions

     25,253         20,412   

All other

     661         779   
  

 

 

    

 

 

 

Total segment net sales

   $ 177,002       $ 187,921   
  

 

 

    

 

 

 

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

 

     Three Months Ended  
     March 31,
2012
     March 31,
2011
 

Korea

   $ 97,951       $ 87,513   

Asia Pacific

     52,603         57,295   

Japan

     6,632         13,339   

North America

     13,370         25,922   

Europe

     5,565         2,967   

Africa

     881         885   
  

 

 

    

 

 

 

Total

   $ 177,002       $ 187,921   
  

 

 

    

 

 

 

Net sales from the Company’s top ten largest customers accounted for 63.7% and 61.1% for the three months ended March 31, 2012 and 2011, respectively.

The Company recorded $24,503 thousand and $26,681 thousand of sales to one customer within its Display Solutions segment, which represents greater than 10% of net sales, for the three months ended March 31, 2012 and 2011, respectively.

Over 99% of the Company’s property, plant and equipment are located in Korea as of March 31, 2012.

 

17


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

15. Earnings per Share

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

 

     Three Months Ended  
     March 31,
2012
     March 31,
2011
 

Net income

   $ 15,263       $ 22,468   

Weighted average common stock outstanding—

     

Basic

     37,524,127         38,332,750   

Diluted

     38,298,336         39,570,522   

Earnings per share—

     

Basic

   $ 0.41       $ 0.59   

Diluted

   $ 0.40       $ 0.57   

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

 

     Three Months Ended  
     March 31,
2012
     March 31,
2011
 

Options

     248,399         —     

Warrants

     1,875,028         1,875,017   

 

18


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

16. Condensed Consolidating Financial Information

The Company’s $203.7 million senior notes are guaranteed by the Company and all of its subsidiaries, except for MagnaChip Semiconductor, Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited. These guarantees are full and unconditional, subject to certain customary release provisions, as well as joint and several.

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

Below are condensed consolidating balance sheets as of March 31, 2012 and December 31, 2011, condensed consolidating statements of operations for the three months ended March 31, 2012 and 2011 and condensed consolidating statements of cash flows for the three months ended March 31, 2012 and 2011 of those entities that guarantee the senior notes, those that do not, MagnaChip Semiconductor Corporation, and the co-issuers.

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

 

19


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Balance Sheets

March 31, 2012

 

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

Assets

            

Current assets

            

Cash and cash equivalents

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

Restricted cash

     —          —          3,934        —          —          3,934   

Accounts receivable, net

     —          —          127,430        22,003        (22,101     127,332   

Inventories, net

     —          —          68,105        158        (158     68,105   

Other receivables

     43        22,825        6,242        363        (25,130     4,343   

Prepaid expenses

     69        —          10,343        597        (2,897     8,112   

Other current assets

     64,477        199,175        2,063        193,694        (453,831     5,578   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     64,908        247,094        346,843        219,299        (504,117     374,027   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     —          —          206,118        88        —          206,206   

Intangible assets, net

     —          —          20,113        235        —          20,348   

Long-term prepaid expenses

     —          —          9,617        7        (5,517     4,107   

Investment in subsidiaries

     (572,654     (655,953     —          (475,184     1,703,791        —     

Long-term intercompany loan

     697,125        803,337        —          648,013        (2,148,475     —     

Other non-current assets

     86        6,416        8,210        3,260        —          17,972   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

   $ 189,465      $ 400,894      $ 590,901      $ 395,718      $ (954,318   $ 622,660   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

            

Current liabilities

            

Accounts payable

   $ —        $ —        $ 112,634      $ 272      $ (22,004   $ 90,902   

Other accounts payable

     24,829        26        13,326        721        (25,130     13,772   

Accrued expenses

     488        74,168        198,805        220,116        (453,928     39,649   

Current portion of capital lease obligations

     —          —          1,458        —          —          1,458   

Derivative liabilities

     —          —          8,308        —          —          8,308   

Other current liabilities

     243        267        2,531        3,122        (2,897     3,266   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     25,560        74,461        337,062        224,231        (503,959     157,355   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term borrowings, net

