QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| Large accelerated filer | ☐ | ☒ | ||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||
| Emerging growth company | ||||||
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
| Page No. | ||||||
| 3 | ||||||
| Item 1. |
3 | |||||
| 3 | ||||||
| 4 | ||||||
| 5 | ||||||
| 6 | ||||||
| 7 | ||||||
| Magnachip Semiconductor Corporation and Subsidiaries Notes to Consolidated Financial Statements |
8 | |||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
24 | ||||
| Item 3. |
44 | |||||
| Item 4. |
45 | |||||
| 46 | ||||||
| Item 1. |
46 | |||||
| Item 1A. |
46 | |||||
| Item 2. |
47 | |||||
| Item 3. |
47 | |||||
| Item 4. |
47 | |||||
| Item 5. |
47 | |||||
| Item 6. |
48 | |||||
| 49 | ||||||
2
Item 1. |
Interim Consolidated Financial Statements (Unaudited) |
March 31, 2024 |
December 31, 2023 |
|||||||
(In thousands of U.S. dollars, except share data) |
||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | $ | ||||||
Accounts receivable, net |
||||||||
Inventories, net |
||||||||
Other receivables |
||||||||
Prepaid expenses |
||||||||
Hedge collateral (Note 6) |
||||||||
Other current assets (Note 16) |
||||||||
Total current assets |
||||||||
Property, plant and equipment, net |
||||||||
Operating lease right-of-use |
||||||||
Intangible assets, net |
||||||||
Long-term prepaid expenses |
||||||||
Deferred income taxes |
||||||||
Other non-current assets |
||||||||
Total assets |
$ | $ | ||||||
Liabilities and Stockholders’ Equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | $ | ||||||
Other accounts payable |
||||||||
Accrued expenses (Note 5) |
||||||||
Accrued income taxes |
||||||||
Operating lease liabilities |
||||||||
Other current liabilities |
||||||||
Total current liabilities |
||||||||
Long-term borrowing |
||||||||
Accrued severance benefits, net |
||||||||
Non-current operating lease liabilities |
||||||||
Other non-current liabilities |
||||||||
Total liabilities |
||||||||
Commitments and contingencies (Note 16) |
||||||||
Stockholders’ equity |
||||||||
Common stock, $ |
||||||||
Additional paid-in capital |
||||||||
Retained earnings |
||||||||
Treasury stock, |
( |
) | ( |
) | ||||
Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
Total stockholders’ equity |
||||||||
Total liabilities and stockholders’ equity |
$ | $ | ||||||
Three Months Ended |
||||||||
March 31, 2024 |
March 31, 2023 |
|||||||
(In thousands of U.S. dollars, except share data) |
||||||||
Revenues: |
||||||||
Net sales – standard products business |
$ | $ | ||||||
Net sales – transitional Fab 3 foundry services |
||||||||
Total revenues |
||||||||
Cost of sales: |
||||||||
Cost of sales – standard products business |
||||||||
Cost of sales – transitional Fab 3 foundry services |
||||||||
Total cost of sales |
||||||||
Gross profit |
||||||||
Operating expenses: |
||||||||
Selling, general and administrative expenses |
||||||||
Research and development expenses |
||||||||
Early termination charges |
||||||||
Total operating expenses |
||||||||
Operating loss |
( |
) | ( |
) | ||||
Interest income |
||||||||
Interest expense |
( |
) | ( |
) | ||||
Foreign currency loss, net |
( |
) | ( |
) | ||||
Other income (expense), net |
( |
) | ||||||
Loss before income tax expense |
( |
) | ( |
) | ||||
Income tax benefit |
( |
) | ( |
) | ||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Basic loss per common share— |
$ | ( |
) | $ | ( |
) | ||
Diluted loss per common share— |
$ | ( |
) | $ | ( |
) | ||
Weighted average number of shares— |
||||||||
Basic |
||||||||
Diluted |
||||||||
Three Months Ended |
||||||||
March 31, 2024 |
March 31, 2023 |
|||||||
(In thousands of U.S. dollars) |
||||||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Other comprehensive loss |
||||||||
Foreign currency translation adjustments |
( |
) | ( |
) | ||||
Derivative adjustments |
||||||||
Fair valuation of derivatives |
( |
) | ( |
) | ||||
Reclassification adjustment for loss on derivatives included in net loss |
||||||||
Total other comprehensive loss |
( |
) | ( |
) | ||||
Total comprehensive loss |
$ | ( |
) | $ | ( |
) | ||
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
|||||||||||||||||||||||||||
Common Stock |
Retained Earnings |
Treasury Stock |
Total |
|||||||||||||||||||||||||
(In thousands of U.S. dollars, except share data) |
Shares |
Amount |
||||||||||||||||||||||||||
Three Months Ended March 31, 2024: |
||||||||||||||||||||||||||||
Balance at December 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Settlement of restricted stock units |
( |
) | — | — | — | — | ||||||||||||||||||||||
Acquisition of treasury stock |
( |
) | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
Other comprehensive loss, net |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Net loss |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
Balance at March 31, 2024 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
Three Months Ended March 31, 2023: |
||||||||||||||||||||||||||||
Balance at December 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Exercise of stock options |
— | — | — | |||||||||||||||||||||||||
Settlement of restricted stock units |
( |
) | — | — | — | — | ||||||||||||||||||||||
Acquisition of treasury stock |
( |
) | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
Other comprehensive loss, net |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||
Net loss |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
Balance at March 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
Three Months Ended |
||||||||
March 31, 2024 |
March 31, 2023 |
|||||||
(In thousands of U.S. dollars) |
||||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities |
||||||||
Depreciation and amortization |
||||||||
Provision for severance benefits |
||||||||
Loss on foreign currency, net |
||||||||
Provision for inventory reserves |
( |
) | ||||||
Stock-based compensation |
||||||||
Deferred income taxes |
( |
) | ||||||
Other, net |
||||||||
Changes in operating assets and liabilities |
||||||||
Accounts receivable, net |
||||||||
Inventories |
||||||||
Other receivables |
( |
) | ||||||
Prepaid expenses |
||||||||
Other current assets |
||||||||
Accounts payable |
||||||||
Other accounts payable |
( |
) | ( |
) | ||||
Accrued expenses |
( |
) | ||||||
Accrued income taxes |
( |
) | ||||||
Other current liabilities |
( |
) | ( |
) | ||||
Other non-current liabilities |
( |
) | ( |
) | ||||
Payment of severance benefits |
( |
) | ( |
) | ||||
Other, net |
( |
) | ( |
) | ||||
Net cash provided by (used in) operating activities |
( |
) | ||||||
Cash flows from investing activities |
||||||||
Proceeds from settlement of hedge collateral |
||||||||
Payment of hedge collateral |
( |
) | ||||||
Purchase of property, plant and equipment |
( |
) | ( |
) | ||||
Payment for intellectual property registration |
( |
) | ( |
) | ||||
Collection guarantee deposits |
||||||||
Payment of guarantee deposits |
( |
) | ( |
) | ||||
Other, net |
||||||||
Net cash used in investing activities |
( |
) | ( |
) | ||||
Cash flows from financing activities |
||||||||
Proceeds from long-term borrowing |
||||||||
Proceeds from exercise of stock options |
||||||||
Acquisition of treasury stock |
( |
) | ( |
) | ||||
Repayment of financing related to water treatment facility arrangement |
( |
) | ( |
) | ||||
Repayment of principal portion of finance lease liabilities |
( |
) | ( |
) | ||||
Net cash provided by (used in) financing activities |
( |
) | ||||||
Effect of exchange rates on cash and cash equivalents |
( |
) | ( |
) | ||||
Net increase (decrease) in cash and cash equivalents |
( |
) | ||||||
Cash and cash equivalents at beginning of period |
||||||||
Cash and cash equivalents at end of period |
$ | $ | ||||||
Supplemental cash flow information |
||||||||
Cash paid for income taxes |
$ | $ | ||||||
Non-cash investing activities |
||||||||
Property, plant and equipment additions in other accounts payable |
$ | $ | ||||||
Non-cash financing activities |
||||||||
Unsettled common stock repurchases |
$ | — | $ | |||||
March 31, 2024 |
December 31, 2023 |
|||||||
Finished goods |
$ | $ | ||||||
Semi-finished goods and work-in-process |
||||||||
Raw materials |
||||||||
Materials in-transit |
||||||||
Less: inventory reserve |
( |
) | ( |
) | ||||
Inventories, net |
$ | $ | ||||||
Three Months Ended |
||||||||
March 31, 2024 |
March 31, 2023 |
|||||||
Beginning balance |
$ | ( |
) | $ | ( |
) | ||
Change in reserve |
||||||||
Inventory reserve charged to costs of sales |
( |
) | ( |
) | ||||
Sale of previously reserved inventory |
||||||||
| ( |
) | |||||||
Write off |
||||||||
Translation adjustments |
||||||||
Ending balance |
$ | ( |
) | $ | ( |
