Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 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 July 31, 2012, the registrant had 36,358,236 shares of common stock outstanding.

 

 

 


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

               Page No.  

PART I FINANCIAL INFORMATION

     4   
   Item 1.   

Interim Consolidated Financial Statements (Unaudited)

     4   
     

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

     4   
     

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

     5   
     

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

     6   
     

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

     7   
     

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

     9   
     

MagnaChip Semiconductor Corporation and Subsidiaries Notes to Consolidated Financial Statements

     10   
   Item 2.   

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

     31   
   Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     50   
   Item 4.   

Controls and Procedures

     50   

PART II OTHER INFORMATION

     51   
   Item 1A.   

Risk Factors

     51   
   Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     63   
   Item 6.   

Exhibits

     64   

SIGNATURES

     65   

 

2


Table of Contents

FORWARD LOOKING STATEMENTS

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

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

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

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

 

3


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

 

     June 30,
2012
    December 31,
2011
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 155,764      $ 162,111   

Restricted cash

     5,218        6,830   

Accounts receivable, net

     135,090        125,922   

Inventories, net

     75,417        62,836   

Other receivables

     2,497        256   

Prepaid expenses

     4,940        6,032   

Other current assets

     8,102        15,909   
  

 

 

   

 

 

 

Total current assets

     387,028        379,896   
  

 

 

   

 

 

 

Property, plant and equipment, net

     219,021        182,663   

Intangible assets, net

     18,139        16,787   

Long-term prepaid expenses

     4,137        4,790   

Other non-current assets

     17,379        18,539   
  

 

 

   

 

 

 

Total assets

   $ 645,704      $ 602,675   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 92,906      $ 77,848   

Other accounts payable

     23,344        13,452   

Accrued expenses

     39,550        31,723   

Current portion of capital lease obligations

     —          2,852   

Derivative liabilities

     8,449        9,757   

Other current liabilities

     6,566        2,007   
  

 

 

   

 

 

 

Total current liabilities

     170,815        137,639   
  

 

 

   

 

 

 

Long-term borrowings, net

     201,519        201,389   

Accrued severance benefits, net

     96,883        90,755   

Other non-current liabilities

     5,939        6,222   
  

 

 

   

 

 

 

Total liabilities

     475,156        436,005   
  

 

 

   

 

 

 

Stockholders’ equity

    

Common stock, $0.01 par value, 150,000,000 shares authorized, 39,468,338 shares issued and 36,353,545 outstanding at June 30, 2012 and 39,439,115 shares issued and 37,907,575 outstanding at December 31, 2011

     395        394   

Additional paid-in capital

     100,027        98,929   

Retained earnings

     113,553        93,950   

Treasury stock, 3,114,793 and 1,531,540 shares at June 30, 2012 and December 31, 2011, respectively

     (28,728     (11,793

Accumulated other comprehensive loss

     (14,699     (14,810
  

 

 

   

 

 

 

Total stockholders’ equity

     170,548        166,670   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 645,704      $ 602,675   
  

 

 

   

 

 

 

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

 

4


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     Three Months Ended     Six Months Ended  
     June 30,
2012
    June 30,
2011
    June 30,
2012
    June 30,
2011
 

Net sales

   $ 202,634      $ 203,679      $ 379,636      $ 391,600   

Cost of sales

     139,776        137,497        266,863        268,944   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     62,858        66,182        112,773        122,656   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     20,093        17,458        38,302        32,859   

Research and development expenses

     19,762        20,614        39,593        39,112   

Restructuring and impairment charges

     —          2,475        —          2,475   

Special expense for IPO incentive

     —          —          —          12,146   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     23,003        25,635        34,878        36,064   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses)

        

Interest expense, net

     (5,619     (6,369     (11,199     (13,480

Foreign currency gain (loss), net

     (10,586     18,234        523        39,593   

Loss on early extinguishment of senior notes

     —          (4,103     —          (4,103

Other

     701        203        790        369   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (15,504     7,965        (9,886     22,379   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     7,499        33,600        24,992        58,443   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     3,159        1,970        5,389        4,345   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 4,340      $ 31,630      $ 19,603      $ 54,098   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—

