MagnaChip(MX) - 2019 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the unaudited interim consolidated financial statements, detailed notes, and management's discussion and analysis of financial performance Item 1. Interim Consolidated Financial Statements (Unaudited) This section presents the unaudited interim consolidated financial statements and notes, showing a net loss for the three and nine months ended September 30, 2019 Consolidated Balance Sheets The consolidated balance sheets show a slight increase in total assets and liabilities from December 31, 2018, to September 30, 2019, while stockholders' deficit widened Consolidated Balance Sheet Summary (in thousands) | Metric | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Total assets | $588,137 | $583,196 | | Total liabilities | $621,564 | $600,506 | | Total stockholders' deficit | $(33,427) | $(17,310) | - Cash and cash equivalents decreased slightly from $132,438 thousand at December 31, 2018, to $131,341 thousand at September 30, 2019[12] - Accounts receivable, net, increased from $80,003 thousand to $106,289 thousand[12] Consolidated Statements of Operations The company reported a net loss of $1.6 million for the three months ended September 30, 2019, a significant decline from a net income of $17.2 million in the prior-year period Consolidated Statements of Operations Summary (in thousands) | Metric | 3 Months Ended Sep 30, 2019 (in thousands) | 3 Months Ended Sep 30, 2018 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $229,677 | $206,000 | $592,202 | $571,504 | | Gross profit | $60,866 | $55,749 | $127,407 | $154,184 | | Operating income | $25,923 | $18,265 | $14,388 | $39,558 | | Net income (loss) | $(1,607) | $17,222 | $(45,252) | $(1,520) | | Basic EPS | $(0.05) | $0.50 | $(1.32) | $(0.04) | - Foreign currency loss, net, significantly impacted results, moving from a gain of $6,002 thousand in Q3 2018 to a loss of $21,205 thousand in Q3 2019[14] - For the nine-month periods, foreign currency loss moved from $20,129 thousand to $41,633 thousand[14] Consolidated Statements of Comprehensive Income (Loss) Total comprehensive income (loss) for the three months ended September 30, 2019, was $13.1 million, down from $14.6 million in the prior-year period Consolidated Statements of Comprehensive Income (Loss) Summary (in thousands) | Metric | 3 Months Ended Sep 30, 2019 (in thousands) | 3 Months Ended Sep 30, 2018 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $(1,607) | $17,222 | $(45,252) | $(1,520) | | Foreign currency translation adjustments | $15,931 | $(3,827) | $30,915 | $15,806 | | Derivative adjustments| $(1,203) | $1,186 | $(2,150) | $(5,392) | | Total comprehensive income (loss) | $13,121 | $14,581 | $(16,487) | $8,894 | Consolidated Statements of Changes in Stockholders' Equity The company's total stockholders' deficit increased from $(17,310) thousand at December 31, 2018, to $(33,427) thousand at September 30, 2019 Consolidated Statements of Changes in Stockholders' Equity Summary (in thousands) | Metric | Balance at Dec 31, 2018 (in thousands) | Balance at Sep 30, 2019 (in thousands) | | :-------------------- | :---------------------- | :---------------------- | | Common Stock | $431 | $434 | | Additional Paid-In Capital | $142,600 | $145,555 | | Accumulated Deficit | $(36,305) | $(81,557) | | Treasury Stock | $(103,926) | $(106,514) | | Accumulated Other Comprehensive Income (Loss) | $(20,110) | $8,655 | | Total Stockholders' Deficit | $(17,310) | $(33,427) | - For the nine months ended September 30, 2019, the company reported a net loss of $45,252 thousand and acquired $2,588 thousand in treasury stock[19] - Accumulated other comprehensive income, primarily from foreign currency translation adjustments, shifted from a loss of $(20,110) thousand to a gain of $8,655 thousand[19] Consolidated Statements of Cash Flows Net cash provided by operating activities increased to $30.0 million for the nine months ended September 30, 2019, from $25.0 million in the prior-year period Consolidated Statements of Cash Flows Summary (in thousands) | Metric | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $30,019 | $25,014 | | Net cash used in investing activities | $(22,565) | $(21,257) | | Net cash provided by (used in) financing activities | $(3,314) | $5,124 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $(1,097) | $4,907 | - Adjustments to reconcile net loss to net cash provided by operating activities included $50,512 thousand in loss on foreign currency, net, for the nine months ended September 30, 2019, compared to $26,931 thousand in 2018[22] Notes to Consolidated Financial Statements These notes detail the company's business, accounting policies, and specific financial items, including new lease standards