     —          898,577        631,351        819,999        (2,148,475     201,452   

Accrued severance benefits, net

     —          —          94,208        144        —          94,352   

Other non-current liabilities

     —          —          3,384        7,723        (5,511     5,596   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     25,560        973,038        1,066,005        1,052,097        (2,657,945     458,755   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

            

Stockholders’ equity

            

Common stock

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

Additional paid-in capital

     99,495        (732,737     (536,410     (730,716     1,999,863        99,495   

Retained earnings

     109,213        45,833        45,532        43,868        (135,233     109,213   

Treasury stock

     (23,728     —          —          —          —          (23,728

Accumulated other comprehensive loss

     (21,469     (21,469     (23,231     (21,507     66,207        (21,469
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     163,905        (572,144     (475,104     (656,379     1,703,627        163,905   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 189,465      $ 400,894      $ 590,901      $ 395,718      $ (954,318   $ 622,660   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Balance Sheets

December 31, 2011

 

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

Assets

            

Current assets

            

Cash and cash equivalents

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

Restricted cash

     —          —          6,830        —          —          6,830   

Accounts receivable, net

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

Inventories, net

     —          —          62,836        158        (158     62,836   

Other receivables

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

Prepaid expenses

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

Other current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     —          —          182,583        80        —          182,663   

Intangible assets, net

     —          —          16,514        273        —          16,787   

Long-term prepaid expenses

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

Investment in subsidiaries

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

Long-term intercompany loan

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

Other non-current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

            

Current liabilities

            

Accounts payable

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

Other accounts payable

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

Accrued expenses

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

Current portion of capital lease obligations

     —          —          2,852        —          —          2,852   

Other current liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term borrowings, net

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

Accrued severance benefits, net

     —          —          90,611        144        —          90,755   

Other non-current liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

            

Stockholders’ equity

            

Common stock

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

Additional paid-in capital

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

Retained earnings

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

Treasury stock

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

Accumulated other comprehensive loss

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Statements of Operations

For the three months ended March 31, 2012

 

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

Net sales

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

Cost of sales

     —          —          127,086        252        (251     127,087   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

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

Research and development expenses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expenses

     115        125        447        1,543        —          2,230   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before equity in earnings of related investment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in earnings of related investment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Statements of Operations

For the three months ended March 31, 2011

 

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

Net sales

   $ —        $ —        $ 187,750       $ 6,616      $ (6,445   $ 187,921   

Cost of sales

     —          —          131,445         74        (72     131,447   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          56,305         6,542        (6,373     56,474   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     637        235        15,614         3,103        (4,188     15,401   

Research and development expenses

     —          —          19,301         1,382        (2,185     18,498   

IPO incentive

     —          —          11,355         791        —          12,146   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (637     (235     10,035         1,266        —          10,429   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other income (expense)

     —          20,752        6,190         (12,528     —          14,414   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

     (637     20,517        16,225         (11,262     —          24,843   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income tax expenses

     —          —          154         2,221        —          2,375   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of related investment

     (637     20,517        16,071         (13,483     —          22,468   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of related investment

     23,105        2,544        —           16,071        (41,720     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 22,468      $ 23,061      $ 16,071       $ 2,588      $ (41,720   $ 22,468   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Statements of Cash Flows

For the three months ended March 31, 2012

 

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

Cash flow from operating activities

            

Net income

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

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

            

Depreciation and amortization

     —          —          7,430        44        —          7,474   

Provision for severance benefits

     —          —          4,694        9        —          4,703   

Amortization of debt issuance costs and original issue discount.