) | ||
March 31, 2024 |
December 31, 2023 |
|||||||
Buildings and related structures |
$ | $ | ||||||
Machinery and equipment |
||||||||
Finance lease right-of-use |
||||||||
Others |
||||||||
Less: accumulated depreciation |
( |
) | ( |
) | ||||
Land |
||||||||
Construction in progress |
||||||||
Property, plant and equipment, net |
$ | $ | ||||||
March 31, 2024 |
||||||||||||
Gross amount |
Accumulated amortization |
Net amount |
||||||||||
Intellectual property assets |
$ | $ | ( |
) | $ | |||||||
Intangible assets |
$ | $ | ( |
) | $ | |||||||
December 31, 2023 |
||||||||||||
Gross amount |
Accumulated amortization |
Net amount |
||||||||||
Intellectual property assets |
$ | $ | ( |
) | $ | |||||||
Intangible assets |
$ | $ | ( |
) | $ | |||||||
March 31, 2024 |
December 31, 2023 |
|||||||
Payroll, benefits and related taxes, excluding severance benefits |
$ | $ | ||||||
Withholding tax attributable to intercompany interest income |
||||||||
Outside service fees |
||||||||
Others |
||||||||
Accrued expenses |
$ | $ | ||||||
Date of transaction |
Total notional amount |
Month of settlement | ||||
| $ | ||||||
| $ | ||||||
Date of transaction |
Total notional amount |
Month of settlement | ||||
| $ | ||||||
| $ | ||||||
Derivatives designated as hedging instruments: |
March 31, 2024 |
December 31, 2023 |
||||||||
Asset Derivatives: |
||||||||||
Zero cost collars |
Other current assets | $ | $ | |||||||
Liability Derivatives: |
||||||||||
Zero cost collars |
Other current liabilities | $ | $ | |||||||
As of March 31, 2024 |
Gross amounts of recognized liabilities |
Gross amounts offset in the balance sheets |
Net amounts of liabilities presented in the balance sheets |
Gross amounts not offset in the balance sheets |
Net amount |
|||||||||||||||||||
Financial instruments |
Cash collateral pledged |
|||||||||||||||||||||||
Liability Derivatives: |
||||||||||||||||||||||||
Zero cost collars |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
As of December 31, 2023 |
Gross amounts of recognized assets/liabilities |
Gross amounts offset in the balance sheets |
Net amounts of assets/liabilities presented in the balance sheets |
Gross amounts not offset in the balance sheets |
Net amount |
|||||||||||||||||||
Financial instruments |
Cash collateral pledged |
|||||||||||||||||||||||
Asset Derivatives: |
||||||||||||||||||||||||
Zero cost collars |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Liability Derivatives: |
||||||||||||||||||||||||
Zero cost collars |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Derivatives in ASC 815 Cash Flow Hedging Relationships |
Amount of Loss Recognized in AOCI on Derivatives |
Location/Amount of Loss Reclassified from AOCI Into Statement of Operations |
Location/Amount of Gain (Loss) Recognized in Statement of Operations on Derivatives |
|||||||||||||||||||||||||
Three Months Ended March 31, |
Three Months Ended March 31, |
Three Months Ended March 31, |
||||||||||||||||||||||||||
2024 |
2023 |
2024 |
2023 |
2024 |
2023 |
|||||||||||||||||||||||
Zero cost collars |
$ | ( |
) | $ | ( |
) | Net sales | $ | ( |
) | $ | ( |
) | Other income, net | $ | $ | ( |
) | ||||||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | |||||||||||||
Counterparty |
March 31, 2024 |
December 31, 2023 |
||||||
SC |
$ | $ | ||||||
Total |
$ | $ | ||||||
Carrying Value March 31, 2024 |
Fair Value Measurement March 31, 2024 |
Quoted Prices in Active Markets for Identical Liability (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||||||
Liabilities: |
||||||||||||||||||||
(other current liabilities) |
$ | $ | — | $ | — | |||||||||||||||
Carrying Value December 31, 2023 |
Fair Value Measurement December 31, 2023 |
Quoted Prices in Active Markets for Identical Liability (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||||||
Assets: |
||||||||||||||||||||
(other current assets) |
$ | $ | — | $ | — | |||||||||||||||
Liabilities: |
||||||||||||||||||||
(other current liabilities) |
$ | $ | — | $ | — | |||||||||||||||
Three Months Ended |
||||||||
March 31, 2024 |
March 31, 2023 |
|||||||
Beginning balance |
$ | $ | ||||||
Provisions |
||||||||
Severance payments |
( |
) | ( |
) | ||||
Translation adjustments |
( |
) | ( |
) | ||||
Less: Cumulative contributions to severance insurance deposit accounts |
( |
) | ( |
) | ||||
The National Pension Fund |
( |
) | ( |
) | ||||
Group severance insurance plan |
( |
) | ||||||
Accrued severance benefits, net |
$ | $ | ||||||
Severance benefit |
||||
Remainder of 2024 |
$ | |||
2025 |
$ | |||
2026 |
$ | |||
2027 |
$ | |||
2028 |
$ | |||
2029 |
$ | |||
2030 — 2034 |
$ | |||
MSS |
PAS |
Total |
||||||||||||||
| Display Solutions |
$ | $ | $ | $ | ||||||||||||
| Power Solutions |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| $ | $ | $ | $ | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Three Months Ended |
||||||||
March 31, 2024 |
March 31, 2023 |
|||||||
| Revenues |
||||||||
| Standard products business |
||||||||
| Mixed-Signal Solutions |
$ | $ | ||||||
| Power Analog Solutions |
||||||||
| |
|
|
|
|||||
| Total standard products business |
$ | $ | ||||||
| Transitional Fab 3 foundry services |
||||||||
| |
|
|
|
|||||
| Total revenues |
$ | $ | ||||||
| |
|
|
|
|||||
Three Months Ended |
||||||||
March 31, 2024 |
March 31, 2023 |
|||||||
| Gross Profit |
||||||||
| Standard products business |
||||||||
| Mixed-Signal Solutions |
$ | $ | ||||||
| Power Analog Solutions |
||||||||
| |
|
|
|
|||||
| Total standard products business |
$ | $ | ||||||
| Transitional Fab 3 foundry services |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total gross profit |
$ | $ | ||||||
| |
|
|
|
|||||
Three Months Ended |
||||||||
March 31, 2024 |
March 31, 2023 |
|||||||
| Korea |
$ | $ | ||||||
| Asia Pacific (other than Korea) |
||||||||
| United States |
||||||||
| Europe |
||||||||
| |
|
|
|
|||||
| Total |
$ | $ | ||||||
| |
|
|
|
|||||
March 31, 2024 |
December 31, 2023 |
|||||||
Foreign currency translation adjustments |
$ | ( |
) | $ | ( |
) | ||
Derivative adjustments |
||||||||
Total |
$ | ( |
) | $ | ( |
) | ||
Three Months Ended March 31, 2024 |
Foreign currency translation adjustments |
Derivative adjustments |
Total |
|||||||||
Beginning balance |
$ | ( |
) | $ | $ | ( |
) | |||||
Other comprehensive loss before reclassifications |
( |
) | ( |
) | ( |
) | ||||||
Amounts reclassified from accumulated other comprehensive loss |
||||||||||||
Net current-period other comprehensive loss |
( |
) | ( |
) | ( |
) | ||||||
Ending balance |
$ | ( |
) | $ | $ | ( |
) | |||||
Three Months Ended March 31, 2023 |
Foreign currency translation adjustments |
Derivative adjustments |
Total |
|||||||||
Beginning balance |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
Other comprehensive loss before reclassifications |
( |
) | ( |
) | ( |
) | ||||||
Amounts reclassified from accumulated other comprehensive loss |
||||||||||||
Net current-period other comprehensive loss |
( |
) | ( |
) | ( |
) | ||||||
Ending balance |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
Three Months Ended |
||||||||
March 31, 2024 |
March 31, 2023 |
|||||||
(In thousands of U.S. dollars, except share data) |
||||||||
Basic Loss per Share |
||||||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Basic weighted average common stock outstanding |
||||||||
Basic loss per share |
$ | ( |
) | $ | ( |
) | ||
Diluted Loss per Share |
||||||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Basic weighted average common stock outstanding |
||||||||
Net effect of dilutive equity awards |
||||||||
Diluted weighted average common stock outstanding |
||||||||
Diluted loss per share |
$ | ( |
) | $ | ( |
) | ||
Three Months Ended |
||||||||
March 31, 2024 |
March 31, 2023 |
|||||||
Options |
||||||||
Restricted Stock Units |
||||||||
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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, in “Part II: Item 1A. Risk Factors” herein and in “Part I: Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2023 filed on March 8, 2024 (“2023 Form 10-K”).
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 Report, unless the context otherwise requires, that 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.
23
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the related notes included elsewhere in this Report.
Overview
We are a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communication, Internet of Things (“IoT”), consumer, computing, industrial and automotive applications. We have a proven record with more than 40 years of operating history, a portfolio of approximately 1,100 registered patents and pending applications and extensive engineering and manufacturing process expertise.