and segment information Note 1. Business, Basis of Presentation and Significant Accounting Policies MagnaChip designs and manufactures analog and mixed-signal semiconductor solutions across two segments, adopting a new lease standard effective January 1, 2019 - The company operates two segments: Foundry Services Group (specialty analog and mixed-signal foundry services) and Standard Products Group (Display Solutions and Power Solutions)[24] - The new lease standard (ASU 2016-02) was adopted on January 1, 2019, using the modified retrospective transition method, leading to a $16,387 thousand increase in total assets and liabilities[52] Note 2. Sales of Accounts Receivable and Receivable Discount Program The company sells selected trade accounts receivable and uses discount programs to accelerate cash collection, generating $14.5 million in proceeds for the nine months ended September 30, 2019 - Proceeds from sales of accounts receivable were $14,474 thousand for the nine months ended September 30, 2019, resulting in pre-tax losses of $45 thousand[53] Note 3. Inventories Net inventories increased slightly to $72.7 million as of September 30, 2019, with a significant increase in the inventory reserve to $(11.8) million Inventory Summary (in thousands) | Inventory Category | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :-------------------------------- | :----------- | :----------- | | Finished goods | $11,802 | $14,334 | | Semi-finished goods and work-in-process | $53,881 | $39,135 | | Raw materials | $17,546 | $21,150 | | Inventory reserve | $(11,756) | $(4,898) | | Inventories, net | $72,703 | $71,611 | - During the first half of 2019, the Company recorded inventory reserves of $5,475 thousand related to certain legacy display products[56] Note 4. Property, Plant and Equipment Net property, plant and equipment decreased to $178.8 million as of September 30, 2019, with depreciation expenses totaling $24.0 million for the nine months Property, Plant and Equipment Summary (in thousands) | Category | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :---------------------- | :----------- | :----------- | | Buildings and related structures | $65,933 | $70,665 | | Machinery and equipment | $312,758 | $323,325 | | Accumulated depreciation | $(257,205) | $(251,962) | | Property, plant and equipment, net | $178,823 | $202,171 | - Aggregate depreciation expenses totaled $23,994 thousand for the nine months ended September 30, 2019, compared to $23,272 thousand for the same period in 2018[57] Note 5. Intangible Assets Net intangible assets remained relatively stable at $3.9 million as of September 30, 2019, primarily consisting of intellectual property assets Intangible Assets Summary (in thousands) | Category | Sep 30, 2019 Net (in thousands) | Dec 31, 2018 Net (in thousands) | | :---------------------- | :--------------- | :--------------- | | Technology | $— | $— | | Customer relationships | $— | $— | | Intellectual property assets | $3,913 | $3,953 | | Intangible assets, net | $3,913 | $3,953 | - Aggregate amortization expenses for intangible assets totaled $667 thousand for the nine months ended September 30, 2019, an increase from $611 thousand in the prior-year period[59] Note 6. Leases Following the adoption of the new lease standard, the company recognized operating lease right-of-use assets of $11.5 million and total lease liabilities of $13.7 million as of September 30, 2019 Lease Metrics (in thousands) | Lease Metric | As of Sep 30, 2019 (in thousands) | | :-------------------------- | :----------------- | | Operating lease right-of-use assets | $11,517 | | Finance lease right-of-use assets (in PPE, net) | $2,147 | | Total leased assets | $13,664 | | Operating lease liabilities (current) | $2,023 | | Finance lease liabilities (current) | $238 | | Non-current operating lease liabilities | $9,494 | | Non-current finance lease liabilities | $1,961 | | Total lease liabilities | $13,716 | Lease Cost (in thousands) | Lease Cost | 9 Months Ended Sep 30, 2019 (in thousands) | | :------------------------ | :-------------------------- | | Operating lease cost | $2,395 | | Amortization of right-of-use assets (finance lease) | $228 | | Interest on lease liabilities (finance lease) | $135 | | Total lease cost | $2,758 | Note 7. Accrued Expenses Accrued expenses increased to $48.9 million as of September 30, 2019, primarily due to withholding tax and payroll-related items Accrued Expense Summary (in thousands) | Accrued Expense | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :----------------------------- | :----------- | :----------- | | Payroll, benefits and related taxes | $18,523 | $14,548 | | Withholding tax attributable to intercompany interest income | $22,705 | $20,879 | | Interest on senior