MagnaChip(MX) - 2022 Q3 - Quarterly Report

PART I Item 1. Interim Consolidated Financial Statements (Unaudited) Magnachip's unaudited interim consolidated financial statements for Q3 and 9M 2022 reveal significant revenue decline and a net loss Consolidated Balance Sheet Highlights (in thousands of U.S. dollars) | Account | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $536,208 | $583,654 | | Cash and cash equivalents | $250,831 | $279,547 | | Total current assets | $379,036 | $409,120 | | Total Liabilities | $122,993 | $130,892 | | Total current liabilities | $74,359 | $85,481 | | Total Stockholders' Equity | $413,215 | $452,762 | Consolidated Statements of Operations Highlights (in thousands of U.S. dollars) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $71,199 | $127,000 | $276,668 | $363,895 | | Gross profit | $17,225 | $46,587 | $85,166 | $114,939 | | Operating income (loss) | $(10,008) | $20,001 | $4,873 | $19,537 | | Net income (loss) | $(17,195) | $10,768 | $(11,007) | $3,097 | Consolidated Statements of Cash Flows Highlights (in thousands of U.S. dollars) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $50,244 | $30,016 | | Net cash used in investing activities | $(25,873) | $(14,443) | | Net cash (used in) provided by financing activities | $(3,710) | $1,791 | | Net decrease in cash and cash equivalents | $(28,716) | $(3,639) | Notes to Consolidated Financial Statements Notes detail business segments, customer concentration, foreign currency hedging, stock repurchases, and merger termination fee - The company designs and manufactures analog and mixed-signal semiconductor solutions, with business divided into Display Solutions and Power Solutions[24][25] Revenues by Business Line (in thousands of U.S. dollars) | Business Line | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Display Solutions | $6,355 | $58,528 | $63,876 | $164,024 | | Power Solutions | $56,416 | $58,887 | $184,193 | $169,565 | | Total standard products | $62,771 | $117,415 | $248,069 | $333,589 | | Transitional Fab 3 foundry | $8,428 | $9,585 | $28,599 | $30,306 | - For the nine months ended Sep 30, 2022, the top ten customers accounted for 70% of standard products business net sales, with two customers representing 20.6% and 13.9% of net sales, respectively[65][66] - The Board of Directors expanded the stock repurchase program from $75 million to $87.5 million, with 324,643 shares repurchased for $3.6 million in September 2022[74] - The merger agreement with an affiliate of Wise Road Capital was terminated, resulting in a remaining termination fee receivable of $1.8 million as of September 30, 2022[80] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2022 revenue decline, resilient Power Solutions, industry trends, non-GAAP measures, and sufficient liquidity Overview and Industry Trends Magnachip's hybrid manufacturing strategy faces industry shifts to weaker demand and inventory oversupply, impacting revenue due to OLED wafer shortages - The company's business lines are Display Solutions (drivers for LCD, OLED, Micro LED) and Power Solutions (MOSFETs, IGBTs, PMICs)[96][97] - The company uses a balanced manufacturing strategy, combining internal capacity with outsourcing to external 12-inch and 8-inch foundries for advanced OLED ICs[105][106] - Global macroeconomic conditions, including China's COVID-19 lockdowns and higher inflation, have led to weaker end-market demand and an oversupply of inventory[113] - Revenues were severely impacted by persisting supply shortages, particularly for 28nm 12-inch OLED wafers[111] Explanation and Reconciliation of Non-U.S. GAAP Measures This section defines and reconciles non-GAAP measures like Adjusted EBITDA, Operating Income, and Net Income, used to assess core performance Reconciliation of Net Income (Loss) to Adjusted EBITDA (in millions) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $(17.2) | $10.8 | $(11.0) | $3.1 | | Adjusted EBITDA | $(3.0) | $26.4 | $24.3 | $52.6 | Reconciliation of Operating Income (Loss) to Adjusted Operating Income (Loss) (in millions) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Operating income (loss) | $(10.0) | $20.0 | $4.9 | $19.5 | | Adjusted Operating Income (Loss) | $(6.6) | $22.7 | $12.7 | $41.7 | Reconciliation of Net Income (Loss) to Adjusted Net Income (in millions) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $(17.2) | $10.8 | $(11.0) | $3.1 | | Adjusted Net Income | $1.1 | $20.1 | $24.6 | $36.5 | Results of Operations – Comparison of Three Months Ended September 30, 2022 and 2021 Q3 2022 total revenues fell 43.9% to $71.2 million due to Display Solutions, leading to a 63.0% gross profit drop and net loss Q3 2022 vs Q3 2021 Performance Summary (in millions) | Metric | Q3 2022 | Q3 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $71.2 | $127.0 | -43.9% | | Standard Products Revenue | $62.8 | $117.4 | -46.5% | | Gross Profit | $17.2 | $46.6 | -63.0% | | Gross Margin | 24.2% | 36.7% | -12.5 p.p. | | Operating Income (Loss) | $(10.0) | $20.0 | N/A | | Net Income (Loss) | $(17.2) | $10.8 | N/A | - The significant decrease in Display Solutions sales was primarily due to lower revenue from mobile OLED display driver ICs, caused by a slowdown in the Chinese smartphone market and a lack of secured 28nm 12-inch wafer capacity[154] - The decrease in gross margin was mainly due to inventory reserves and scrap costs for 12-inch display products and a lower utilization rate of the internal fabrication facility[157] Results of Operations – Comparison of Nine Months Ended September 30, 2022 and 2021 9M 2022 total revenues decreased 24.0% to $276.7 million due to Display Solutions, resulting in a 25.9% gross profit drop and net loss 9M 2022 vs 9M 2021 Performance Summary (in millions) | Metric | 9M 2022 | 9M 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $276.7 | $363.9 | -24.0% | | Standard Products Revenue | $248.1 | $333.6 | -25.6% | | Gross Profit | $85.2 | $114.9 | -25.9% | | Gross Margin | 30.8% | 31.6% | -0.8 p.p. | | Operating Income | $4.9 | $19.5 | -74.9% | | Net Income (Loss) | $(11.0) | $3.1 | N/A | - The decrease in standard products revenue was driven by a significant drop in Display Solutions, while Power Solutions revenue grew due to strong demand for MOSFETs and IGBTs[178] - The decrease in operating income was primarily due to a $29.8 million decrease in gross profit, partially offset by a $13.8 million decrease in Merger-related costs which were present in 2021[190] Liquidity and Capital Resources As of Sep 30, 2022, the company held $250.8 million in cash, with working capital at $304.7 million, and management deems liquidity sufficient - As of September 30, 2022, cash and cash equivalents were $241.3 million, with 96% held by the Korean subsidiary[202] - Working capital decreased by $19.0 million since December 31, 2021, primarily due to a decrease in cash and other receivables[203] Cash Flow Summary for Nine Months Ended Sep 30, 2022 (in millions) | Category | Amount | | :--- | :--- | | Cash from Operating Activities | $50.2 | | Cash used in Investing Activities | $(25.9) | | Cash used in Financing Activities | $(3.7) | - Capital expenditures for the nine months ended September 30, 2022, were $11.8 million, a decrease of 11.6% from the prior year[208] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign currency exposure, mainly USD-KRW fluctuations, partially mitigated by derivative contracts - The company is primarily exposed to market risk from foreign currency exchange rate fluctuations, mainly the Korean won versus the U.S. dollar[213][214] - A 10% devaluation of the Korean won against the U.S. dollar would have resulted in a $1.2 million decrease in the value of financial instruments and cash balances as of September 30, 2022[214] - The company utilizes foreign currency zero cost collar contracts to mitigate a portion of the impact of U.S. dollar-Korean won exchange rate fluctuations[145][215] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of Sep 30, 2022, with no material changes to internal controls - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[217] - There were no material changes in the company's internal control over financial reporting during the third quarter of 2022[218] PART II OTHER INFORMATION Item 1. Legal Proceedings This section refers to the 2021 Form 10-K for legal proceedings, indicating no material updates in the current quarter - For a discussion of legal proceedings, the report refers to "Part I: Item 3. Legal Proceedings" of the company's 2021 Form 10-K[220] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the 2021 Form 10-K and prior Form 10-Q are reported - There have been no material changes to the risk factors disclosed in the company's 2021 Form 10-K and the prior Form 10-Q[224] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details stock repurchase activities, including 324,643 shares repurchased for $3.6 million and an expanded program to $87.5 million Common Stock Repurchases in Q3 2022 | Period | Total Shares Purchased | Average Price Paid per Share | Value of Shares Remaining for Purchase (in thousands) | | :--- | :--- | :--- | :--- | | July 2022 | — | — | — | | August 2022 | — | — | — | | September 2022 | 324,643 | $11.21 | $46,362 | - On August 31, 2022, the Board of Directors authorized an expansion of the stock repurchase program from $75 million to $87.5 million[226] Item 3. Defaults Upon Senior Securities This item is not applicable, indicating no defaults upon senior securities during the reporting period - Not applicable[227] Item 4. Mine Safety Disclosures This item is not applicable, as the company's operations do not involve mine safety - Not applicable[228] Item 5. Other Information There is no other information to report for this item - None[229] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements, certifications, and XBRL data files - The report includes exhibits such as management compensation agreements, amendments to key contracts, CEO/CFO certifications, and XBRL interactive data files[230]