MagnaChip(MX) - 2020 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents the unaudited interim consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Interim Consolidated Financial Statements (Unaudited) This section presents the unaudited interim consolidated financial statements of MagnaChip Semiconductor Corporation and its subsidiaries, including the balance sheets, statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows, along with detailed notes to these financial statements Consolidated Balance Sheets (Unaudited) This chapter presents the company's financial position, including assets, liabilities, and equity, at specific reporting dates | Metric | September 30, 2020 (in thousands) | December 31, 2019 (in thousands) | Change (in thousands) | Percentage Change | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------- | :------------------ | | Total Assets | $757,452 | $595,328 | $162,124 | 27.23% | | Total Liabilities | $479,148 | $610,309 | $(131,161) | -21.49% | | Total Stockholders' Equity | $278,304 | $(14,981) | $293,285 | N/A | | Cash and cash equivalents | $542,111 | $151,657 | $390,454 | 257.46% | | Current portion of long-term borrowings, net | $306,567 | $— | $306,567 | N/A | | Retained earnings (deficit) | $220,253 | $(58,131) | $278,384 | N/A | Consolidated Statements of Operations (Unaudited) This chapter details the company's revenues, expenses, and net income or loss over specific reporting periods | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total revenues | $124,813 | $149,167 | $364,114 | $397,319 | | Gross profit | $28,588 | $35,255 | $89,856 | $85,900 | | Operating income | $3,223 | $14,336 | $17,810 | $18,034 | | Income (loss) from discontinued operations, net of tax | $264,501 | $12,637 | $289,227 | $(963) | | Net income (loss) | $272,962 | $(1,607) | $278,384 | $(45,252) | | Basic earnings (loss) per common share - Total | $7.74 | $(0.05) | $7.93 | $(1.32) | | Diluted earnings (loss) per common share - Total | $5.89 | $(0.05) | $7.93 | $(1.32) | Consolidated Statements of Comprehensive Income (Loss) (Unaudited) This chapter presents the company's net income or loss and other comprehensive income or loss components | Metric | Three Months Ended Sep 30, 2020 (in thousands) | Three Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | | :--------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net income (loss) | $272,962 | $(1,607) | $278,384 | $(45,252) | | Total other comprehensive income (loss) | $(5,086) | $14,728 | $8,073 | $28,765 | | Total comprehensive income (loss) | $267,876 | $13,121 | $286,457 | $(16,487) | Consolidated Statements of Changes in Stockholders' Equity (Unaudited) This chapter outlines the changes in the company's equity accounts, including common stock and retained earnings, over a period | Metric | Balance at Dec 31, 2019 (in thousands) | Balance at Sep 30, 2020 (in thousands) | Change (in thousands) | | :-------------------------- | :------------------------------------- | :------------------------------------- | :-------------------- | | Common Stock (Amount) | $439 | $447 | $8 | | Additional Paid-In Capital | $152,404 | $159,840 | $7,436 | | Retained Earnings (Deficit) | $(58,131) | $220,253 | $278,384 | | Treasury Stock | $(107,033) | $(107,649) | $(616) | | Accumulated Other Comprehensive Income (Loss) | $(2,660) | $5,413 | $8,073 | | Total Stockholders' Equity | $(14,981) | $278,304 | $293,285 | Consolidated Statements of Cash Flows (Unaudited) This chapter summarizes the cash inflows and outflows from operating, investing, and financing activities | Metric | Nine Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | Change (in thousands) | | :--------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | | Net cash provided by operating activities | $51,541 | $30,019 | $21,522 | | Net cash provided by (used in) investing activities | $334,030 | $(22,565) | $356,595 | | Net cash provided by (used in) financing activities | $1,102 | $(3,314) | $4,416 | | Net increase (decrease) in cash and cash equivalents | $390,454 | $(1,097) | $391,551 | | Cash and cash equivalents, End of the period | $542,111 | $131,341 | $410,770 | Notes to Consolidated Financial Statements This chapter provides detailed explanations and disclosures supporting the interim consolidated financial statements - The Company completed the sale of its Foundry Services Group business and Fab 4 on September 1, 2020, strategically shifting its focus to its standard products business, which includes Display Solutions and Power Solutions, resulting in a gain of $287.1 million and reclassification of these operations as discontinued[23][32][93] - The Company utilizes zero cost collar and forward contracts to hedge against foreign currency exchange rate fluctuations, primarily related to U.S. dollar denominated revenues of its Korean subsidiary[49] - As of September 30, 2020, the Company had $83.74 million