     —          242        —          —          —          242   

Loss (gain) on foreign currency translation, net

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

Gain on disposal of property, plant and equipment, net

     —          —          (269     —          —          (269

Loss on disposal of intangible assets, net

     —          —          11        —          —          11   

Stock-based compensation

     (34     —          484        8        —          458   

Equity in earnings of related investment

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

Other

     1        1        95        27        (1     123   

Changes in operating assets and liabilities

            

Accounts receivable, net

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

Inventories, net

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

Other receivables

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

Other current assets

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

Deferred tax assets

     74        81        190        526        —          871   

Accounts payable

     —          —          12,601        (570     550        12,581   

Other accounts payable

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

Accrued expenses

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

Other current liabilities

     243        266        705        1,011        —          2,225   

Payment of severance benefits

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

Other

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

            

Decrease in restricted cash

     —          —          2,995        —          —          2,995   

Proceeds from disposal of plant, property

     —          —          273        —          —          273  

Purchases of plant, property and equipment

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

Payment for intellectual property registration

     —          —          (190     —          —          (190

Payment for purchase of Dawin, net of cash acquired

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

Decrease in short-term financial instruments

     —          —          173        —          —          173   

Collection of guarantee deposits

     —          —          14        17        —          31   

Payment of guarantee deposits

     —          —          (176     (2     —          (178

Other

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow from financing activities

            

Proceeds from issuance of common stock

     108        —          —          —          —          108   

Repayment of long-term intercompany borrowings

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

Repayment of obligations under capital lease

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

Acquisition of treasury stock

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchanges rate on cash and cash equivalents

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

            

Beginning of the period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of the period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Statements of Cash Flows

For the three months ended March 31, 2011

 

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

Cash flow from operating activities

            

Net income

   $ 22,468      $ 23,061      $ 16,071      $ 2,588      $ (41,720   $ 22,468   

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

            

Depreciation and amortization

     —          —          13,826        77        —          13,903   

Provision for severance benefits

     —          —          2,796        58        —          2,854   

Amortization of debt issuance costs and original issue discount.

     —          246        —          —          —          246   

Loss (gain) on foreign currency translation, net

     —          (10,701     (24,128     11,145        —          (23,684

Loss on disposal of intangible assets, net

     —          —          4        —          —          4   

Stock-based compensation

     73        —          590        335        (357     641   

Equity in earnings of related investment

     (23,105     (2,544     —          (16,071     41,720        —     

Other

     (1     —          290        232        28        549   

Changes in operating assets and liabilities

            

Accounts receivable, net

     —          —          30,499        38,116        (77,865     (9,250

Inventories, net

     —          —          (3,467     —          —          (3,467

Other receivables

     718        718        17,656        2,719        (22,852     (1,041

Other current assets

     (713     (16,858     (531     (14,432     31,085        (1,449

Deferred tax assets

     —          —          —          548        —          548   

Accounts payable

     —          —          (22,873     (40,744     77,906        14,289   

Other accounts payable

     (6,613     (8,842     (3,455     (5,290     22,852        (1,348

Accrued expenses

     (151     6,530        14,904        16,996        (31,126     7,153   

Other current liabilities

     —          —          (415     (1,103     —          (1,518

Payment of severance benefits

     —          —          (1,610     —          —          (1,610

Other

     —          —          972        (1,044     —          (72
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (7,324     (8,390     41,129        (5,870     (329     19,216   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

            

Purchases of plant, property and equipment

     —          —          (6,765     (14     —          (6,779

Payment for intellectual property registration

     —          —          (165     —          —          (165

Collection of guarantee deposits

     —          —          979        —          —          979   

Payment of guarantee deposits

     —          —          (1,004     —          —          (1,004

Other

     —          —          (23     (21     —          (44
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          —          (6,978     (35     —          (7,013
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow from financing activities

            

Proceeds from issuance of common stock

     11,425        —          —          —          —          11,425   

Repayment of obligations under capital lease

     —          —          (1,515     (47     —          (1,562
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     11,425        —          (1,515     (47     —          9,863   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchanges rate on cash and cash equivalents

     —          —          (159     (229     329        (59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     4,101        (8,390     32,477        (6,181     —          22,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

            

Beginning of the period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of the period

   $ 4,180      $ 38,205      $ 144,847      $ 6,947      $ —        $ 194,179   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


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. This discussion and analysis contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” and elsewhere in this report.