notes | $3,444 | $8,226 | | Accrued expenses | $48,944 | $46,250 | Note 8. Derivative Financial Instruments The company uses zero cost collar and forward contracts to hedge foreign currency risk, with derivative liabilities of $2.2 million and hedge collateral of $9.4 million as of September 30, 2019 Derivative Financial Instruments (in thousands) | Derivative Type | Sep 30, 2019 (Asset, in thousands) | Sep 30, 2019 (Liability, in thousands) | Dec 31, 2018 (Asset, in thousands) | Dec 31, 2018 (Liability, in thousands) | | :----------------------------- | :------------------- | :----------------------- | :------------------- | :----------------------- | | Zero cost collars | $13 | $2,234 | $— | $117 | | Forward | $— | $— | $— | $607 | - The company set aside $9,400 thousand in cash deposits as hedge collateral as of September 30, 2019, an increase from $4,000 thousand at December 31, 2018[73] - As of September 30, 2019, $2,199 thousand is expected to be reclassified from accumulated other comprehensive income into loss within the next twelve months[72] Note 9. Fair Value Measurements The company measures derivative financial instruments and long-term borrowings at fair value using Level 2 inputs, showing differences between carrying and fair values Fair Value of Long-Term Borrowings (in thousands) | Financial Instrument | Carrying Value (Sep 30, 2019, in thousands) | Fair Value (Sep 30, 2019, in thousands) | | :---------------------------------- | :---------------------------- | :------------------------ | | 5.0% Exchangeable Senior Notes due March 2021 | $81,594 | $116,078 | | 6.625% Senior Notes due July 2021 | $222,561 | $219,765 | - Derivative assets and liabilities are measured at fair value on a recurring basis using Level 2 inputs, which are observable inputs other than quoted prices in active markets[76] Note 10. Long-Term Borrowings Long-term borrowings, net, increased slightly to $304.2 million as of September 30, 2019, including Exchangeable Senior Notes and Senior Notes, with repurchases resulting in a net loss on early extinguishment Long-Term Borrowings Summary (in thousands) | Long-Term Borrowing | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :--------------------------------- | :----------- | :----------- | | 5.0% Exchangeable Senior Notes due March 2021 | $83,740 | $84,660 | | 6.625% Senior Notes due July 2021 | $224,250 | $224,500 | | Less: unamortized discount and debt issuance costs | $(3,835) | $(5,583) | | Long-term borrowings, net | $304,155 | $303,577 | - In February 2019, the company repurchased $920 thousand principal amount of Exchangeable Notes, resulting in a $63 thousand loss on early extinguishment[88] - In January 2019, $250 thousand principal amount of 2021 Notes were repurchased, resulting in a $21 thousand gain[94] Note 11. Accrued Severance Benefits Accrued severance benefits, primarily for Korean employees, decreased to $138.8 million as of September 30, 2019, due to translation adjustments and payments Accrued Severance Benefits (in thousands) | Severance Benefit | 3 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :------------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $146,261 | $149,408 | | Provisions | $4,085 | $10,491 | | Severance payments | $(1,616) | $(6,195) | | Translation adjustments | $(5,413) | $(10,387) | | Accrued severance benefits, net | $138,794 | $138,794 | - As of September 30, 2019, 98% of employees were eligible for severance benefits under Korean law[96] Note 12. Foreign Currency Gain (Loss), Net Net foreign currency loss for the nine months ended September 30, 2019, was $41.6 million, significantly higher than the prior-year period, largely due to non-cash translation losses - Net foreign currency loss for the nine months ended September 30, 2019, was $41,633 thousand, compared to $20,129 thousand for the same period in 2018[14] - A substantial portion of this loss is non-cash translation gain or loss associated with intercompany long-term loans to the Korean subsidiary, denominated in U.S. dollars[102] Note 13. Income Taxes Income tax expense for the nine months ended September 30, 2019, was $3.1 million, primarily for the Korean subsidiary, utilizing net operating loss carryforwards Income Tax Expense (in thousands) | Metric | 3 Months Ended Sep 30, 2019 (in thousands) | 3 Months Ended Sep 30, 2018 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense | $1,454 | $1,608 | $3,107 | $4,119 | - Income tax expense for the Korean subsidiary is based on estimated taxable income and the ability to utilize net operating loss carryforwards (60% in 2019, 70% in 2018)[104] Note 14. Geographic and Segment Information The company operates in two segments, Foundry Services Group and Standard Products Group, with Standard Products