        

Basic

   $ 0.12      $ 0.81      $ 0.53      $ 1.40   

Diluted

   $ 0.12      $ 0.78      $ 0.52      $ 1.35   

Weighted average number of shares—

        

Basic

     36,713,569        39,066,303        37,118,848        38,701,553   

Diluted

     37,566,699        40,294,902        37,916,149        39,925,275   

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

 

5


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; in thousands of US dollars)

 

     Three Months Ended     Six Months Ended  
     June 30,
2012
    June 30,
2011
    June 30,
2012
    June 30,
2011
 

Net income

   $ 4,340      $ 31,630      $ 19,603      $ 54,098   

Other comprehensive income (loss)

        

Unrealized gain (loss) on investments

     (106     (518     (27     37   

Derivative adjustments

     (690     (1,909     884        (3,866

Foreign currency translation adjustments

     7,566        (11,451     (746     (25,718
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 11,110      $ 17,752      $ 19,714      $ 24,551   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

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 June 30, 2012

                 

Balance at April 1, 2012

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

Stock-based compensation

     —          —           457         —           —          —          457   

Issuance of new stock

     1,650        —           18         —           —          —          18   

Exercise of stock options

     9,625        1         57         —           —          —          58   

Acquisitions of treasury stock

     (538,609     —           —           —           (5,000     —          (5,000

Comprehensive income:

                 

Net income

     —          —           —           4,340         —          —          4,340   

Fair valuation of derivatives

     —          —           —           —           —          (2,187     (2,187

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

     —          —           —           —           —          1,497        1,497   

Foreign currency translation adjustments

     —          —           —           —           —          7,566        7,566   

Unrealized losses on investments

     —          —           —           —           —          (106     (106
                 

 

 

 

Total comprehensive income

                    11,110   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

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

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2012

                 

Balance at January 1, 2012

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

Stock-based compensation

     —          —           915         —           —          —          915   

Issuance of new stock

     2,468        —           26         —           —          —          26   

Exercise of stock options

     26,755        1         157         —           —          —          158   

Acquisition of treasury stock

     (1,583,253              (16,935       (16,935

Comprehensive income:

                 

Net income

     —          —           —           19,603         —          —          19,603   

Fair valuation of derivatives

     —          —           —           —           —          (645     (645

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

     —          —           —           —           —          1,529        1,529   

Foreign currency translation adjustments

     —          —           —           —           —          (746     (746

Unrealized losses on investments

     —          —           —           —           —          (27     (27
                 

 

 

 

Total comprehensive income

                    19,714   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

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

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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

 

7


Table of Contents

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)
     Accumulated
Other
Comprehensive
Income (loss)
    Total  
     Common Stock            
     Shares      Amount            

Three Months Ended June 30, 2011

               

Balance at April 1, 2011

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

Stock-based compensation

     —           —           386        —           —          386   

Issuance of new stock

     —           —           (215     —           —          (215

Exercise of stock options

     722         —           4        —           —          4   

Comprehensive income:

               

Net Income

     —           —           —          31,630         —          31,630   

Fair valuation of derivatives

     —           —           —          —           3,740        3,740   

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

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

Foreign currency translation adjustments

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

Unrealized losses on investments

     —           —           —          —           (518     (518
               

 

 

 

Total comprehensive income

                  17,752   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2011

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

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Six Months Ended June 30, 2011

               

Balance at January 1, 2011

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

Stock-based compensation

     —           —           817        —           —          817   

Issuance of new stock

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

Exercise of stock options

     5,486         —           32        —           —          32   

Comprehensive income:

               

Net income

     —           —           —          54,098         —          54,098   

Fair valuation of derivatives

     —           —           —          —           6,076        6,076   

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

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

Foreign currency translation adjustments

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

Unrealized gains on investments

     —           —           —          —           37        37   
               

 

 

 

Total comprehensive income

                  24,551   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2011

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

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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

 

8


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands of US dollars)

 

     Six Months Ended  
     June 30,
2012
    June 30,
2011
 

Cash flows from operating activities

    

Net income

   $ 19,603      $ 54,098   

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

    