On May 30, 2023, we announced a plan to regroup the business lines in our standard products business, originally grouped as Display Solutions and Power Solutions business lines, into the following two business lines to better align our product strategies (the “Reorganization”):
| (i) | Our display integrated circuit (“IC”) and power IC businesses, which are fabless, became the Mixed-Signal Solutions (“MSS”) business line; and |
| (ii) | Our power discrete business, which is an integrated device manufacturing (“IDM”) business, became the Power Analog Solutions (“PAS”) business line. |
On January 10, 2024, we transferred the MSS business line into a newly formed Korean limited liability company named “Magnachip Mixed-Signal, Ltd.” Following the Reorganization, our MSS business line is primarily operated by Magnachip Mixed-Signal, Ltd., and our PAS business line is primarily operated by Magnachip Semiconductor, Ltd., our already existing Korean operating entity. Both entities are indirect wholly owned subsidiaries of the Company.
Our MSS business line consist of display IC and power IC businesses. Our display IC products provide flat panel display solutions to major suppliers of large and small flat panel displays. These products include source and gate drivers and timing controllers that cover flat panel displays used in an array of applications, applied with liquid crystal display (“LCD”), organic light emitting diodes (“OLED”) or micro light emitting diode (“Micro LED”). Since 2007, we have designed and manufactured OLED display driver IC products. Our current portfolio of OLED solutions address various resolutions, ranging from HD (High Definition) to UHD (Ultra High Definition), for a wide range of applications, including smartphones, televisions, automotive and IT applications, such as monitors, notebook PCs and tablet PCs, as well as AR/VRs. Our power IC products provide power IC solutions to major television suppliers and large panel display suppliers. These products include AC-DC/DC-DC converters, LED drivers, regulators, power management integrated circuits (“PMICs”) and level shifter for a range of devices, including televisions, wearable devices, notebooks, tablet PCs and others consumer electronics, as well as automotive applications.
Our PAS business line produces power management semiconductor products, including power discrete solutions for power management in communication, consumer, computing, servers, automotive and industrial applications. These products include metal oxide semiconductor field effect transistors (“MOSFETs”) and insulated-gate bipolar transistors (“IGBTs”) for a range of devices, including televisions, smartphones, mobile phones, wearable devices, desktop PCs, notebook PCs, tablet PCs, other consumer electronics, as well as automotive and industrial applications such as power suppliers, e-bikes, solar inverters, LED lighting and motor drives.
Our wide variety of analog and mixed-signal semiconductor products combined with our mature technology platform allow us to address multiple high-growth end markets and rapidly develop and introduce new products and services in response to market demands. Our design center in Korea and substantial global manufacturing operations place us at the core of the global electronics device supply chain. We believe this enables us to quickly and efficiently respond to our customers’ needs, and allows us to better serve and capture additional demand from existing and new customers. Certain of our OLED display driver IC and power IC products are produced using external foundries. Through a strategic cooperation with external foundries, we manage to ensure outsourcing wafers at competitive price and produce quality products.
24
To maintain and increase our profitability, we must accurately forecast trends in demand for electronics devices that incorporate semiconductor products we produce. We must understand our customers’ needs as well as the likely end market trends and demand in the markets they serve. We must also invest in relevant research and development activities and purchase necessary materials on a timely basis to meet our customers’ demand while maintaining our target margins and cash flow.
The semiconductor markets in which we participate are highly competitive. The prices of our products tend to decrease regularly over their useful lives, and such price decreases can be significant as new generations of products are introduced by us or our competitors. We strive to offset the impact of declining selling prices for existing products through cost reductions and the introduction of new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to mitigate the risk of losses from product obsolescence.
Demand for our products and services is driven by overall demand for communication, IoT, consumer, industrial and automotive products and can be adversely affected by periods of weak consumer and enterprise spending or by market share losses by our customers. In order to mitigate the impact of market volatility on our business, we continually strive to diversify our portfolio of products, customers, and target applications. We also expect that new competitors will emerge in these markets that may place increased pressure on the pricing for our products and services. While we believe we are well positioned competitively to compete in these markets and against these new competitors as a result of our long operating history, existing manufacturing capacity and our worldwide customer base, if we are not effective in competing in these markets, our operating results may be adversely affected.
Net sales for our standard products business are driven by design wins in which we are selected by an electronics original equipment manufacturer (“OEM”) or other potential customer to supply its demand for a particular product. A customer will often have more than one supplier designed into multi-source components for a particular product line. Once we have design wins and the products enter into mass production, we often specify the pricing of a particular product for a set period of time, with periodic discussions and renegotiations of pricing with our customers. In any given period, our net sales depend heavily upon the end-market demand for the goods in which our products are used, the inventory levels maintained by our customers and, in some cases, allocation of demand for components for a particular product among selected qualified suppliers.
In contrast to completely fabless semiconductor companies, our internal manufacturing capacity provides us with greater control over certain manufacturing costs and the ability to implement process and production improvements for our internally manufactured products, which can favorably impact gross profit margins. Our internal manufacturing capacity also allows for better control over delivery schedules, improved consistency over product quality and reliability and improved ability to protect intellectual property from misappropriation on these internally manufactured products. However, having internal manufacturing capacity exposes us to the risk of under-utilization of manufacturing capacity that results in lower gross profit margins, particularly during downturns in the semiconductor industry.
Our standard products business requires investments in capital equipment. Analog and mixed-signal manufacturing facilities and processes are typically distinguished by the design and process implementation expertise rather than the use of the most advanced equipment. Many of these processes also tend to migrate more slowly to smaller geometries due to technological barriers and increased costs. For example, some of our products use high-voltage technology that requires larger geometries and that may not migrate to smaller geometries for several years, if at all. As a result, our manufacturing base and strategy do not require substantial investment in leading edge process equipment for those products, allowing us to utilize our facilities and equipment over an extended period of time with moderate required capital investments. In addition, we are less likely to experience significant industry overcapacity, which can cause product prices to decline significantly. In general, we seek to invest in manufacturing capacity that can be used for multiple high-value applications over an extended period of time. In addition, we outsource manufacturing of those products which do require advanced technology and 12-inch and 8-inch wafer capacity, such as OLED display driver IC and power IC products. We believe this balanced capital investment strategy enables us to optimize our capital investments and facilitates more diversified product and service offerings.
Since 2007, we had designed and manufactured OLED display driver ICs in our internal manufacturing facilities. As we expanded our design capabilities to products that require lower geometries unavailable at our existing manufacturing facilities, we began outsourcing manufacturing of certain OLED display driver ICs to external 12-inch foundries starting in the second half of 2015 and we have started outsourcing 8-inch wafer for OLED TV ICs and power ICs after the sale of our fabrication facility located in Cheongju, Korea in 2020. This additional source of manufacturing is an increasingly important part of our supply chain management. By outsourcing manufacturing of OLED display driver IC and power IC products to external foundries, we are able to adapt dynamically to changing customer requirements and address growing markets without substantial capital investments by us. However, relying on external foundries exposes us to the risk of being unable to secure manufacturing capacity, particularly during the global shortage of foundry services. Although we work strategically with external foundries to ensure long-term wafer capacity, if these efforts are at any time unsuccessful, our ability to deliver products to our customers may be negatively impacted, which would adversely affect our relationship with customers and opportunities to secure new design-wins.
25
Our success going forward will depend upon our ability to adapt to future challenges such as the emergence of new competitors for our products and services or the consolidation of current competitors. Additionally, we must innovate to remain ahead of, or at least rapidly adapt to, technological breakthroughs that may lead to a significant change in the technology necessary to deliver our products and services. We believe that our established relationships and close collaboration with leading customers enhance our awareness of new product opportunities, market and technology trends and improve our ability to adapt and grow successfully.
26
Recent Developments
Loan Agreement
On March 26, 2024, Magnachip Semiconductor, Ltd., a Korean limited liability company (“MSK”) and indirect wholly owned subsidiary of the Company, executed a Standard Credit Agreement (together with its General Terms and Conditions, the “Loan Agreement”) with Korea Development Bank (“KDB”). In connection with the Loan Agreement, on March 26, 2024, MSK entered into a Kun-Pledge (Mortgage) Agreement (the “Pledge Agreement”) with KDB pursuant to which MSK pledged its real property and buildings located in Gumi, Korea (“Fab 3 properties”) in favor of KDB.
The Loan Agreement provides for a working capital term loan (the “Term Loan”) of KRW 40,000,000,000 (approximately $29.8 million based on the KRW/USD exchange rate of 1,340.7:1 as of March 26, 2024 as quoted by KEB Hana Bank), which was funded in full to MSK on March 26, 2024.
The Term Loan bears interest at a variable rate equal to the 3-month CD rate quoted by KDB, plus 1.21%, which rate is adjusted quarterly. The initial interest rate on the Term Loan was 4.86% per annum. The Term Loan requires monthly interest-only payments and matures on March 26, 2027, at which time the full principal balance will be due and payable. All obligations of MSK under the Loan Agreement and the Term Loan are secured by the Fab 3 properties pursuant to the Pledge Agreement.
New Stock Repurchase Program
On July 19, 2023, our Board of Directors authorized a new $50 million stock buyback program. Purchases have been and will be made in the open market or in privately negotiated transactions, depending upon market conditions and other factors.
From August 2023 to December 2023, we repurchased 1,730,173 shares of our common stock in the open market for an aggregate purchase price of $13.6 million and a weighted average price per share of $7.84 under the new stock repurchase program.