Group showing increased net sales for the nine months ended September 30, 2019 Segment Net Sales (in thousands) | Segment Net Sales | 3 Months Ended Sep 30, 2019 (in thousands) | 3 Months Ended Sep 30, 2018 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Foundry Services Group | $90,340 | $83,862 | $220,513 | $242,198 | | Standard Products Group | $139,240 | $122,036 | $371,484 | $329,139 | | Total net sales | $229,677 | $206,000 | $592,202 | $571,504 | Geographic Net Sales (in thousands) | Geographic Net Sales | 3 Months Ended Sep 30, 2019 (in thousands) | 3 Months Ended Sep 30, 2018 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Korea | $70,965 | $91,570 | $190,839 | $204,319 | | Asia Pacific (other than Korea) | $138,125 | $93,475 | $342,413 | $302,906 | | U.S.A. | $7,182 | $5,831 | $20,784 | $29,242 | - Net sales from the top ten largest customers accounted for 69% and 68% for the three and nine months ended September 30, 2019, respectively[112] Note 15. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) shifted from a loss of $(20.1) million at December 31, 2018, to a gain of $8.7 million at September 30, 2019 Accumulated Other Comprehensive Income (Loss) (in thousands) | Component | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :----------------------- | :----------- | :----------- | | Foreign currency translation adjustments | $10,854 | $(20,061) | | Derivative adjustments | $(2,199) | $(49) | | Total | $8,655 | $(20,110) | - For the nine months ended September 30, 2019, foreign currency translation adjustments contributed $30,915 thousand in other comprehensive income, a significant increase from $15,806 thousand in the prior-year period[117] Note 16. Earnings (Loss) per Share Basic and diluted loss per share for the three months ended September 30, 2019, was $(0.05), worsening to $(1.32) for the nine months, reflecting the overall net loss Earnings (Loss) per Share (in dollars) | Metric | 3 Months Ended Sep 30, 2019 (in dollars) | 3 Months Ended Sep 30, 2018 (in dollars) | 9 Months Ended Sep 30, 2019 (in dollars) | 9 Months Ended Sep 30, 2018 (in dollars) | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $(0.05) | $0.50 | $(1.32) | $(0.04) | | Diluted EPS | $(0.05) | $0.41 | $(1.32) | $(0.04) | - Potential common stock from the assumed conversion of Exchangeable Notes (10,144,155 shares for Q3 2019 and 10,156,810 shares for 9M 2019) were excluded from diluted EPS computation due to their anti-dilutive effect[118] Note 17. Commitments and Contingencies The company manages long-term purchase agreements and prepayments to suppliers, with prepayments decreasing to $5.8 million as of September 30, 2019 - Prepayments to suppliers were $5,847 thousand as of September 30, 2019, compared to $8,132 thousand as of December 31, 2018[122] - The company reviews long-term supply agreements for estimated losses but required no accrual as of September 30, 2019, and December 31, 2018[121] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial condition, operations, liquidity, and accounting policies, noting increased net sales but a significant net loss Overview MagnaChip designs and manufactures analog and mixed-signal semiconductor solutions across two segments, emphasizing mature technology and outsourcing advanced OLED product manufacturing - MagnaChip operates two segments: Foundry Services Group (specialty analog and mixed-signal foundry services) and Standard Products Group (Display Solutions and Power Solutions)[132] - The company's internal manufacturing capacity provides control over costs and delivery, but exposes it to under-utilization risk during industry downturns[140] - Outsourcing manufacturing of advanced OLED products to external foundries allows dynamic adaptation to customer requirements and addresses growing markets without substantial capital investments[142] Recent Developments Recent developments include a strategic evaluation of the Foundry Services Group, repurchases of long-term borrowings, and settlements of tax audits and litigations - The company initiated a strategic evaluation of its Foundry Services Group business and Fab 4, incurring $2.6 million in legal and consulting fees for the nine months ended September 30, 2019[145] - In January and February 2019, the company repurchased $0.3 million of 2021 Notes and $0.9 million of Exchangeable Notes, resulting in a $0.04 million net loss on early extinguishment[147] - The company settled a Korean National Tax Service audit for $6.0 million (including penalties), with $4.2 million charged in Q4 2017, and resolved SEC investigations with a $3.0 million monetary penalty paid in Q2 2017[150][151][164] Segments The company's two operating segments are Foundry Services Group and Standard Products Group, with Standard