in 5.0% Exchangeable Senior Notes due March 2021 and $224.25 million in 6.625% Senior Notes due July 2021 outstanding, with the 2021 Notes subsequently redeemed on October 2, 2020, for approximately $227.4 million[62][63][72][110] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including an overview of the business, recent developments, explanation of non-GAAP measures, factors affecting results, and a detailed comparison of financial performance for the three and nine months ended September 30, 2020 and 2019 Overview This chapter describes the company's business, strategic focus, and product offerings - MagnaChip Semiconductor Corporation designs and manufactures analog and mixed-signal semiconductor platform solutions for communications, IoT, consumer, industrial, and automotive applications[118] - The Company completed the sale of its Foundry Services Group business and Fab 4 on September 1, 2020, to strategically shift its operational focus to its standard products business[119] - The standard products business comprises Display Solutions, such as OLED and LCD panel display drivers, and Power Solutions, including MOSFETs, IGBTs, AC-DC/DC-DC converters, and PMICs[120][121][122] Recent Developments This chapter highlights key corporate events and their potential financial implications - The Company completed the redemption of all outstanding 6.625% Senior Notes due 2021 on October 2, 2020, paying approximately $227.4 million, funded by proceeds from the Foundry Services Group business and Fab 4 sale[134] - The sale of the Foundry Services Group business and Fab 4 was completed on September 1, 2020, for approximately $350.6 million in cash, with the buyer also assuming $100 million in severance liabilities[135] - A temporary power outage at the Fab 3 facility on July 20, 2020, resulted in approximately $1.2 million in incremental costs and limited production capacity in Q3 2020[136] - The COVID-19 pandemic caused minor disruptions in the Power Solutions business in Q1 2020, and its future impact on customer demand and financial results remains uncertain[138] Explanation and Reconciliation of Non-U.S. GAAP Measures This chapter reconciles non-GAAP financial measures to their most directly comparable GAAP measures | Metric | Three Months Ended Sep 30, 2020 (in millions) | Three Months Ended Sep 30, 2019 (in millions) | Nine Months Ended Sep 30, 2020 (in millions) | Nine Months Ended Sep 30, 2019 (in millions) | | :-------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Adjusted EBITDA | $11.7 | $17.4 | $34.3 | $28.1 | | Adjusted Operating Income | $8.8 | $14.8 | $26.2 | $20.3 | | Adjusted Net Income | $5.1 | $8.2 | $11.0 | $2.3 | | Adjusted EPS – Basic | $0.15 | $0.24 | $0.31 | $0.07 | | Adjusted EPS – Diluted | $0.14 | $0.21 | $0.30 | $0.07 | Factors Affecting Our Results of Operations This chapter discusses the key drivers and influences on the company's financial performance - Net sales are primarily derived from the standard products business, with additional revenue from transitional Fab 3 foundry services, where the top ten customers accounted for 88% and 90% of standard products net sales for the nine months ended September 30, 2020 and 2019, respectively[158][159][160] - Gross profit fluctuates due to changes in sales volumes, average selling prices, product mix, manufacturing facility utilization, yields, material/labor costs, outsourced manufacturing expenses, and depreciation[161] - Research and development expenses are continuously incurred for new product development, particularly for 28-nanometer OLED display driver ICs and power products, typically one to two years before generating sales[168] - The Company is exposed to significant foreign currency exchange rate fluctuations, primarily between the Korean won and the U.S. dollar, which can materially impact reported results due to intercompany long-term loans and operational expenses[170][172] Results of Operations – Comparison of Three Months Ended September 30, 2020 and 2019 This chapter compares the company's financial performance for the three-month periods ended September 30, 2020 and 2019 | Metric | Sep 30, 2020 (in millions) | Sep 30, 2019 (in millions) | Change (in millions) | Percentage Change | | :--------------------------------------- | :------------------------- | :------------------------- | :------------------- | :------------------ | | Total revenues | $124.8 | $149.2 | $(24.4) | -16.3% | | Net sales – standard products business | $116.3 | $139.3 | $(23.0) | -16.5% | | Gross profit | $28.6 | $35.3 | $(6.7) | -18.9% | | Gross profit as % of net sales | 22.9% | 23.6% | -0.7% | -2.97% | | Operating income | $3.2 | $14.3 | $(11.1) | -77.6% | | Income from discontinued operations, net of tax | $264.5 | $12.6 | $251.9 | 1999.2% | | Net income (loss) | $273.0 | $(1.6) | $274.6 | N/A | - The decrease in standard products net sales was primarily due to U.S. Government