Overview

We are a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer applications. We believe we have one of the broadest and deepest analog and mixed-signal semiconductor technology platforms in the industry, supported by our 30-year operating history, large portfolio of approximately 3,040 registered novel patents and 340 pending novel patent applications and extensive engineering and manufacturing process expertise. Our business is comprised of three key segments: Display Solutions, Power Solutions and Semiconductor Manufacturing Services. Our Display Solutions products include display drivers that cover a wide range of flat panel displays and multimedia devices. Our Power Solutions products include discrete and integrated circuit solutions for power management in high-volume consumer applications. Our Semiconductor Manufacturing Services segment provides specialty analog and mixed-signal foundry services for fabless semiconductor companies that serve the consumer, computing and wireless end markets.

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

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

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

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

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

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

 

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

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

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

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

Recent Changes to Our Business

In March 2011, we completed an initial public offering, which we refer to as the “MagnaChip Corporation IPO,” of 9,500,000 shares of common stock, and we 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 us and 8,550,000 shares were sold by selling stockholders. All outstanding depositary shares were automatically cancelled on April 24, 2011 and the underlying shares of common stock were issued to the holders of such cancelled depositary shares. We received $12.4 million of proceeds from the issuance of the new shares of common stock after deducting underwriters’ discounts and commissions, and we did not receive any proceeds from the sale of shares of common stock offered by the selling stockholders. We incurred $10.8 million of MagnaChip Corporation IPO expenses that were recorded as decrease of additional paid-in capital in our consolidated balance sheets.

Prior to the MagnaChip Corporation IPO, our board of directors and the holders of a majority of our outstanding common units converted MagnaChip Semiconductor LLC from a Delaware limited liability company to MagnaChip Semiconductor Corporation, a Delaware corporation. In connection with the corporate conversion, outstanding common units of MagnaChip Semiconductor LLC were automatically converted into shares of common stock of MagnaChip Semiconductor Corporation, outstanding options to purchase common units of MagnaChip Semiconductor LLC were automatically converted into options to purchase shares of common stock of MagnaChip Semiconductor Corporation and outstanding warrants to purchase common units of MagnaChip Semiconductor LLC were automatically converted into warrants to purchase shares of common stock of MagnaChip Semiconductor Corporation, all at a ratio of one share of common stock for eight common units.

On May 16, 2011, two of our 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 our 10.5% senior notes due 2018, or senior notes, then outstanding at a price of 109.0% from funds affiliated with Avenue Capital Management II, L.P., collectively referred to in this report as Avenue. In connection with the May 2011 repurchase of the senior notes, the Company recognized $4.1 million of loss on early extinguishment of senior notes, which consisted of $3.2 million from repurchase premium, $0.4 million from write-off of discounts, $0.2 million from write-off of debt issuance costs and $0.3 million from incurrence of direct legal and advisory service fees.

 

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On September 19, 2011, two our wholly-owned subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, repurchased $11.3 million out of $215 million aggregate principal amount of our senior notes then outstanding at a price of 107.5%. In connection with the September 2011 repurchase of the senior notes, we recognized $1.4 million of loss on early extinguishment of senior notes, which consisted of $0.9 million from repurchase premium, $0.1 million from write-off of discounts, $0.4 million from write-off of debt issuance costs.

On October 11, 2011, we announced that our board of directors adopted a stock repurchase program whereby we may, subject to prevailing market conditions and other factors, repurchase up to $35.0 million of our outstanding common stock. The stock repurchase program began on October 27, 2011 and will end on October 27, 2012 unless earlier terminated by our board. The stock repurchase program does not require that we purchase a minimum amount of shares of our common stock and may be commenced, suspended, resumed or terminated at any time without notice. As of March 31, 2012, we had purchased 2,576,184 shares of our common stock in the open market at an aggregate cost of $23.7 million.

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

Business Segments

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

 

   

Display Solutions: Our Display Solutions products include source and gate drivers and timing controllers that cover a wide range of flat panel displays used in LCD televisions and LED televisions and displays, mobile PCs and mobile communications and entertainment devices. Our display solutions support the industry’s most advanced display technologies, such as LTPS and AMOLED, as well as high-volume display technologies such as TFT. Our Display Solutions business represented 47.0% and 39.6% of our net sales for the three months ended March 31, 2012 and March 31, 2011, respectively.