Products Group's net sales increasing to 62.7% of total net sales for the nine months ended September 30, 2019 - Foundry Services Group net sales represented 37.2% of total net sales for the nine months ended September 30, 2019, down from 42.4% in 2018, with gross profit of $41.4 million in 2019[169] - Standard Products Group net sales represented 62.7% of total net sales for the nine months ended September 30, 2019, up from 57.6% in 2018, with gross profit of $85.8 million in 2019[169] - The Standard Products Group includes Display Solutions (OLED, LTPS, TFT drivers) and Power Solutions (MOSFETs, IGBTs, converters, regulators)[169] Explanation and Reconciliation of Non-US GAAP Measures The company uses non-GAAP measures, Adjusted EBITDA and Adjusted Net Income, to provide a more comparable view of its core operating performance by excluding specific items Non-GAAP Reconciliation (in millions) | Metric | 3 Months Ended Sep 30, 2019 (in millions) | 9 Months Ended Sep 30, 2019 (in millions) | 3 Months Ended Sep 30, 2018 (in millions) | 9 Months Ended Sep 30, 2018 (in millions) | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $(1.6) | $(45.3) | $17.2 | $(1.5) | | EBITDA | $13.0 | $(2.4) | $31.8 | $41.7 | | Adjusted EBITDA | $35.5 | $46.8 | $27.9 | $66.9 | Non-GAAP Adjusted Net Income (in millions) | Metric | 3 Months Ended Sep 30, 2019 (in millions) | 9 Months Ended Sep 30, 2019 (in millions) | 3 Months Ended Sep 30, 2018 (in millions) | 9 Months Ended Sep 30, 2018 (in millions) | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $(1.6) | $(45.3) | $17.2 | $(1.5) | | Adjusted Net Income | $20.9 | $3.9 | $13.3 | $23.6 | - Adjustments to EBITDA and Net Income include restructuring and other charges ($4.8 million for 9M 2019), equity-based compensation ($1.9 million for 9M 2019), and foreign currency loss ($41.6 million for 9M 2019)[171][177] Factors Affecting Our Results of Operations Key factors influencing results include net sales from Foundry Services and Standard Products, gross profit fluctuations, operating expenses, and the substantial impact of foreign currency exchange rates - Net sales are derived from Foundry Services Group and Standard Products Group, with 68% of net sales to the top ten largest customers for the nine months ended September 30, 2019[183][184] - Gross profit is influenced by sales volumes, average selling prices, product mix, manufacturing utilization, yields, and material/labor costs[185] - Foreign currency exchange rates, especially between the Korean won and the US dollar, materially impact reported results due to a significant portion of operating expenses and intercompany loans being denominated in non-US currencies[195] Results of Operations – Q3 2019 vs. Q3 2018 For Q3 2019, net sales increased by 11.5% to $229.7 million, but a significant foreign currency loss led to a net loss of $1.6 million, despite increased operating income Q3 2019 vs. Q3 2018 Financial Highlights (in millions) | Metric | Q3 2019 (in millions) | Q3 2018 (in millions) | Change (Amount, in millions) | Change (%) | | :------------------- | :------ | :------ | :-------------- | :--------- | | Net sales | $229.7 | $206.0 | $23.7 | 11.5% | | Gross profit | $60.9 | $55.7 | $5.1 | 9.2% | | Operating income | $25.9 | $18.3 | $7.7 | 42.0% | | Net income (loss) | $(1.6) | $17.2 | $(18.8) | -109.3% | - Foundry Services Group net sales increased by 7.7% to $90.3 million, driven by communication-related products and gate driver ICs[207] - Standard Products Group net sales increased by 14.1% to $139.2 million, primarily due to mobile OLED display driver ICs and premium power products[208] - A net foreign currency loss of $21.2 million in Q3 2019, compared to a $6.0 million gain in Q3 2018, was the primary driver of the net loss, attributed to Korean won depreciation[223] Results of Operations – 9M 2019 vs. 9M 2018 For the nine months ended September 30, 2019, net sales increased by 3.6% to $592.2 million, but gross profit decreased by 17.4%, and a substantial foreign currency loss led to a widened net loss of $45.3 million 9M 2019 vs. 9M 2018 Financial Highlights (in millions) | Metric | 9M 2019 (in millions) | 9M 2018 (in millions) | Change (Amount, in millions) | Change (%) | | :------------------- | :------ | :------ | :-------------- | :--------- | | Net sales | $592.2 | $571.5 | $20.7 | 3.6% | | Gross profit | $127.4 | $154.2 | $(26.8) | -17.4% | | Operating income | $14.4 | $39.6 | $(25.2) | -63.6% | | Net loss | $(45.3) | $(1.5) | $(43.7) | -2913.3% | - Foundry Services Group net sales decreased by 9.0% to $220.5 million due to weaker demand and selective business engagement amid strategic evaluation[232] - Standard Products Group net sales increased by 12.9% to $371.5 million, driven by mobile OLED