export restrictions on Huawei, strategic reduction of lower-margin non-auto LCD DDIC business, and the Fab 3 power outage affecting Power Solutions products[183] - The significant increase in net income was mainly driven by a $287.1 million gain on the sale of the Foundry Services Group business and Fab 4, contributing to a $251.9 million increase in income from discontinued operations[200][201] Results of Operations – Comparison of Nine Months Ended September 30, 2020 and 2019 This chapter compares the company's financial performance for the nine-month periods ended September 30, 2020 and 2019 | Metric | Sep 30, 2020 (in millions) | Sep 30, 2019 (in millions) | Change (in millions) | Percentage Change | | :--------------------------------------- | :------------------------- | :------------------------- | :------------------- | :------------------ | | Total revenues | $364.1 | $397.3 | $(33.2) | -8.4% | | Net sales – standard products business | $336.0 | $371.5 | $(35.6) | -9.6% | | Gross profit | $89.9 | $85.9 | $4.0 | 4.6% | | Gross profit as % of net sales | 24.7% | 21.6% | 3.1% | 14.35% | | Operating income | $17.8 | $18.0 | $(0.2) | -1.1% | | Income (loss) from discontinued operations, net of tax | $289.2 | $(1.0) | $290.2 | N/A | | Net income (loss) | $278.4 | $(45.3) | $323.6 | N/A | - The decrease in standard products net sales was primarily due to a strategic reduction of lower-margin non-auto LCD DDIC business, COVID-19's negative impact on the global smartphone market, and U.S. Government export restrictions on Huawei[206] - Gross profit increased due to inventory reserves related to legacy display products in 2019 and an improved product mix, partially offset by a $2.3 million inventory charge related to Huawei and lower Fab 3 utilization[209][210] - Net income significantly increased due to a $287.1 million gain on the sale of discontinued operations and a $30.4 million increase in gross profit from discontinued operations[226][228] Liquidity and Capital Resources This chapter assesses the company's ability to generate and manage cash to meet its financial obligations - Working capital as of September 30, 2020, was $244.9 million, slightly down from $245.5 million at December 31, 2019, with the increase in cash and cash equivalents from the Foundry Services Group sale offset by the reclassification of outstanding notes to current liabilities[235] | Cash Flow Activity (Nine Months Ended) | Sep 30, 2020 (in millions) | Sep 30, 2019 (in millions) | Change (in millions) | | :------------------------------------- | :------------------------- | :------------------------- | :------------------- | | Operating Activities | $51.5 | $30.0 | $21.5 | | Investing Activities | $334.0 | $(22.6) | $356.6 | | Financing Activities | $1.1 | $(3.3) | $4.4 | - Cash provided by investing activities significantly increased by $356.6 million, primarily due to $350.6 million in proceeds from the sale of the Foundry Services Group business and Fab 4[237] | Contractual Obligation (as of Sep 30, 2020) | Total (in millions) | Remainder of 2020 (in millions) | 2021 (in millions) | 2022 (in millions) | 2023 (in millions) | 2024 (in millions) | Thereafter (in millions) | | :---------------------------------------- | :------------------ | :------------------------------ | :----------------- | :----------------- | :----------------- | :----------------- | :----------------------- | | Exchangeable Notes | $85.8 | $— | $85.8 | $— | $— | $— | $— | | Senior Notes | $227.4 | $227.4 | $— | $— | $— | $— | $— | | Operating leases | $2.2 | $0.4 | $1.5 | $0.3 | $0.0 | $— | $— | | Finance leases | $0.2 | $0.0 | $0.1 | $0.1 | $0.1 | $— | $— | | Water Treatment Services | $29.2 | $1.0 | $4.0 | $3.9 | $3.9 | $3.7 | $12.7 | | Others | $13.0 | $4.5 | $5.2 | $1.4 | $0.8 | $0.6 | $0.4 | Critical Accounting Policies and Estimates This chapter explains the significant accounting judgments and estimates that impact the financial statements - There have been no material changes to critical accounting policies for the nine months ended September 30, 2020, except for those related to discontinued operations following the sale of the Foundry Services Group business and Fab 4[254] - The Foundry Services Group business and Fab 4 met the criteria for classification as discontinued operations, leading to reclassification of comparative periods in the consolidated balance sheet and reporting results as income or loss from discontinued operations, net of tax[255][256] Recent Accounting Pronouncements This chapter discusses the impact of newly adopted or upcoming accounting standards on the company's financial reporting - The Company adopted ASU 2016-13 (Credit Losses), ASU 2019-04, ASU 2019-11, and ASU 2020-02 as of January 1, 2020, with no material impact on consolidated financial statements[29] - ASU 2019-12 (Income Taxes) is effective for fiscal years beginning after December 15, 2020, and is not