 

   

Power Solutions: Our Power Solutions segment produces power management semiconductor products including discrete and integrated circuit solutions for power management in high-volume consumer applications. These products include MOSFETs, LED drivers, DC-DC converters, analog switches and linear regulators, such as low-dropout regulators, or LDOs. Our power solutions products are designed for applications such as mobile phones, LCD televisions, and desktop computers, and allow electronics manufacturers to achieve specific design goals of high efficiency and low standby power consumption. Going forward, we expect to continue to expand our power management product portfolio. Our Power Solutions business represented 14.3% and 10.9% of our net sales for three months ended March 31, 2012 and March 31, 2011, respectively.

 

   

Semiconductor Manufacturing Services: Our Semiconductor Manufacturing Services segment provides specialty analog and mixed-signal foundry services to fabless semiconductor companies that serve the consumer, computing and wireless end markets. We manufacture wafers based on our customers’ product designs. We do not market these products directly to end customers but rather supply manufactured wafers and products to our customers to market to their end customers. We offer approximately 285 process flows to our manufacturing services customers. We also often partner with key customers to jointly develop or customize specialized processes that enable our customers to improve their products and allow us to develop unique manufacturing expertise. Our manufacturing services are targeted at customers who require differentiated, specialty analog and mixed-signal process technologies such as high voltage CMOS, embedded memory and power. These customers typically serve high-growth and high-volume applications in the consumer, computing and wireless end markets. Our Semiconductor Manufacturing Services business represented 38.3% and 49.1% of our net sales for the three months ended March 31, 2012 and March 31, 2011, respectively.

Factors Affecting Our Results of Operations

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

 

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We recognize revenue when risk and reward of ownership passes to the customer either upon shipment, upon product delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement. For the three months ended March 31, 2012 and March 31, 2011, we sold products to over 190 and 209 customers, respectively, and our net sales to our ten largest customers represented 64% and 61% of our net sales. We have a combined production capacity of over 136,000 eight-inch equivalent semiconductor wafers per month. We believe our large-scale, cost-effective fabrication facilities enable us to rapidly adjust our production levels to meet shifts in demand by our end customers.

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

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

Labor Costs. A significant portion of our employees are located in Korea. Under Korean labor laws, most employees and certain executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of March 31, 2012, approximately 98.5% of our employees were eligible for severance benefits.

Depreciation Expense. We periodically evaluate the carrying values of long-lived assets, including property, plant and equipment and intangible assets, as well as the related depreciation periods. We depreciated our property, plant and equipment using the straight-line method over the estimated useful lives of our assets. Depreciation rates vary from 30-40 years on buildings to five 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. As incentive compensation is tied to various net sales goals, it will increase or decrease with net sales.

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

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

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

Interest Expense, Net. Our interest expense was incurred primarily under our $203.7 million in aggregate principal amount of 10.500% senior notes due 2018.

 

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

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

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

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

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

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

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

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

 

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

 

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Results of Operations – Comparison of Three Months Ended March 31, 2012 and 2011

The following table sets forth consolidated results of operations for the three months ended March 31, 2012 and 2011:

 

     Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
       
     Amount     % of
Net Sales
    Amount     % of
Net Sales
    Change
Amount
 
     (In millions)  

Net sales

   $ 177.0        100.0   $ 187.9        100.0   $ (10.9

Cost of sales

     127.1        71.8        131.4        69.9        (4.4
  

 

 

     

 

 

     

 

 

 

Gross profit

     49.9        28.2        56.5        30.1        (6.6
  

 

 

     

 

 

     

 

 

 

Selling, general and administrative expenses

     18.2        10.3        15.4        8.2        2.8   

Research and development expenses

     19.8        11.2        18.5        9.8        1.3   

Special expense for IPO incentive

     —          —          12.1        6.5        (12.1
  

 

 

     

 

 

     

 

 

 

Operating income

     11.9        6.7        10.4        5.5        1.4   
  

 

 

     

 

 

     

 

 

 

Interest expense, net

     (5.6     (3.2     (7.1     (3.8     1.5   

Foreign currency gain, net

     11.1        6.3        21.4        11.4        (10.2

Others

     0.1        0.1        0.2        0.1        (0.1
  

 