Depreciation and amortization

     15,397        29,315   

Provision for severance benefits

     10,975        8,396   

Amortization of debt issuance costs and original issue discount

     497        491   

Loss (gain) on foreign currency translation, net

     55        (44,109

Gain on disposal of property, plant and equipment, net

     (190     (11

Loss on disposal of intangible assets, net

     15        8   

Restructuring and impairment charges

     —          2,475   

Stock-based compensation

     915        1,246   

Loss on early extinguishment of senior notes

     —          4,103   

Other

     (348     1,104   

Changes in operating assets and liabilities

    

Accounts receivable

     (8,296     2,103   

Inventories

     (11,498     (14,300

Other receivables

     (2,580     (1,309

Other current assets

     8,851        (884

Deferred tax assets

     1,146        824   

Accounts payable

     14,654        12,139   

Other accounts payable

     9,677        13,800   

Accrued expenses

     7,890        3,141   

Other current liabilities

     6,611        (1,155

Payment of severance benefits

     (4,816     (3,745

Other

     (1,996     (232
  

 

 

   

 

 

 

Net cash provided by operating activities

     66,562        67,498   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Decrease in restricted cash

     1,634        —     

Proceeds from disposal of plant, property and equipment

     891        23   

Purchase of plant, property and equipment

     (46,728     (26,926

Payment for intellectual property registration

     (565     (324

Payment for purchase of Dawin, net of cash acquired

     (8,642     —     

Decrease in short-term financial instruments

     173        —     

Collection of guarantee deposits

     70        979   

Payment of guarantee deposits

     (176     (1,483

Other

     (53     (402
  

 

 

   

 

 

 

Net cash used in investing activities

     (53,396     (28,133
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from issuance of common stock

     183        8,818   

Repurchase of senior notes

     —          (38,150

Repayment of obligations under capital lease

     (2,968     (3,182

Acquisition of treasury stock

     (16,935     —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (19,720     (32,514

Effect of exchange rates on cash and cash equivalents

     207        (1,259
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (6,347     5,592   
  

 

 

   

 

 

 

Cash and cash equivalents

    

Beginning of the period

     162,111        172,172   
  

 

 

   

 

 

 

End of the period

   $ 155,764      $ 177,764   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for interest

   $ 10,737      $ 13,468   
  

 

 

   

 

 

 

Cash paid (refunded) for income taxes

   $ (684 )     $ 1,207   
  

 

 

   

 

 

 

Noncash transactions

    

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

   $ —        $ 7,269   
  

 

 

   

 

 

 

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

 

9


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

1. General

The Company

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

2. Significant Accounting Policies

Basis of Presentation

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

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

Recent Accounting Pronouncements

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

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

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.

 

10


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

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

3. Completion of acquisition

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

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

4. Sales of Accounts Receivable

The Company has entered into an agreement to sell selected trade accounts receivable to a financial institution. After the sale, the Company does not retain any interests in the receivables and the applicable financial institution collects these accounts receivable directly from the customer. The proceeds from the sales of these accounts receivable totaled $8,412 thousand for the six months period ended June 30, 2012 and these sales resulted in a pre-tax loss of $4 thousand for the six months period ended June 30, 2012, which is included in selling, general and administrative expenses in the consolidated Statements of Income. Net proceeds of these accounts receivable sale program are recognized in the Consolidated Statements of Cash Flows as part of operating cash flows.

5. Inventories

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

 

     June 30,
2012
    December 31,
2011
 

Merchandise

   $ 10      $ —     

Finished goods

     8,821        7,140   

Semi-finished goods and work-in-process

     59,110        46,562   

Raw materials

     14,393        9,933   

Materials in-transit

     814        1,471   

Less: inventory reserve

     (7,731     (2,270
  

 

 

   

 

 

 

Inventories, net

   $ 75,417      $ 62,836   
  

 

 

   

 

 

 

 

11


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

6. Property, Plant and Equipment

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

 

     June 30,
2012
    December 31,
2011
 

Buildings and related structures

   $ 73,946      $ 73,021   

Machinery and equipment

     192,991        151,100   

Vehicles and others

     13,801        11,998   

Equipment under capital lease

     11,308        11,160   
  

 