display driver ICs and premium power products[233] - Gross profit margin for Foundry Services Group decreased from 26.1% to 18.8%, and for Standard Products Group from 27.6% to 23.1%, primarily due to unfavorable product mix, lower utilization rates, and inventory reserves[235][236] - Net foreign currency loss increased to $41.6 million from $20.1 million, contributing significantly to the widened net loss[246] Liquidity and Capital Resources The company's liquidity is primarily from cash on hand, operations, and financing activities, with operating cash flow increasing to $30.0 million for the nine months ended September 30, 2019 - Net cash provided by operating activities was $30.0 million for the nine months ended September 30, 2019, up from $25.0 million in 2018[255] - Cash outflow from investing activities increased to $22.6 million, primarily due to a net increase in hedge collateral and guarantee deposits, partially offset by decreased purchase of plant, property, and equipment[257] - Financing activities resulted in a $3.3 million cash outflow, a reversal from a $5.1 million inflow in 2018, mainly due to repurchases of long-term borrowings and common stock[258] - Capital expenditures for plant, property, and equipment decreased by 27.9% to $16.7 million for the nine months ended September 30, 2019[259] Contractual Obligations (in millions) | Contractual Obligation | Total (in millions) | Remainder of 2019 (in millions) | 2020 (in millions) | 2021 (in millions) | 2022 (in millions) | 2023 (in millions) | Thereafter (in millions) | | :----------------------------------- | :---- | :---------------- | :--- | :--- | :--- | :--- | :--------- | | Exchangeable Notes | $90.0 | $— | $4.2 | $85.8 | $— | $— | $— | | Senior notes | $254.0| $— | $14.9| $239.1| $— | $— | $— | | Operating leases | $18.1 | $0.8 | $2.7 | $1.3 | $1.1 | $1.0 | $11.3 | | Finance leases | $3.2 | $0.1 | $0.4 | $0.4 | $0.4 | $0.4 | $1.6 | | Water Treatment Services | $47.7 | $2.0 | $8.1 | $8.0 | $8.0 | $5.5 | $16.1 | | Others | $21.1 | $2.3 | $13.4| $4.9 | $0.3 | $0.1 | $0.2 | Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgment and estimates for revenue recognition, inventory, long-lived assets, and income taxes, with an updated policy for leases - The company's critical accounting policies include revenue recognition, inventory valuation, long-lived assets, and income taxes, all requiring significant management judgment and estimates[269] - The accounting policy for leases was updated with the adoption of ASU 2016-02, requiring the recognition of operating lease right-of-use assets and liabilities on the balance sheet[271] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks primarily from foreign currency exchange rate fluctuations and interest rate changes, with limited interest rate risk due to fixed-rate borrowings - A 10% devaluation of the Korean won against the US dollar would result in a $0.2 million decrease in the company's US dollar financial instruments and cash balances for its Korean subsidiary[279] - The company's Exchangeable Notes (5.0% fixed rate) and 2021 Notes (6.625% fixed rate) have fixed interest rates, limiting exposure to interest rate market risk[281] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2019[284] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2019[285] PART II OTHER INFORMATION This section provides additional information on legal proceedings, risk factors, and required exhibits Item 1. Legal Proceedings This section refers to the legal proceedings discussed in the company's 2018 Form 10-K, indicating no new material updates for the current reporting period - For a discussion of legal proceedings, refer to Part I: Item 3. Legal Proceedings of the 2018 Form 10-K[287] Item 1A. Risk Factors The company highlights risks related to the ongoing strategic review of its Foundry Services Group business and Fab 4, including potential employee retention issues and litigation - The company is subject to risks related to the strategic review of its Foundry Services Group business and Fab 4, including potential employee retention issues, management distraction, customer loss, and litigation[290] - There is no assurance that the strategic review will result in a sale or any other transaction, nor is there a finite timetable for its completion[290] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO and XBRL-related documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer, as well as XBRL instance and taxonomy documents[291] SIGNATURES The report is duly signed on November 7, 2019, by Young-Joon Kim, CEO, and Jonathan W. Kim, CFO, certifying its submission - The report was signed by Young-Joon Kim, Chief Executive Officer, and Jonathan W. Kim, Chief Financial Officer, on November 7, 2019[295]