During the first quarter of 2024, we repurchased 626,279 shares of our common stock in the open market for an aggregate purchase price of $4.1 million and a weighted average price per share of $6.57 under the new stock repurchase program.
Macroeconomic Industry Conditions
The semiconductor industry continues to face a number of macroeconomic challenges, including rising inflation, increased interest rates, supply chain disruptions, inventory corrections, shifting customer and end-user demand, fluctuations in currency rates, and geopolitical tensions, including without limitation ongoing conflicts involving Russia and Ukraine and Israel and Hamas including sustained military action and conflict in the Red Sea and recent escalations between Iran and Israel, any one of and all of which may cause volatility and unpredictability in the market for semiconductor products and end-user demand. The length and severity of these macroeconomic events and their overall impact on our business, results of operations and financial condition remain uncertain.
Developments in Export Control Regulations
On October 7, 2022, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce published changes to U.S. export control regulations (U.S. Export Regulations), including new restrictions on Chinese entities’ ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. Further, on October 12, 2022, a new rule went into effect requiring U.S. persons to obtain a license prior to engaging in certain activities that could “support” certain end-uses and end-users, including those related to weapons of mass destruction. Additionally, on October 21, 2022, BIS brought into effect a series of new Foreign Direct Product (FDP) rules and various new controls on advanced computing items, significantly expanding the scope of items that are subject to export control under the U.S. Export Regulations. More recently, on October 25, 2023, BIS published additional rules, which went into effect on November 17, 2023 to expand, clarify, and correct the rules published in October 2022. A further corrected and clarified version of these rules went into effect on April 4, 2024. Based on our understanding of the U.S. Export Regulations and related rules currently in effect, we do not anticipate that they will have a material impact on our current business, but we will continue reviewing and assessing these rules and regulations and their potential impact on our business. Additional changes to the U.S. Export Regulations are expected, but the scope or timing of such changes is unknown. We will continue to monitor such developments, including potential additional trade restrictions, and other regulatory or policy changes by the U.S. and foreign governments.
27
Explanation and Reconciliation of Non-U.S. GAAP Measures
Adjusted EBITDA, Adjusted Operating Income (Loss) and Adjusted Net Income (Loss)
We use the terms Adjusted EBITDA, Adjusted Operating Income (Loss) and Adjusted Net Income (Loss) (including on a per share basis) in this Report. Adjusted EBITDA, as we define it, is a non-U.S. GAAP measure. We define Adjusted EBITDA for the periods indicated as EBITDA (as defined below), adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss, net, (iii) derivative valuation loss (gain), net and (iv) early termination charges. EBITDA for the periods indicated is defined as net income (loss) before interest income, interest expense, income tax benefit, and depreciation and amortization.
See the footnotes to the table below for further information regarding these items. We present Adjusted EBITDA as a supplemental measure of our performance because:
| • | we believe that Adjusted EBITDA, by eliminating the impact of a number of items that we do not consider to be indicative of our core ongoing operating performance, provides a more comparable measure of our operating performance from period-to-period and may be a better indicator of future performance; |
| • | we believe that Adjusted EBITDA is commonly requested and used by securities analysts, investors and other interested parties in the evaluation of a company as an enterprise level performance measure that eliminates the effects of financing, income taxes and the accounting effects of capital spending, as well as other one time or recurring items described above; and |
| • | we believe that Adjusted EBITDA is useful for investors, among other reasons, to assess a company’s period-to-period core operating performance and to understand and assess the manner in which management analyzes operating performance. |
We use Adjusted EBITDA in a number of ways, including:
| • | for planning purposes, including the preparation of our annual operating budget; |
| • | to evaluate the effectiveness of our enterprise level business strategies; |
| • | in communications with our Board of Directors concerning our consolidated financial performance; and |
| • | in certain of our compensation plans as a performance measure for determining incentive compensation payments. |
We encourage you to evaluate each adjustment and the reasons we consider them appropriate. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Adjusted EBITDA is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to net income (loss) or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities as a measure of liquidity. A reconciliation of net loss to Adjusted EBITDA is as follows:
| Three Months Ended March 31, 2024 |
Three Months Ended March 31, 2023 |
|||||||
| (Dollars in millions) | ||||||||
| Net Loss |
$ | (15.4 | ) | $ | (21.5 | ) | ||
| Interest income |
(2.2 | ) | (2.8 | ) | ||||
| Interest expense |
0.2 | 0.3 | ||||||
| Income tax benefit |
(1.0 | ) | (1.2 | ) | ||||
| Depreciation and amortization |
4.1 | 4.4 | ||||||
| EBITDA |
(14.3 | ) | (20.9 | ) | ||||
| Adjustments: |
||||||||
| Equity-based compensation expense(a) |
0.9 | 1.1 | ||||||
| Foreign currency loss, net(b) |
5.0 | 3.4 | ||||||
| Derivative valuation loss, net(c) |
(0.0 | ) | 0.1 | |||||
| Early termination charges(d) |
— | 8.4 | ||||||
|
|
|
|
|
|||||
| Adjusted EBITDA |
$ | (8.4 | ) | $ | (7.9 | ) | ||
|
|
|
|
|
|||||
28
| (a) | This adjustment eliminates the impact of non-cash equity-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses as supplemental information. |
| (b) | This adjustment mainly eliminates the impact of non-cash foreign currency translation associated with intercompany debt obligations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily non-cash gains or losses, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results. |
| (c) | This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in U.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance. |
| (d) | For the three months ended March 31, 2023, this adjustment eliminates the termination related charges of $8.4 million in connection with the voluntary resignation program (the “Program”) that we offered to certain employees during the first quarter of 2023. As this adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is excluded. |
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
| • | Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
| • | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| • | Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; |
| • | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often need to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| • | Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees; |
| • | Adjusted EBITDA does not reflect the costs of holding certain assets and liabilities in foreign currencies; and |
| • | other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.
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We present Adjusted Operating Income (Loss) as supplemental measures of our performance. We prepare Adjusted Operating Income (Loss) by adjusting operating income (loss) to eliminate the impact of equity-based compensation expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted Operating Income (Loss) is useful to investors to provide a supplemental way to understand our underlying operating performance and allows investors to monitor and understand changes in our ability to generate income (loss) from ongoing business operations.
Adjusted Operating Income (Loss) is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to operating income (loss) or any other performance measure derived in accordance with U.S. GAAP. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Operating Income (Loss) differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Operating Income (Loss), you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Operating Income (Loss) for the periods indicated as operating income (loss) adjusted to exclude (i) equity-based compensation expense and (ii) early termination charges.
The following table summarizes the adjustments to operating loss that we make in order to calculate Adjusted Operating Loss for the periods indicated:
| Three Months Ended March 31, 2024 |
Three Months Ended March 31, 2023 |
|||||||
| (Dollars in millions) | ||||||||
| Operating loss |
$ | (13.5 | ) | $ | (21.8 | ) | ||
| Adjustments: |
||||||||
| Equity-based compensation expense(a) |
0.9 | 1.1 | ||||||
| Early termination charges(b) |
— | 8.4 | ||||||
|
|
|
|
|
|||||
| Adjusted Operating Loss |
$ | (12.6 | ) | $ | (12.2 | ) | ||
|
|
|
|
|
|||||
| (a) | This adjustment eliminates the impact of non-cash equity-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses as supplemental information. |
| (b) | For the three months ended March 31, 2023, this adjustment eliminates the termination related charges of $8.4 million in connection with the Program that we offered to certain employees during the first quarter of 2023. As this adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is excluded. |
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We present Adjusted Net Income (Loss) (including on a per share basis) as a further supplemental measure of our performance. We prepare Adjusted Net Income (Loss) (including on a per share basis) by adjusting net income (loss) to eliminate the impact of a number of non-cash expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted Net Income (Loss) (including on a per share basis) is particularly useful because it reflects the impact of our asset base and capital structure on our operating performance. We present Adjusted Net Income (Loss) (including on a per share basis) for a number of reasons, including:
| • | we use Adjusted Net Income (Loss) (including on a per share basis) in communications with our Board of Directors concerning our consolidated financial performance without the impact of non-cash expenses and the other items as we discussed below since we believe that it is a more consistent measure of our core operating results from period to period; and |
| • | we believe that reporting Adjusted Net Income (Loss) (including on a per share basis) is useful to readers in evaluating our core operating results because it eliminates the effects of non-cash expenses as well as the other items we discuss below, such as foreign currency gains and losses, which are out of our control and can vary significantly from period to period. |
Adjusted Net Income (Loss) (including on a per share basis) is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to net income (loss) or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities as a measure of liquidity. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Net Income (Loss) (including on a per share basis) differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Net Income (Loss) (including on a per share basis), you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Net Income (Loss) (including on a per share basis); for the periods indicated as net income (loss), adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss, net, (iii) derivative valuation loss (gain), net, (iv) early termination charges and (v) income tax effect on non-GAAP adjustments.