 

     

 

 

     

 

 

 
     5.6        3.2        14.4        7.7        (8.8
  

 

 

     

 

 

     

 

 

 

Income before income taxes

     17.5        9.9        24.8        13.2        (7.4

Income tax expenses

     2.2        1.3        2.4        1.3        (0.1
  

 

 

     

 

 

     

 

 

 

Net income

   $ 15.3        8.6   $ 22.5        12.0   $ (7.2
  

 

 

     

 

 

     

 

 

 

Net Sales

 

     Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
       
     Amount      % of
Net Sales
    Amount      % of
Net Sales
    Change
Amount
 
     (In millions)  

Display Solutions

   $ 83.2         47.0   $ 74.5         39.6   $ 8.8   

Power Solutions

     25.2         14.3        20.4         10.9        4.8   

Semiconductor Manufacturing Services

     67.9         38.3        92.3         49.1        (24.4

All other

     0.7         0.4        0.8         0.4        (0.1
  

 

 

      

 

 

      

 

 

 
   $ 177.0         100.0   $ 187.9         100.0   $ (10.9
  

 

 

      

 

 

      

 

 

 

Net sales were $177.0 million for the three months ended March 31, 2012, a $10.9 million, or 5.8%, decrease, compared to $187.9 million for the three months ended March 31, 2011. This decrease was primarily due to lower net sales driven by our Semiconductor Manufacturing Services segment, which was offset in part by an increase in net sales from our Display Solutions segment and Power Solutions segment.

 

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Display Solutions. Net sales from our Display Solutions segment were $83.2 million for the three months ended March 31, 2012, an $8.8 million, or 11.8%, increase from $74.5 million for the three months ended March 31, 2011. The increase was primarily due to an increase in sales volume related to higher demand for certain consumer electronics products such as digital televisions, PCs and smart phones and an increase in average selling prices due to an improved product mix.

Power Solutions. Net sales from our Power Solutions segment were $25.2 million for the three months ended March 31, 2012, a $4.8 million, or 23.7%, increase from $20.4 million for the three months ended March 31, 2011. The increase was primarily due to an increase in sales volume and an increase in average selling prices driven by an improved product mix and higher demand for MOSFET products from existing and new customers as we expanded this business.

Semiconductor Manufacturing Services. Net sales from our Semiconductor Manufacturing Services segment were $67.9 million for the three months ended March 31, 2012, a $24.4 million, or 26.4%, decrease compared to $92.3 million for the three months ended March 31, 2011. This decrease was primarily due to a decrease in sales volume of eight-inch equivalent wafers driven by weak market demand, which was partially offset by an increase in average selling prices.

All Other. Net sales from All other were $0.7 million for the three months ended March 31, 2012, a $0.1 million, or 15.1%, decrease compared to $0.8 million for the three months ended March 31, 2011.

Net Sales by Geographic Region

The following table sets forth our net sales by geographic region and the percentage of total net sales represented by each geographic region for the three months ended March 31, 2012 and 2011:

 

     Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
       
     Amount      % of
Net Sales
    Amount      % of
Net Sales
    Change
Amount
 
     (In millions)  

Korea

   $ 98.0         55.3   $ 87.5         46.6   $ 10.4   

Asia Pacific

     52.6         29.7        57.3         30.5        (4.7

Japan

     6.6         3.7        13.3         7.1        (6.7

North America

     13.4         7.6        25.9         13.8        (12.6

Europe

     5.6         3.1        3.0         1.6        2.6   

Africa

     0.9         0.5        0.9         0.5        0.0   
  

 

 

      

 

 

      

 

 

 
   $ 177.0         100.0   $ 187.9         100.0   $ 10.9   
  

 

 

      

 

 

      

 

 

 

Net sales in Korea for the three months ended March 31, 2012 increased from $87.5 million to $98.0 million compared to the three months ended March 31, 2011, or by $10.4 million, or 11.9%, primarily due to increased demand in the market for Display Solution products. Net sales in North America for the three months ended March 31, 2012 decreased from $25.9 million to $13.4 million compared to the three months ended March 31, 2011, or by $12.6 million, or 48.4%, primarily due to decreased demand for Semiconductor Manufacturing Services products.