 

   

 

 

 
     292,046        242,279   

Less: accumulated depreciation

     (87,089     (78,130

accumulated depreciation on equipment under capital lease

     (2,991     (2,414

Land

     15,921        15,928   

Construction in progress

     1,134        —     
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 219,021      $ 182,663   
  

 

 

   

 

 

 

7. Intangible Assets

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

 

     June 30,
2012
    December 31,
2011
 

Technology

   $ 23,218      $ 21,126   

Customer relationships

     26,931        26,777   

Intellectual property assets

     6,395        5,868   

Less: accumulated amortization

     (41,525     (36,984

Goodwill

     3,120        —     
  

 

 

   

 

 

 

Intangible assets, net

   $ 18,139      $ 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 June 30, 2012 are as follows:

 

Date of transaction

  

Type of derivative

   Total notional amount     

Month of settlement

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

May 18, 2012

   Zero cost collar      54,000       April to June 2013

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

The fair values of the Company’s outstanding forward and zero cost collar contracts recorded as assets and liabilities as of June 30, 2012 and December 31, 2011 are as follows:

 

Derivatives designated as hedging instruments:

   June 30,
2012
     December 31,
2011
 

Liability Derivatives:

        

Forward

   Derivative liabilities    $ 6,800       $ 6,801   

Zero cost collars

   Derivative liabilities    $ 1,649       $ 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 June 30, 2012 and 2011:

 

Derivatives in ASC 815

Cash Flow Hedging

Relationships

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

AOCI into
Statement of
Income
(Effective Portion)
   

Location of

Gain (Loss)

Recognized in

Statement of

Income on

Derivative

(Ineffective

Portion and

Amount

Excluded from

Effectiveness

Testing)

   Amount of  Gain
(Loss)
Recognized in
Statement of
Income on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 
     2Q, 2012     2Q, 2011            2Q, 2012     2Q, 2011          2Q, 2012      2Q, 2011  

Options

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

Forward

     (1,552     897        Net sales         —          6,145      Other income (expenses) — Others      529         85   

Zero cost collars

     (635     2,857        Net sales         (1,497     —        Other income (expenses) — Others      172         125   
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 

Total

   $ (2,187   $ 3,740         $ (1,497   $ 5,649         $ 701       $ 203   
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 

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

 

Derivatives in ASC 815

Cash Flow Hedging

Relationships

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

AOCI into
Statement of
Income
(Effective Portion)
     Amount of Gain (Loss)
Reclassified from

AOCI into
Statement of
Income
(Effective Portion)
   

Location of

Gain (Loss)

Recognized in

Statement of

Income on

Derivative

(Ineffective

Portion and

Amount

Excluded from

Effectiveness

Testing)

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

Options

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

Forward

     (385     2,707        Net sales         —          10,771      Other income (expenses) — Others      513         263   

Zero cost collars

     (260     3,454        Net sales         (1,529     —        Other income (expenses) — Others      273         116   
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 

Total

   $ (645   $ 6,076         $ (1,529   $ 9,942         $ 786       $ 361   
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

    

 

 

 

 

14


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

The estimated net loss as of June 30, 2012 that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings within the next twelve months is $8,324 thousand.

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

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

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

In addition, the Company is required to deposit cash collateral with Goldman Sachs International Bank (“GS”), the counterparty to the option, forward and zero cost collar contracts, for any exposure in excess of $5 million. As of June 30, 2012, the Company has transferred $5,218 thousand of cash collateral to GS for the purpose of credit support to the counterparty. This cash collateral is changed depending on derivative market exposures. GS is required to return the cash collateral to the Company when the derivative market exposures decreases. Under this circumstance, the Company recorded the balance of $5,218 thousand as restricted cash in the balance sheet as of June 30, 2012.

9. Fair Value Measurements

The Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2012, and the basis for that measurement is as follows:

 

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

Assets:

              

Available-for-sale securities

   $ 544       $ 544       $ 544      $ —         $ —     

Liabilities:

              

Derivative liabilities

     8,449         8,449         —           8,449         —     

As of June 30, 2012, the total carrying value and estimated fair value of the senior notes which are not measured at fair value on a recurring basis were $201,519 thousand and $225,588 thousand, respectively. The estimated fair value is based on Level 2 inputs.