The following table summarizes the adjustments to net loss that we make in order to calculate Adjusted Net Loss (including on a per share basis) for the periods indicated:
| Three Months Ended March 31, 2024 |
Three Months Ended March 31, 2023 |
|||||||
| (Dollars in millions, except per share data) |
||||||||
| Net Loss |
$ | (15.4 | ) | $ | (21.5 | ) | ||
| Adjustments: |
||||||||
| Equity-based compensation expense(a) |
0.9 | 1.1 | ||||||
| Foreign currency loss, net(b) |
5.0 | 3.4 | ||||||
| Derivative valuation loss (gain), net(c) |
(0.0 | ) | 0.1 | |||||
| Early termination charges(d) |
— | 8.4 | ||||||
| Income tax effect on non-GAAP adjustments(e) |
(1.3 | ) | (1.9 | ) | ||||
|
|
|
|
|
|||||
| Adjusted Net Loss |
$ | (10.9 | ) | $ | (10.4 | ) | ||
|
|
|
|
|
|||||
| Reported loss per share—basic |
$ | (0.40 | ) | $ | (0.49 | ) | ||
| Reported loss per share—diluted |
$ | (0.40 | ) | $ | (0.49 | ) | ||
| Weighted average number of shares—basic |
38,544,781 | 43,390,832 | ||||||
| Weighted average number of shares—diluted |
38,544,781 | 43,390,832 | ||||||
| Adjusted loss per share—basic |
$ | (0.28 | ) | $ | (0.24 | ) | ||
| Adjusted loss per share—diluted |
$ | (0.28 | ) | $ | (0.24 | ) | ||
| Weighted average number of shares—basic |
38,544,781 | 43,390,832 | ||||||
| Weighted average number of shares—diluted |
38,544,781 | 43,390,832 | ||||||
| (a) | This adjustment eliminates the impact of non-cash equity-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses as supplemental information. |
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| (b) | This adjustment mainly eliminates the impact of non-cash foreign currency translation associated with intercompany debt obligations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily non-cash gains or losses, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results. |
| (c) | This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in U.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance. |
| (d) | For the three months ended March 31, 2023, this adjustment eliminates the termination related charges of $8.4 million in connection with the Program that we offered to certain employees during the first quarter of 2023. As this adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is excluded. |
| (e) | For the three months ended March 31, 2024 and 2023, income tax effect on non-GAAP adjustments were calculated by calculating the tax expense of each jurisdiction with or without the non-GAAP adjustments. For the three months ended March 31, 2024, income tax effect on non-GAAP adjustments related to our Korean subsidiaries and the U.S. parent entity were negative $1.1 million and negative $0.3 million, respectively. For the three months ended March 31, 2023, income tax effect on non-GAAP adjustments related to our Korean subsidiary and the U.S. parent entity were negative $1.2 million and negative $0.7 million, respectively. |
We believe that all adjustments to net income (loss) used to calculate Adjusted Net Income (Loss) was applied consistently to the periods presented.
Adjusted Net Income (Loss) has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
| • | Adjusted Net Income (Loss) does not reflect changes in, or cash requirements for, our working capital needs; |
| • | Adjusted Net Income (Loss) does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees; |
| • | Adjusted Net Income (Loss) does not reflect the costs of holding certain assets and liabilities in foreign currencies; and |
| • | Other companies in our industry may calculate Adjusted Net Income (Loss) differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted Net Income (Loss) should not be considered as a measure of profitability of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted Net Income (Loss) only as a supplement.
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Factors Affecting Our Results of Operations
Net Sales. We derive substantially all of our sales (net of sales returns and allowances) from our standard products business. We outsource manufacturing of mobile OLED products to external 12-inch foundries. Our product inventory is primarily located in Korea and is available for drop shipment globally. Outside of Korea, we maintain limited product inventory, and our sales representatives generally relay orders to our fabrication facility in Korea for fulfillment. We have strategically located our sales offices near concentrations of major customers. Our sales offices are located in Korea, Japan, Taiwan and Greater China. Our network of authorized agents and distributors is in the United States, Europe and the Asia Pacific region.
We recognize revenue when a customer obtains control of the product, which is generally upon product shipment, delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement. For the three months ended March 31, 2024 and 2023, we sold products to 129 and 120 customers, respectively, and our net sales to our ten largest customers represented 74% and 71% of our net sales—standard products business, respectively.
We are currently in the process of winding down the Transitional Fab 3 Foundry Services, which represented 7.2% and 9.6% of our total revenues for the three months ended March 31, 2024 and 2023, respectively.
Gross Profit. Our overall gross profit generally fluctuates as a result of changes in overall sales volumes and in the average selling prices of our products and services. Other factors that influence our gross profit include changes in product mix, the introduction of new products and services and subsequent generations of existing products and services, shifts in the utilization of our manufacturing facility and the yields achieved by our manufacturing operations, changes in material, labor and other manufacturing costs including outsourced manufacturing expenses, and variation in depreciation expense.
Average Selling Prices. Average selling prices for our products tend to be highest at the time of introduction of new products which utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products. We strive to offset the impact of declining selling prices for existing products through our product development activities and by introducing new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to preclude losses from product and productive capacity obsolescence.
Material Costs. Our material costs consist of costs of raw materials, such as silicon wafers, chemicals, gases and tape and packaging supplies. We use processes that require specialized raw materials, such as silicon wafers, that are generally available from a limited number of suppliers. If demand increases or supplies decrease, the costs of our raw materials could increase significantly.
Labor Costs. A significant portion of our employees are located in Korea. Under Korean labor laws, most employees and certain executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of March 31, 2024, 96% of our employees were eligible for severance benefits.
Depreciation Expense. We periodically evaluate the carrying values of long-lived assets, including property, plant and equipment and intangible assets, as well as the related depreciation periods. We depreciated our property, plant and equipment using the straight-line method over the estimated useful lives of our assets. Depreciation rates vary from 30-40 years on buildings to 3-12 years for certain equipment and assets. Our evaluation of carrying values is based on various analyses including cash flow and profitability projections. If our projections indicate that future undiscounted cash flows are not sufficient to recover the carrying value of the related long-lived assets, the carrying value of the assets is impaired and will be reduced, with the reduction charged to expense so that the carrying value is equal to fair value.
Selling Expenses. We sell our products worldwide through a direct sales force as well as a network of sales agents and representatives to OEMs, including major branded customers and contract manufacturers, and indirectly through distributors. Selling expenses consist primarily of the personnel costs for the members of our direct sales force, a network of sales representatives and other costs of distribution. Personnel costs include base salary, benefits and incentive compensation.
General and Administrative Expenses. General and administrative expenses consist of the costs of various corporate operations, including finance, legal, human resources and other administrative functions. These expenses primarily consist of payroll-related expenses, consulting and other professional fees and office facility-related expenses.
Research and Development. The rapid technological change and product obsolescence that characterize our industry require us to make continuous investments in research and development. Product development time frames vary but, in general, we incur research and development costs one to two years before generating sales from the associated new products. These expenses include personnel costs for members of our engineering workforce, cost of photomasks, silicon wafers and other non-recurring engineering
33
charges related to product design. Additionally, we develop base line process technology through experimentation and through the design and use of characterization wafers that help achieve commercially feasible yields for new products. The majority of research and development expenses of our display IC business are material and design-related costs for OLED display driver IC product development involving 28-nanometer or finer processes. The majority of research and development expenses of our power IC business are material and design-related costs for power IC products. Power IC uses standard BCD process technologies which can be sourced from multiple foundries. The majority of research and development expenses of our power discrete business are certain equipment, material and design-related costs for power discrete products.
Impact of Foreign Currency Exchange Rates on Reported Results of Operations. Historically, a portion of our revenues and cost of sales and greater than the majority of our operating expenses have been denominated in non-U.S. currencies, principally the Korean won, and we expect that this will remain true in the future. Because we report our results of operations in U.S. dollars converted from our non-U.S. revenues and expenses based on monthly average exchange rates, changes in the exchange rate between the Korean won and the U.S. dollar could materially impact our reported results of operations and distort period to period comparisons. In particular, because of the difference in the amount of our consolidated revenues and expenses that are in U.S. dollars relative to Korean won, depreciation in the U.S. dollar relative to the Korean won could result in a material increase in reported costs relative to revenues, and therefore could cause our profit margins and operating income to appear to decline materially, particularly relative to prior periods. The converse is true if the U.S. dollar were to appreciate relative to the Korean won. Moreover, our foreign currency gain or loss would be affected by changes in the exchange rate between the Korean won and the U.S. dollar as a substantial portion of non-cash translation gain or loss is associated with the intercompany long-term loans to one of our Korean subsidiaries, Magnachip Semiconductor, Ltd. or MSK, which is denominated in U.S. dollars. As of March 31, 2024, the outstanding intercompany loan balance including accrued interest between MSK and our Dutch subsidiary was $258.3 million. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our stock could be adversely affected.
From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. Our Korean subsidiary, Magnachip Semiconductor, Ltd., enters into foreign currency zero cost collar contracts in order to mitigate a portion of the impact of U.S. dollar-Korean won exchange rate fluctuations on our operating results. Obligations under these foreign currency zero cost collar contracts must be cash collateralized if our exposure exceeds certain specified thresholds. These zero cost collar contracts may be terminated by a counterparty in a number of circumstances, including if our total cash and cash equivalents is less than $30.0 million at the end of a fiscal quarter unless a waiver is obtained from the counterparty. We cannot assure that any hedging technique we implement will be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on our results of operations.