 

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Gross Profit

Total gross profit was $49.9 million for the three months ended March 31, 2012 compared to $56.5 million for the three months ended March 31, 2011, a $6.6 million, or 11.6%, decrease. Gross profit as a percentage of net sales for the three months ended March 31, 2012 decreased to 28.2% compared to 30.1% for the three months ended March 31, 2011. This decrease in gross profit was primarily attributable to a significant volume decrease in our Semiconductor Manufacturing Services segment, which was partially offset by an increase in product sales volume in our Display Solutions segment and an increase in average selling prices in our Power Solutions segment.

Operating Expenses

Selling, General and Administrative Expenses. Selling, general, and administrative expenses were $18.2 million, or 10.3% of net sales, for the three months ended March 31, 2012, compared to $15.4 million, or 8.2% of net sales, for the three months ended March 31, 2011. The increase of $2.8 million, or 18.2%, was primarily attributable to an increase in salaries and related expenses resulting from an annual salary increase and an increase in outside service fees.

Research and Development Expenses. Research and development expenses were $19.8 million, or 11.2% of net sales, for the three months ended March 31, 2012, compared to $18.5 million, or 9.8% of net sales, for the three months ended March 31, 2011. The increase of $1.3 million, or 7.2%, was due to an increase in material costs, partially offset by a decrease in outside service fees.

Special expense for the MagnaChip Corporation IPO Incentive. We paid the special incentives to all employees, excluding management, which were contingent upon the consummation of MagnaChip Corporation IPO in March 2011.

Operating Income

As a result of the foregoing, operating income increased by $1.4 million, or 13.9%, in the three months ended March 31, 2012 compared to the three months ended March 31, 2011. As discussed above, the increase in operating income resulted from the payment of $12.1 million incentive which was incurred in March 2011 in connection with the MagnaChip Corporation IPO, which was partially offset by a $6.6 million decrease in gross profit, a $2.8 million increase in selling, general, and administrative expenses and $1.3 million increase in research and development expenses.

Other Income (Expense)

Interest Expense, Net. Net interest expense was $5.6 million during the three months ended March 31, 2012, a decrease of $1.5 million compared to $7.1 million for the three months ended March 31, 2011. Interest expense for the three months ended March 31, 2012 and March 31, 2011 was mainly incurred under our senior notes issued on April 9, 2010. This decrease is attributable to the repurchase of $35.0 million and $11.3 million out of an aggregate of $250.0 million of our senior notes on May 16, 2011 and on September 19, 2011, respectively.

Foreign Currency Gain (Loss), Net. Net foreign currency gain for the three months ended March 31, 2012 was $11.1 million compared to net foreign currency gain of $21.4 million for the three months ended March 31, 2011. A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss associated with intercompany balances at our Korean subsidiary and is affected by changes in the exchange rate between the Korean won and the U.S. dollar. Foreign currency translation gain from intercompany balances was 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. The Korean won to U.S. dollar exchange rates were 1,137.8:1 and 1,107.2:1 using the first base rate as of March 31, 2012 and March 31, 2011, respectively, as quoted by the Korea Exchange Bank.

Others. Others were comprised of gains and losses on valuation of derivatives which were designated as hedging instruments. Net gain on valuation of derivatives for the three months ended March 31, 2012 represents either hedge ineffectiveness or components of changes in fair value of derivatives excluded from the assessments of hedge effectiveness.

Income Tax Expenses

Income tax expenses for the three months ended March 31, 2012 were $2.2 million compared $2.4 million for the three months ended March 31, 2011. This decrease was primarily attributable to a $0.4 million decrease of withholding taxes. The majority of income tax expenses for the three months ended March 31, 2012 was comprised of $1.1 million of withholding taxes mostly accrued on intercompany interest payments, which would be utilized as foreign tax credits, but due to the uncertainty of utilization, full valuation allowance was recognized, and a $0.6 million income tax effect from the change of deferred tax assets.