 

15


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

10. Accrued Severance Benefits

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

Ended
    Three
Months

Ended
    Six
Months

Ended
 
     June 30, 2012     June 30, 2011  

Beginning balance

   $ 95,472      $ 91,882      $ 92,715      $ 88,973   

Provisions

     6,272        10,975        5,542        8,396   

Severance payments

     (2,493     (4,816     (2,135     (3,745

Translation adjustments

     (1,284     (74     2,525        5,023   
  

 

 

   

 

 

   

 

 

   

 

 

 
     97,967        97,967        98,647        98,647   

Less: Cumulative contributions to the National Pension Fund

     (372     (372     (466     (466

Group Severance insurance plan

     (712     (712     (764     (764
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued severance benefits, net

   $ 96,883      $ 96,883      $ 97,417      $ 97,417   
  

 

 

   

 

 

   

 

 

   

 

 

 

The severance benefits are funded approximately 1.11% and 1.25 % as of June 30, 2012 and 2011, respectively, through the Company’s National Pension Fund and group severance insurance plan which will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.

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

 

     Severance benefit  

Remainder of 2012

   $ 56  

2013

     —     

2014

     323   

2015

     326   

2016

     1,202   

2017

     1,612   

2018 – 2022

     16,582   

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

 

16


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

11. Foreign Currency Gain (Loss), Net

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

12. Income Taxes

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

MagnaChip Semiconductor Ltd. (Korea) is the principal operating entity within the consolidated Company. For the three and six months ended June 30, 2012 and 2011, no income tax expense for MagnaChip Semiconductor, Ltd. (Korea) was recorded due to net operating loss carry-forwards available to offset taxable income and full allowance for deferred tax assets.

Income tax expense recorded for the three month period ended June 30, 2012 and 2011 was $3,159 and $1,970, respectively, and for the six month period ended June 30, 2012 and 2011 was $5,389 and $4,345, respectively.

13. Geographic and Segment Information

The following sets forth information relating to the reportable segments:

 

     Three Months Ended  
     June 30,
2012
     June 30,
2011
 

Net Sales

     

Display Solutions

   $ 76,784       $ 82,719   

Semiconductor Manufacturing Services

     91,318         96,458   

Power Solutions

     33,699         23,739   

All other

     833         763   
  

 

 

    

 

 

 

Total segment net sales

   $ 202,634       $ 203,679   
  

 

 

    

 

 

 

 

     Six Months Ended  
     June 30,
2012
     June 30,
2011
 

Net Sales

     

Display Solutions

   $ 160,009       $ 157,183   

Semiconductor Manufacturing Services

     159,180         188,724   

Power Solutions

     58,952         44,151   

All other

     1,495         1,542   
  

 

 

    

 

 

 

Total segment net sales

   $ 379,636       $ 391,600   
  

 

 

    

 

 

 

 

17


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

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

 

     Three Months Ended  
     June 30,
2012
     June 30,
2011
 

Korea

   $ 94,385       $ 99,298   

Asia Pacific

     66,113         59,585   

Japan

     7,102         18,451   

North America

     26,218         20,715   

Europe

     8,385         5,029   

Africa

     431         601   
  

 

 

    

 

 

 

Total

   $ 202,634       $ 203,679   
  

 

 

    

 

 

 

 

     Six Months Ended  
     June 30,
2012
     June 30,
2011
 

Korea

   $ 192,336       $ 186,811   

Asia Pacific

     118,716         116,880   

Japan

     13,734         31,790   

North America

     39,588         46,637   

Europe

     13,950         7,996   

Africa

     1,312         1,486   
  

 

 

    

 

 

 

Total

   $ 379,636       $ 391,600   
  

 

 

    

 

 

 

Net sales from the Company’s top ten largest customers accounted for 64.0 % and 61.2% for the three months ended June 30, 2012 and 2011, respectively, and 62.6% and 61.2% for the six months ended June 30, 2012 and 2011, respectively.