Foreign Currency Gain or Loss. Foreign currency translation gains or losses on transactions by us or our subsidiaries in a currency other than our or our subsidiaries’ functional currency are included in foreign currency gain (loss), net in our statements of operations. A substantial portion of this net foreign currency gain or loss relates to non-cash translation gain or loss related to the principal balance of intercompany balances at our Korean subsidiary, Magnachip Semiconductor, Ltd., that are denominated in U.S. dollars. This gain or loss results from fluctuations in the exchange rate between the Korean won and U.S. dollar.
Income Taxes. We record our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax basis of our assets and liabilities. We exercise significant management judgment in determining our provision for income taxes, deferred tax assets and liabilities. We assess whether it is more likely than not that the deferred tax assets existing at the period-end will be realized in future periods. In such assessment, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent results of operations. In the event we were to determine that we would be able to realize the deferred income tax assets in the future in excess of their net recorded amount, we would adjust the valuation allowance, which would reduce the provision for income taxes.
We are subject to income-or non-income-based tax examinations by tax authorities of the U.S., Korea and multiple other foreign jurisdictions for all open tax years. Significant estimates and judgments are required in determining our worldwide provision for income-or non-income based taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.
Capital Expenditures. We primarily invest in manufacturing equipment, software design tools and other tangible assets mainly for fabrication facility maintenance, capacity expansion and technology improvement. Capacity expansions and technology improvements typically occur in anticipation of increases in demand. We typically pay for capital expenditures in partial installments with portions due on order, delivery and final acceptance. Our capital expenditures mainly include our payments for the purchase of property, plant and equipment.
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Inventories. We monitor our inventory levels in light of product development changes and market expectations. We may be required to take additional charges for quantities in excess of demand, cost in excess of market value and product age. Our analysis may take into consideration historical usage, expected demand, anticipated sales price, new product development schedules, the effect new products might have on the sales of existing products, product age, customer design activity, customer concentration and other factors. These forecasts require us to estimate our ability to predict demand for current and future products and compare those estimates with our current inventory levels and inventory purchase commitments. Our forecasts for our inventory may differ from actual inventory use.
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Results of Operations – Comparison of Three Months Ended March 31, 2024 and 2023
In previous reporting periods, we categorized revenues from two business lines in our standard products business: the Display Solutions business line and the Power Solutions business line. As part of the Reorganization, we regrouped our standard products business into the Mixed-Signal Solutions business line, which comprises the display IC and power IC businesses, and the Power Analog Solutions business line, which comprises the power discrete business. Accordingly, effective as of the first quarter of fiscal 2024, we categorize our standard product business revenue by those two regrouped business lines. Certain reclassifications have been made to the prior period revenue presentation to conform to the current period revenue presentation.
The following table sets forth consolidated results of operations for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, 2024 |
Three Months Ended March 31, 2023 |
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| Amount | % of Total Revenues |
Amount | % of Total Revenues |
Change Amount |
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| (Dollars in millions) | ||||||||||||||||||||
| Revenues |
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| Net sales – standard products business |
$ | 45.5 | 92.8 | % | $ | 51.5 | 90.4 | % | $ | (6.0 | ) | |||||||||
| Net sales – transitional Fab 3 foundry services |
3.5 | 7.2 | 5.5 | 9.6 | (2.0 | ) | ||||||||||||||
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| Total revenues |
49.1 | 100.0 | 57.0 | 100.0 | (7.9 | ) | ||||||||||||||
| Cost of sales |
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| Cost of sales – standard products business |
35.9 | 73.1 | 37.3 | 65.5 | (1.4 | ) | ||||||||||||||
| Cost of sales – transitional Fab 3 foundry services |
4.2 | 8.6 | 7.6 | 13.3 | (3.4 | ) | ||||||||||||||
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| Total cost of sales |
40.1 | 81.7 | 44.9 | 78.8 | (4.8 | ) | ||||||||||||||
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| Gross profit |
9.0 | 18.3 | 12.1 | 21.2 | (3.1 | ) | ||||||||||||||
| Selling, general and administrative expenses |
11.3 | 23.0 | 12.2 | 21.3 | (0.9 | ) | ||||||||||||||
| Research and development expenses |
11.2 | 22.8 | 13.3 | 23.3 | (2.1 | ) | ||||||||||||||
| Early termination charges |
— | — | 8.4 | 14.8 | (8.4 | ) | ||||||||||||||
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| Operating loss |
(13.5 | ) | (27.4 | ) | (21.8 | ) | (38.3 | ) | 8.4 | |||||||||||
| Interest income |
2.2 | 4.5 | 2.8 | 5.0 | (0.6 | ) | ||||||||||||||
| Interest expense |
(0.2 | ) | (0.5 | ) | (0.3 | ) | (0.4 | ) | 0.0 | |||||||||||
| Foreign currency loss, net |
(5.0 | ) | (10.2 | ) | (3.4 | ) | (6.0 | ) | (1.6 | ) | ||||||||||
| Others, net |
0.0 | 0.1 | (0.0 | ) | (0.1 | ) | 0.1 | |||||||||||||
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| (3.0 | ) | (6.1 | ) | (0.9 | ) | (1.5 | ) | (2.1 | ) | |||||||||||
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| Loss before income tax benefit |
(16.4 | ) | (33.5 | ) | (22.7 | ) | (39.8 | ) | 6.3 | |||||||||||
| Income tax benefit |
(1.0 | ) | (2.1 | ) | (1.2 | ) | (2.2 | ) | 0.2 | |||||||||||
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| Net loss |
$ | (15.4 | ) | (31.4 | ) | $ | (21.5 | ) | (37.7 | ) | $ | 6.1 | ||||||||
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| Three Months Ended March 31, 2024 |
Three Months Ended March 31, 2023 |
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| Amount | % of Total Revenues |
Amount | % of Total Revenues |
Change Amount |
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| (Dollars in millions) | ||||||||||||||||||||
| Revenues |
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| Net sales – standard products business |
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| Mixed-Signal Solutions |
$ | 9.0 | 18.4 | % | $ | 12.8 | 22.5 | % | $ | (3.8 | ) | |||||||||
| Power Analog Solutions |
36.5 | 74.5 | 38.7 | 67.9 | (2.2 | ) | ||||||||||||||
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| Total standard products business |
45.5 | 92.8 | 51.5 | 90.4 | (6.0 | ) | ||||||||||||||
| Net sales – transitional Fab 3 foundry services |
3.5 | 7.2 | 5.5 | 9.6 | (2.0 | ) | ||||||||||||||
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| Total cost of sales |
$ | 49.1 | 100.0 | % | $ | 57.0 | 100.0 | % | $ | (7.9 | ) | |||||||||
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| Three Months Ended March 31, 2024 |
Three Months Ended March 31, 2023 |
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| Amount | % of Net Sales |
Amount | % of Net Sales |
Change Amount |
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| (Dollars in millions) | ||||||||||||||||||||
| Gross Profit |
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| Gross profit – standard products business |
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| Mixed-Signal Solutions |
$ | 4.0 | 44.6 | % | $ | 3.9 | 30.2 | % | $ | 0.2 | ||||||||||
| Power Analog Solutions |
5.6 | 15.4 | 10.3 | 26.7 | (4.7 | ) | ||||||||||||||
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| Total standard products business |
$ | 9.7 | 21.2 | % | $ | 14.2 | 27.6 | % | $ | (4.5 | ) | |||||||||
| Gross profit – transitional Fab 3 foundry services |
(0.7 | ) | (19.4 | ) | (2.1 | ) | (38.4 | ) | 1.4 | |||||||||||
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| Total gross profit |
$ | 9.0 | 18.3 | % | $ | 12.1 | 21.2 | % | $ | (3.1 | ) | |||||||||
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Revenues
Total revenues were $49.1 million for the three months ended March 31, 2024, a $7.9 million, or 13.9%, decrease compared to $57.0 million for the three months ended March 31, 2023. This decrease was primarily due to a decrease in revenue related to our standard products business as described below.
The standard products business. Net sales from our standard products business were $45.5 million for the three months ended March 31, 2024, a $6.0 million, or 11.6%, decrease compared to $51.5 million for the three months ended March 31, 2023.
Net sales from our Mixed-Signal Solutions business line decreased from $12.8 million for the three months ended March 31, 2023 to $9.0 million for the three months ended March 31, 2024. The decrease in net sales from our Mixed-Signal Solutions business line was primarily attributable to a decrease in revenue from our mobile OLED display driver ICs stemmed from slower than expected new design-wins and lower customer demand for legacy products, and weak demand for our auto-LCD display driver ICs also had an unfavorable impact on net sales. This decrease was offset in part by a higher demand for our Power IC products, primarily for televisions.