expected to have a material effect on the Company's consolidated financial statements[28] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily from changes in foreign currency exchange rates and interest rates, and outlines its hedging activities Foreign Currency Exposures This chapter addresses the company's exposure to risks arising from fluctuations in foreign currency exchange rates - The Company is exposed to foreign currency exchange rate fluctuations, particularly between the Korean won and the U.S. dollar, where a 10% devaluation of the Korean won against the U.S. dollar would result in an $8.5 million decrease in U.S. dollar financial instruments and cash balances for its Korean subsidiary[260] - The Company uses foreign currency forward and zero cost collar contracts to mitigate the impact of exchange rate fluctuations on its operating results[261] Interest Rate Exposures This chapter addresses the company's exposure to risks arising from changes in interest rates - The Company's Exchangeable Notes (5.0% fixed rate, due March 2021) and 2021 Notes (6.625% fixed rate, due July 2021, redeemed October 2020) have fixed interest rates, eliminating market interest rate risk related to these borrowings[262] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This chapter assesses the effectiveness of the company's controls and procedures for financial reporting - Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2020[265] Changes in Internal Control Over Financial Reporting This chapter reports on any material changes in the company's internal control over financial reporting - There were no material changes in the Company's internal control over financial reporting during the quarter ended September 30, 2020[266] PART II. OTHER INFORMATION This section provides additional information not covered in Part I, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings This section refers to the company's Annual Report on Form 10-K for a discussion of legal proceedings and additional risk factors - For a discussion of legal proceedings, refer to "Part I: Item 3. Legal Proceedings" of the Company's 2019 Annual Report on Form 10-K[268] - Additional information on risk factors is available in "Part I: Item 1A. Risk Factors" of the 2019 Form 10-K and Note 18 of the current report[269] Item 1A. Risk Factors This section outlines significant risks and uncertainties that could materially and adversely affect the company's business, financial condition, liquidity, or consolidated financial statements, with a particular focus on the impacts of the COVID-19 pandemic and international trade policies Risks Related to COVID-19 This chapter discusses the potential adverse impacts of the COVID-19 pandemic on the company's operations and financial results - The COVID-19 pandemic, a global public health crisis, has led to travel bans, quarantines, and business restrictions, impacting the Company's workforce, operations, customers, and suppliers[271][272] - The future impact of COVID-19 on the Company's business, results of operations, and financial condition is difficult to assess and could have severe adverse effects if disruptions continue for an extended period[273] Risks Related to Independent Subcontractors This chapter addresses the risks associated with relying on third-party subcontractors for manufacturing and testing - The Company relies on independent subcontractors in Korea, China, Taiwan, and Thailand for packaging and testing semiconductors, exposing it to risks from political disorders, labor disruptions, public health issues like COVID-19, and delays in onboarding new subcontractors[274][275] Risks Related to Our International Operations and Trade This chapter discusses risks stemming from international trade policies, tariffs, and export restrictions - Changes in international trade policy and the imposition of tariffs, particularly between the U.S. and China, could negatively impact demand for the Company's products and increase costs[276] - Expanded U.S. export restrictions on Huawei and its affiliates limit the Company's ability to supply certain customers, creating uncertainty regarding the impact and duration on future business[277] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications, XBRL documents, and the cover page - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) and 18 U.S.C. Section 1350[279] - XBRL (eXtensible Business Reporting Language) documents, including the Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase, are filed[279] - The cover page of the Quarterly Report on Form 10-Q is formatted in Inline XBRL[279] SIGNATURES This section contains the formal declaration of the report's authenticity by the company's authorized officers - The report was duly signed on November 6, 2020, by Young-Joon Kim, Chief Executive Officer, and Young Soo Woo, Chief Financial Officer, on behalf of MagnaChip Semiconductor Corporation[282]