For the three months ended June 30, 2012, we had one customer which represented 12.3% of the Company’s net sales, and for the six months ended June 30, 2012, we had two customers which represented 13.0% and 11.3%, respectively.

For the three months and six months ended June 30, 2011, we had one customer which represented 15.4% and 14.8% of the Company’s net sales, respectively.

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

 

18


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

14. Earnings per Share

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

 

     Three Months Ended  
     June 30,
2012
     June 30,
2011
 

Net income

   $ 4,340       $ 31,630   

Weighted average common stock outstanding—

     

Basic

     36,713,569         39,066,303   

Diluted

     37,566,699         40,294,902   

Earnings per share—

     

Basic

   $ 0.12       $ 0.81   

Diluted

   $ 0.12       $ 0.78   

 

     Six Months Ended  
     June 30,
2012
     June 30,
2011
 

Net income

   $ 19,603       $ 54,098   

Weighted average common stock outstanding—

     

Basic

     37,118,848         38,701,553   

Diluted

     37,916,149         39,925,275   

Earnings per share—

     

Basic

   $ 0.53       $ 1.40   

Diluted

   $ 0.52       $ 1.35   

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

 

     Six Months Ended  
     June 30,
2012
     June 30,
2011
 

Options

     230,625         106,500   

Warrants

     1,875,028         1,875,017   

 

19


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

15. Condensed Consolidating Financial Information

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

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

Below are condensed consolidating balance sheets as of June 30, 2012 and December 31, 2011, condensed consolidating statements of operations for the three months and six months ended June 30, 2012 and 2011 and condensed consolidating statements of cash flows for the six months ended June 30, 2012 and 2011 of those entities that guarantee the senior notes, those that do not, MagnaChip Semiconductor Corporation, and the co-issuers.

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

 

20


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Balance Sheets

June 30, 2012

 

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

Assets

            

Current assets

            

Cash and cash equivalents

   $ 131      $ 15,487      $ 136,520      $ 3,626      $ —        $ 155,764   

Restricted cash

     —          —          5,218        —          —          5,218   

Accounts receivable, net

     —          —          135,396        22,023        (22,329     135,090   

Inventories, net

     —          —          75,417        —          —          75,417   

Other receivables

     74        28,728        5,746        338        (32,389     2,497   

Prepaid expenses

     168        —          7,202        467        (2,897     4,940   

Other current assets

     70,250        210,836        4,265        183,466        (460,715     8,102   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     70,623        255,051        369,764        209,920        (518,330     387,028   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     —          —          218,935        86        —          219,021   

Intangible assets, net

     —          —          17,941        198        —          18,139   

Long-term prepaid expenses

     —          —          8,931        —          (4,794     4,137   

Investment in subsidiaries

     (563,490     (636,951     —          (465,088     1,665,529        —     

Long-term intercompany loan

     697,125        785,620        —          642,750        (2,125,495     —     

Other non-current assets

     641        6,137        8,308        2,980        (687     17,379   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 204,899      $ 409,857      $ 623,879      $ 390,846      $ (983,777   $ 645,704   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

            

Current liabilities

            

Accounts payable

   $ —        $ —        $ 114,439      $ 474      $ (22,007   $ 92,906   

Other accounts payable

     31,228        —          22,795        2,032        (32,711     23,344   

Accrued expenses

     470        74,248        213,633        211,914        (460,715     39,550   

Derivative liabilities

     —          —          8,449        —          —          8,449   

Other current liabilities

     2,608        —          2,988        3,867        (2,897     6,566   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     34,306        74,248        362,304        218,287        (518,330     170,815   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term borrowings, net

     —          898,644        625,447        802,922        (2,125,494     201,519   

Accrued severance benefits, net

     —          —          96,715        168        —          96,883   

Other non-current liabilities

     45        —          4,444        6,931        (5,481     5,939   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     34,351        972,892        1,088,910        1,028,308        (2,649,305     475,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

            

Stockholders’ equity

            