Net sales from our Power Analog Solutions business line decreased from $38.7 million for the three months ended March 31, 2023 to $36.5 million for the three months ended March 31, 2024. The decrease in net sales from our Power Analog Solutions business line was attributable to lower demand for power products such as high-end MOSFETs and IGBTs in the industrial segment, especially solar inverter and LED lighting. This decrease was offset in part by a higher demand for power products such as MOSFETs in the communication segment.
The transitional Fab 3 foundry services. Net sales from the transitional Fab 3 foundry services were $3.5 million and $5.5 million for the three months ended March 31, 2024 and 2023, respectively.
Gross Profit
Total gross profit was $9.0 million for the three months ended March 31, 2024 compared to $12.1 million for the three months ended March 31, 2023, a $3.1 million, or 25.8%, decrease. Gross profit as a percentage of net sales for the three months ended March 31, 2024 decreased to 18.3% compared to 21.2% for the three months ended March 31, 2023. The decrease in gross profit and gross profit as a percentage of net sales was primarily due to our standard products business as further described below.
The standard products business. Gross profit from our standard products business was $9.7 million for the three months ended March 31, 2024, which represented a $4.5 million, or 32.0%, decrease from gross profit of $14.2 million for the three months ended March 31, 2023. Gross profit as a percentage of net sales for the three months ended March 31, 2024 decreased to 21.2% compared to 27.6% for the three months ended March 31, 2023.
Gross profit from our Mixed-Signal Solutions business line was $4.0 million for the three months ended March 31, 2024, which represented a $0.2 million, or 3.9%, increase from gross profit of $3.9 million for the three months ended March 31, 2023. Gross profit as a percentage of net sales for the three months ended March 31, 2024 increased to 44.6% compared to 30.2% for the three months ended March 31, 2023. The year-over-year increase in gross profit as a percentage of net sales was primarily attributable to a reversal of certain inventory charge as such reserved inventory was subsequently sold to certain other customers.
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Gross profit from our Power Analog Solutions business line was $5.6 million for the three months ended March 31, 2024, which represented a $4.7 million, or 45.5%, decrease from gross profit of $10.3 million for the three months ended March 31, 2023. Gross profit as a percentage of net sales for the three months ended March 31, 2024 decreased to 15.4% compared to 26.7% for the three months ended March 31, 2023. The year-over-year decrease in gross profit as a percentage of net sales was primarily attributable to a lower utilization rate of our internal fabrication facility in Gumi and an unfavorable product mix.
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Net Sales – Standard Products Business by Geographic Region
We report net sales – standard products business by geographic region based on the location to which the products are billed. The following table sets forth our net sales—standard products business by geographic region and the percentage of total net sales—standard products business represented by each geographic region for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, 2024 |
Three Months Ended March 31, 2023 |
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| Amount | % of Net Sales – standard products business |
Amount | % of Net Sales – standard products business |
Change Amount |
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| (Dollars in millions) | ||||||||||||||||||||
| Korea |
$ | 18.1 | 39.8 | % | $ | 16.5 | 32.0 | % | $ | 1.6 | ||||||||||
| Asia Pacific (other than Korea) |
25.7 | 56.4 | 31.9 | 62.0 | (6.2 | ) | ||||||||||||||
| United States |
0.3 | 0.7 | 1.0 | 2.0 | (0.7 | ) | ||||||||||||||
| Europe |
1.4 | 3.1 | 2.1 | 4.0 | (0.7 | ) | ||||||||||||||
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| $ | 45.5 | 100.0 | % | $ | 51.5 | 100.0 | % | $ | (6.0 | ) | ||||||||||
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Net sales – standard products business in Korea increased from $16.5 million for the three months ended March 31, 2023 to $18.1 million for the three months ended March 31, 2024, or by $1.6 million, or 10.0%, primarily due to a higher demand for power products such as MOSFETs, primarily for smartphone applications, which was offset in part by a lower demand for high-end MOSFETS, primary for televisions. A higher demand for our Power IC products, primarily for televisions, also had a favorable impact on net sales.
Net sales – standard products business in Asia Pacific (other than Korea) decreased from $31.9 million in the three months ended March 31, 2023 to $25.7 million for the three months ended March 31, 2024, or by $6.2 million, or 19.5%, primarily due to a decrease in revenue from our mobile OLED display driver ICs stemmed from slower than expected new design-wins and lower customer demand for legacy products. The decreased demand for our power products such as IGBTs mainly for solar inverters in the industrial segment also had an unfavorable impact on net sales.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $11.3 million, or 23.0% of total revenues, for the three months ended March 31, 2024, compared to $12.2 million, or 21.3% of total revenues, for the three months ended March 31, 2023. The decrease of $0.9 million, or 7.4%, was primarily attributable to a decrease in employee compensation including certain incentives and benefit related accruals.
Research and Development Expenses. Research and development expenses were $11.2 million, or 22.8% of total revenues, for the three months ended March 31, 2024, compared to $13.3 million, or 23.3% of total revenues, for the three months ended March 31, 2023. The decrease of $2.1 million, or 16.1%, was primarily attributable to a decrease in material costs for our 28-nanometer OLED display driver ICs based on the timing of development activities.
Early Termination Charges. For the three months ended March 31, 2023, we recorded in our consolidated statement of operations $8.4 million of termination related charges in connection with the Program that we offered to certain employees during the first quarter of 2023.
Operating Loss
As a result of the foregoing, operating loss of $13.5 million was recorded for the three months ended March 31, 2024 compared to operating income of $21.8 million for the three months ended March 31, 2023. As discussed above, the decrease in operating loss of $8.4 million resulted primarily from an $8.4 million decrease in early termination charges, a $2.1 million decrease in research and development expenses and a $0.9 million decrease in selling, general and administrative expenses. This decrease in operating loss was offset in part by a $3.1 million decrease in gross profit.
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Other Income (Expense)
Interest Income. Interest income was $2.2 million and $2.8 million for the three months ended March 31, 2024 and March 31, 2023, respectively.
Interest Expense. Interest expense was $0.2 million and $0.3 million for the three months ended March 31, 2024 and March 31, 2023, respectively.
Foreign Currency Loss, Net. Net foreign currency loss for the three months ended March 31, 2024 was $5.0 million compared to net foreign currency loss of $3.4 million for the three months ended March 31, 2023. The net foreign currency loss for the three months ended March 31, 2024 and March 31, 2023 was due to the depreciation in value of the Korean won relative to the U.S. dollar during the period.
A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss associated with intercompany long-term loans to one of our Korean subsidiaries, which are denominated in U.S. dollars, and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of March 31, 2024 and March 31, 2023, the outstanding intercompany loan balances, including accrued interest between our Korean subsidiary, Magnachip Semiconductor, Ltd., and our Dutch subsidiary, were $258.3 million and $301.9 million, respectively. Foreign currency translation gain or loss from intercompany balances were included in determining our consolidated net income (loss) since the intercompany balances were not considered long-term investments in nature because management intended to settle these intercompany balances at their respective maturity dates.
Income Tax Benefit
Income tax benefit was $1.0 million for the three months ended March 31, 2024, which was primarily attributable to the estimated taxable loss in one of our Korean subsidiaries for the respective period.
Income tax benefit was $1.2 million for the three months ended March 31, 2023, which was primarily attributable to the estimated taxable loss in our then primary operating entity in Korea for the respective period.
Net Loss
As a result of the foregoing, a net loss of $15.4 million was recorded for the three months ended March 31, 2024 compared to a net loss of $21.5 million for the three months ended March 31, 2023. As discussed above, the $6.1 million improvement in net loss was primarily attributable to an $8.4 million decrease in operating loss, which was offset in part by a $1.6 million increase in net foreign currency loss and a $0.6 million decrease in interest income.
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Liquidity and Capital Resources
Our principal capital requirements are to fund sales and marketing, invest in research and development and capital equipment, to make debt service payments and to fund working capital needs. We calculate working capital as current assets less current liabilities.
Our principal sources of liquidity are our cash, cash equivalents, cash flows from operations and financing activities. Our ability to manage cash and cash equivalents may be limited, as our primary cash flows are dictated by the terms of our sales and supply agreements, contractual obligations, debt instruments and legal and regulatory requirements. From time to time, we may sell accounts receivable to third parties under factoring agreements or engage in accounts receivable discounting to facilitate the collection of cash. In addition, from time to time, we may make payments to our vendors on extended terms with their consent. As of March 31, 2024, we did not have any accounts payable on extended terms or payment deferment with our vendors.
As of June 29, 2018, our Korean subsidiary, Magnachip Semiconductor, Ltd., entered into an arrangement whereby it (i) acquired a water treatment facility from SK hynix for $4.2 million to support our fabrication facility in Gumi, Korea, and (ii) subsequently sold the water treatment facility for $4.2 million to a third party management company that we engaged to run the facility for a 10-year term beginning July 1, 2018. As of March 31, 2024, the outstanding obligation of this arrangement is approximately $18.5 million for remaining service term through 2028.
On March 26, 2024, our Korean subsidiary, Magnachip Semiconductor, Ltd., executed a Standard Credit Agreement (together with its General Terms and Conditions, the “Loan Agreement”) with Korea Development Bank (“KDB”). The Loan Agreement provides for a working capital term loan (the “Term Loan”) of KRW 40,000,000,000 (approximately $29.7 million based on the KRW/USD exchange rate of 1,346.8:1 as of March 31, 2024 as quoted by KEB Hana Bank). The Term Loan requires monthly interest-only payments and matures on March 26, 2027, at which time the full principal balance will be due and payable.