 

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Net Income

As a result of the foregoing, net income decreased by $7.2 million, or 32.1%, in the three months ended March 31, 2012 compared to the three months ended March 31, 2011. As discussed above, the decrease in net income was primarily due to a $10.2 million decrease of foreign currency gain, which was partially offset by a $1.5 million decrease in interest expenses.

Additional Business Metrics Evaluated by Management

Adjusted EBITDA and Adjusted Net Income

We define Adjusted EBITDA as net income adjusted to exclude (i) depreciation and amortization, (ii) interest expense, net, (iii) income tax expenses, (iv) stock-based compensation expense, (v) foreign currency gain, net, (vi) derivative valuation gain, net, and (vii) one-time incentive payments in connection with the MagnaChip Corporation IPO. 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:

 

   

Adjusted EBITDA eliminates the impact of a number of items that may be either one time or recurring items that we do not consider to be indicative of our core ongoing operating performance;

 

   

we believe that Adjusted EBITDA is an enterprise level performance measure commonly reported and widely used by analysts and investors in our industry;

 

   

our investor and analyst presentations include Adjusted EBITDA; and

 

   

we believe that Adjusted EBITDA provides investors with a more consistent measurement of period to period performance of our core operations, as well as a comparison of our operating performance to that of other companies in our industry.

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 GAAP and should not be construed as an alternative to cash flows from operating activities or net income, as determined in accordance with GAAP. A reconciliation of net income to Adjusted EBITDA is as follows:

 

     Successor  
     Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 
     (In millions)  

Net income

   $ 15.3      $ 22.5   

Adjustments:

    

Depreciation and amortization

     7.5        13.9   

Interest expense, net

     5.6        7.1   

Income tax expenses

     2.2        2.4   

Stock-based compensation expense(a)

     0.5        0.6   

Foreign currency gain, net(b)

     (11.1     (21.4

Derivative valuation gain, net(c)

     (0.1     (0.2

One-time IPO incentive(d)

     —          12.1   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 19.8      $ 37.1   
  

 

 

   

 

 

 

 

(a) This adjustment eliminates the impact of non-cash stock-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, 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 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, as supplemental information.

 

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(c) This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents hedge ineffectiveness or 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 USD, 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) This adjustment eliminates the one-time impact of incentive payments to all employees excluding management in connection with the MagnaChip Corporation IPO.

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 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 have 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 stock-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 GAAP results and using Adjusted EBITDA only supplementally.

We present Adjusted Net Income as a further supplemental measure of our performance. We prepare Adjusted Net Income 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 is particularly useful because it reflects the impact of our asset base and capital structure on our operating performance.

We present Adjusted Net Income for a number of reasons, including:

 

   

we use Adjusted Net Income in communications with our board of directors concerning our consolidated financial performance;

 

   

we believe that Adjusted Net Income is an enterprise level performance measure commonly reported and widely used by analysts and investors in our industry; and

 

   

our investor and analyst presentations include Adjusted Net Income.

Adjusted Net Income is not a measure defined in accordance with GAAP and should not be construed as an alternative to cash flows from operating activities or net income, as determined in accordance with 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 differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Net Income, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Net Income as net income adjusted to exclude (i) stock-based compensation expense, (ii) amortization of intangibles, (iii) foreign currency gain, net, (iv) derivative valuation gain, net, and (v) one-time incentive payments in connection with the MagnaChip Corporation IPO.

 

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The following table summarizes the adjustments to net income that we make in order to calculate Adjusted Net Income for the periods indicated:

 

     Successor  
     Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 
     (In millions)  

Net income

   $ 15.3      $ 22.5   

Adjustments:

    

Stock-based compensation expense(a)

     0.5        0.6   

Amortization of intangibles(b)

     2.0        2.0   

Foreign currency gain, net(c)

     (11.1     (21.4

Derivative valuation gain, net(d)

     (0.1     (0.2

One-time IPO incentive(e)

     —          12.1   
  

 

 

   

 

 

 

Adjusted Net Income

   $ 6.5      $ 15.7   
  

 

 

   

 

 

 

 

(a) This adjustment eliminates the impact of non-cash stock-based compensation expenses. Although we expect to incur non-cash stock-based compensation expenses in the future, 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