Common stock

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

Additional paid-in capital

     100,027        (732,212     (535,872     (730,191     1,998,275        100,027   

Retained earnings

     113,553        47,647        49,114        55,629        (152,390     113,553   

Treasury stock

     (28,728     —          —          —          —          (28,728

Accumulated other comprehensive loss

     (14,699     (14,699     (17,278     (14,876     46,853        (14,699
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     170,548        (563,035     (465,031     (637,462     1,665,528        170,548   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 204,899      $ 409,857      $ 623,879      $ 390,846      $ (983,777   $ 645,704   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Balance Sheets

December 31, 2011

 

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

Assets

            

Current assets

            

Cash and cash equivalents

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

Restricted cash

     —          —          6,830        —          —          6,830   

Accounts receivable, net

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

Inventories, net

     —          —          62,836        158        (158     62,836   

Other receivables

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

Prepaid expenses

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

Other current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     —          —          182,583        80        —          182,663   

Intangible assets, net

     —          —          16,514        273        —          16,787   

Long-term prepaid expenses

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

Investment in subsidiaries

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

Long-term intercompany loan

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

Other non-current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

            

Current liabilities

            

Accounts payable

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

Other accounts payable

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

Accrued expenses

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

Current portion of capital lease obligations

     —          —          2,852        —          —          2,852   

Other current liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term borrowings, net

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

Accrued severance benefits, net

     —          —          90,611        144        —          90,755   

Other non-current liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

            

Stockholders’ equity

            

Common stock

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

Additional paid-in capital

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

Retained earnings

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

Treasury stock

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

Accumulated other comprehensive loss

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Statements of Comprehensive Income

For the three months ended June 30, 2012

 

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

Net sales

   $ —        $ —        $ 202,760      $ 4,791       $ (4,917   $ 202,634   

Cost of sales

     —          —          139,775        349         (348     139,776   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     —          —          62,985        4,442         (4,569     62,858   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Selling, general and administrative expenses

     1,477        9        19,102        3,054         (3,549     20,093   

Research and development expenses

     —          —          20,540        242         (1,020     19,762   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     (1,477     (9     23,343        1,146         —          23,003   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other income (expense)

     5,419        (10,181     (19,900     9,158         —          (15,504
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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

     3,942        (10,190     3,443        10,304         —          7,499   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income tax expenses (benefits)

     1,498        (295     (170     2,126         —          3,159   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before equity in earnings of related investment

     2,444        (9,895     3,613        8,178         —          4,340   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Equity in earnings of related investment

     1,896        11,739        —          3,614         (17,249     —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 4,340      $ 1,844      $ 3,613      $ 11,792       $ (17,249   $ 4,340   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 11,110      $ 8,614      $ 9,566      $ 18,423       $ (36,603   $ 11,110   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

23


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Statements of Comprehensive Income

For the six months ended June 30, 2012

 

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

Net sales

   $ —        $ —        $ 379,771      $ 9,615       $ (9,750   $ 379,636   

Cost of sales

     —          —          266,861        601         (599     266,863   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     —          —          112,910        9,014         (9,151     112,773   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Selling, general and administrative expenses

     2,097        53        37,112        6,140         (7,100     38,302   

Research and development expenses

     —          —          41,112        532         (2,051     39,593   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income (loss)

     (2,097     (53     34,686        2,342         —          34,878   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other income (expense)

     11,215        (6,001     (20,362     5,262         —          (9,886
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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

     9,118        (6,054     14,324        7,604         —          24,992   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income tax expenses (benefits)

     1,613        (170     277        3,669         —          5,389   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before equity in earnings of related investment

     7,505        (5,884     14,047        3,935         —          19,603   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Equity in earnings of related investment

     12,098        17,844        —          14,046         (43,988     —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 19,603      $ 11,960      $ 14,047      $ 17,981       $ (43,988   $ 19,603   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 19,714      $ 12,071      $ 15,425      $ 17,952       $ (45,448   $ 19,714   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

24


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Statements of Comprehensive Income

For the three months ended June 30, 2011

 

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

Net sales

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

Cost of sales

     —          —          137,514         538        (555     137,497   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

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

Research and development expenses

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

Restructuring and impairment charges

     —          —          799         1,676        —          2,475   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other income (expense)

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income tax expenses (benefits)