As of March 31, 2024, cash and cash equivalents held by our Korean subsidiaries were $154.5 million, which represents 90% of our total cash and cash equivalents on a consolidated basis. We currently believe that we will have sufficient cash reserves from cash on hand and expected cash from operations to fund our operations as well as capital expenditures for the next 12 months and the foreseeable future.
Working Capital
Our working capital balance as of March 31, 2024 was $213.3 million compared to $198.5 million as of December 31, 2023. The increase in working capital balance was mainly attributable to a $13.5 million increase in cash and cash equivalents resulted mainly from $29.7 million of Term Loan with KDB, which was funded in full to MSK on March 26, 2024. This increase in cash and cash equivalents was offset in part by a $4.1 million of continued execution of stock repurchase program.
Cash Flows from Operating Activities
Cash outflow used in operating activities totaled $4.0 million for the three months ended March 31, 2024, compared to $7.9 million of cash inflow provided by operating activities for the three months ended March 31, 2023. The net operating cash outflow for the three months ended March 31, 2024 reflects our net loss of $15.4 million, as adjusted favorably by $17.3 million, which mainly consisted of depreciation and amortization, provision for severance benefits, provision for inventory reserves, net foreign currency loss and stock-based compensation, and net unfavorable impact of $5.8 million from changes of operating assets and liabilities.
Cash Flows from Investing Activities
Cash outflow used in investing activities totaled $1.5 million for the three months ended March 31, 2024, compared to $3.6 million of cash outflow used in investing activities for the three months ended March 31, 2023. The $2.1 million decrease was primarily attributable to a $2.7 million net decrease in guarantee deposits, which was offset in part by a $0.5 million increase in purchase of property, plant and equipment.
Cash Flows from Financing Activities
Cash inflow provided by financing activities totaled $25.2 million for the three months ended March 31, 2024, compared to $12.4 million of cash outflow used in financing activities for the three months ended March 31, 2023. The financing cash inflow for the three months ended March 31, 2024 was primarily attributable to the $30.1 million of proceeds received from the new Term Loan with KDB, which was offset in part by a payment of $4.1 million for the repurchases of our common stock pursuant to our stock repurchase program and a payment of $0.5 million for the repurchase of our common stock to satisfy tax withholding obligations in
41
connection with the vesting of restricted stock units. The financing cash outflow for the three months ended March 31, 2023 was primarily attributable to a payment of $11.9 million for the repurchases of our common stock pursuant to our stock repurchase program and a payment of $0.4 million for the repurchase of our common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock units.
Capital Expenditures
We routinely make capital expenditures for fabrication facility maintenance, enhancement of our existing facility and reinforcement of our global research and development capability. For the three months ended March 31, 2024, capital expenditures for property, plant and equipment were $0.7 million, a $0.5 million, or 394.8%, increase from $0.1 million for the three months ended March 31, 2023. The capital expenditures for the three months ended March 31, 2024 and 2023 were related to meeting our customer demand and supporting technology and facility improvement at our fabrication facility.
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Critical Accounting Policies and Estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in our consolidated financial statements and accompanying notes.
We believe that our significant accounting policies, which are described further in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for our fiscal year ended December 31, 2023, or our 2023 Form 10-K, are critical due to the fact that they involve a high degree of judgment and estimates about the effects of matters that are inherently uncertain. We base these estimates and judgments on historical experience, knowledge of current conditions and other assumptions and information that we believe to be reasonable. Estimates and assumptions about future events and their effects cannot be determined with certainty. Accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the business environment in which we operate changes.
A description of our critical accounting policies that involve significant management judgement appears in our 2023 Form 10-K, under “Management’s Discussion and Analysis of Financial Conditions and Reports of Operations—Critical Accounting Policies and Estimates.” There have been no other material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates included in our 2023 Form 10-K.
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| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to the market risk that the value of a financial instrument will fluctuate due to changes in market conditions, primarily from changes in foreign currency exchange rates and interest rates. In the normal course of our business, we are subject to market risks associated with interest rate movements and currency movements on our assets and liabilities.
Foreign Currency Exposures
We have exposure to foreign currency exchange rate fluctuations on net income from our subsidiaries denominated in currencies other than U.S. dollars, as our foreign subsidiaries in Korea, Taiwan, China, Japan and Hong Kong use local currency as their functional currency. From time to time these subsidiaries have cash and financial instruments in local currency. The amounts held in Japan, Taiwan, Hong Kong and China are not material in regards to foreign currency movements. However, based on the cash and financial instruments balance at March 31, 2024 for our Korean subsidiaries, a 10% devaluation of the Korean won against the U.S. dollar would have resulted in a decrease of $3.5 million in our U.S. dollar financial instruments and cash balances.
See “Note 6. Derivative Financial Instruments” to our consolidated financial statements under “Item 1. Interim Consolidated Financial Statements” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Impact of Foreign Currency Exchange Rates on Reported Results of Operations” for additional information regarding our foreign exchange hedging activities.
Interest Rate Exposures
As of March 31, 2024, $29.7 million aggregate principal amount of our Term Loan was outstanding. The Term Loan bears interest at a variable rate equal to the 3-month CD rate quoted by KDB, plus 1.21%, which rate is adjusted quarterly until the Term Loan mature on March 26, 2027. We have interest rate exposure with respect to the $29.7 million of our variable interest rate debt outstanding under our Term Loan as of March 31, 2024. A 50 basis point increase in interest rates would increase our expected annual interest expense for the next 12 months by approximately $0.2 million.
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| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In connection with the preparation of this Report, we carried out an evaluation under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, as of March 31, 2024, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2024.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
For a discussion of legal proceedings, see “Part I: Item 3. Legal Proceedings” of our 2023 Form 10-K.
See also “Item 1A. Risk Factors” in this Report and “Part I: Item 1A. Risk Factors” of our 2023 Form 10-K for additional information.
| Item 1A. | Risk Factors |
The Company is subject to risks and uncertainties, any of which could have a significant or material adverse effect on our business, financial condition, liquidity or consolidated financial statements.
In addition to the other information contained in this Report and the other reports and materials the Company files with the SEC, investors should carefully consider the risk factors disclosed in Part I, Item 1A of our 2023 Form 10-K as well as in our subsequent filings with the SEC. The risks described herein and therein are not the only ones we face.
Except as set forth below, there have been no material changes to the risk factors disclosed in Part I, Item 1A of our 2023 Form 10-K.
Our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations under our debt instruments when they come due.
As of March 31, 2024, we had approximately $29.7 million aggregate principal amount of indebtedness under the working capital Term Loan borrowed under the Loan Agreement, which is secured by a pledge of our Fab 3 properties. We may also incur additional indebtedness to meet future financing needs. Our indebtedness could have significant negative consequences for our security holders and our business, results of operations and financial condition by, among other things:
| • | increasing our vulnerability to adverse economic and industry conditions; |
| • | limiting our ability to obtain additional financing on acceptable terms or at all; |
| • | requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, which will reduce the amount of cash available for other purposes; |
| • | limiting our flexibility to plan for, or react to, changes in our business; |
| • | exposing us to the risk of increased interest rates, as our Term Loan borrowing is at a variable rate of interest; and |
| • | placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital. |
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts due under our indebtedness and our cash needs may increase in the future. If we are unable to pay our indebtedness when due, including the Term Loan, the lenders may declare default and invoke remedies that could include the foreclosure on pledged collateral to satisfy such indebtedness, which would have a material adverse effect on our financial condition and results of operations.
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) |
Approximate dollar value of Shares that may yet be Purchased under the Plans or Programs (in thousands)(1) |
||||||||||||
January 2024 |
101,282 | $ | 6.69 | 101,282 | $ | 35,760 | ||||||||||
February 2024 |
524,997 | $ | 6.55 | 524,997 | $ | 32,323 | ||||||||||
March 2024 |
— | — | — | $ | 32,323 | |||||||||||
Total |
626,279 | $ | 6.57 | 626,279 | $ | 32,323 | ||||||||||
| (1) | On July 19, 2023, the Company’s Board of Directors authorized a new $50 million stock buyback program. Purchases have been and will be made in the open market or through privately negotiated transactions, depending upon market conditions and other factors. In connection with the repurchase program, the Company established a stock trading plan with Needham & Company, LLC in accordance with Rule 10b5-1 |
Item 3. |
Defaults Upon Senior Securities |
Item 4. |
Mine Safety Disclosures |
Item 5. |
Other Information |
Item 6. |
Exhibits. |
# |
Filed herewith |
| † | Furnished herewith |
MAGNACHIP SEMICONDUCTOR CORPORATION (Registrant) | ||||||
| Dated: May 10, 2024 | By: | /s/ Young-Joon Kim | ||||
| Young-Joon Kim | ||||||
Chief Executive Officer (Principal Executive Officer) | ||||||
| Dated: May 10, 2024 | By: | /s/ Shin Young Park | ||||
| Shin Young Park | ||||||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||||