     (18     —          1,039         949        —          1,970   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of related investment

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of related investment

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 17,752      $ 18,388      $ 16,525       $ 7,445      $ (42,358   $ 17,752   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Statements of Comprehensive Income

For the six months ended June 30, 2011

 

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

Net sales

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

Cost of sales

     —          —          268,959         612        (627     268,944   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

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

Research and development expenses

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

Restructuring and impairment charges

     —          —          799         1,676        —          2,475   

IPO incentive

     —          —          11,355         791        —          12,146   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other income (expense)

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income tax expenses (benefits)

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of related investment

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of related investment

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 24,551      $ 25,779      $ 17,964       $ (5,640   $ (38,103   $ 24,551   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Statements of Cash Flows

For the six months ended June 30, 2012

 

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

Cash flow from operating activities

            

Net income

   $ 19,603      $ 11,960      $ 14,047      $ 17,981      $ (43,988   $ 19,603   

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

            

Depreciation and amortization

     —          —          15,308        89        —          15,397   

Provision for severance benefits

     —          —          10,948        27        —          10,975   

Amortization of debt issuance costs and original issue discount

     —          497        —          —          —          497   

Loss (gain) on foreign currency translation, net

     95        6,563        449        (7,052     —          55   

Gain on disposal of property, plant and equipment, net

     —          —          (190     —          —          (190

Loss on disposal of intangible assets, net

     —          —          15        —          —          15   

Stock-based compensation

     (103     —          1,021        (3     —          915   

Equity in earnings of related investment

     (12,098     (17,844     —          (14,046     43,988        —     

Other

     —          1        (348     20        (21     (348

Changes in operating assets and liabilities

            

Accounts receivable, net

     —          —          (8,119     142        (319     (8,296

Inventories, net

     —          —          (11,498     —          —          (11,498

Other receivables

     1        (16,935     1,425        58        12,871        (2,580

Other current assets

     (11,894     (22,816     9,255        (19,310     53,616        8,851   

Deferred tax assets

     —          —          —          1,146        —          1,146   

Accounts payable

     —          —          14,475        (368     547        14,654   

Other accounts payable

     17,569        (1     9,470        (4,169     (13,192     9,677   

Accrued expenses

     (30     11,308        26,898        23,237        (53,523     7,890   

Other current liabilities

     2,607        —          1,233        2,771        —          6,611   

Payment of severance benefits

     —          —          (4,816     —          —          (4,816

Other

     (544     —          2,578        (4,255     225        (1,996
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     15,206        (27,267     82,151        (3,732     204        66,562   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

            

Decrease in restricted cash

     —          —          1,634        —          —          1,634   

Proceeds from disposal of plant, property and equipment

     —          —          891        —          —          891   

Purchases of plant, property and equipment

     —          —          (46,707     (21     —          (46,728

Payment for intellectual property registration

     —          —          (565     —          —          (565

 

27


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

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

Payment for purchase of Dawin, net of cash acquired

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

Decrease in short-term financial instruments

     —          —          173        —          —          173   

Collection of guarantee deposits

     —          —          42        28        —          70   

Payment of guarantee deposits

     —          —          (175     (1     —          (176

Other

     —          17,635        (40     16,922        (34,570     (53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          17,635        (53,389     16,928        (34,570     (53,396
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow from financing activities

            

Proceeds from issuance of common stock

     183        —          —          —          —          183   

Repayment of long-term intercompany borrowings

     —          —          (17,215     (17,635     34,850        —     

Repayment of obligations under capital lease

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

Acquisition of treasury stock

     (16,935     —          —          —          —          (16,935
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (16,752     —          (20,183     (17,635     34,850        (19,720
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     —          —          823        (132     (484     207   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (1,546     (9,632     9,402        (4,571     —          (6,347
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

            

Beginning of the period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of the period

   $ 131      $ 15,487      $ 136,520      $ 3,626      $ —        $ 155,764   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

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

 

Condensed Consolidating Statements of Cash Flows

For the six months ended June 30, 2011

 

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

Cash flow from operating activities

            

Net income

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

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

            

Depreciation and amortization

     —          —          29,171        144        —          29,315