Magnachip Semiconductor Earnings 2019-03-31

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2019

or

 

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

For the transition period from                  to                 .

Commission File Number: 001-34791

 

 

MagnaChip Semiconductor Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		83-0406195
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

c/o MagnaChip Semiconductor S.A.

1, Allée Scheffer, L-2520

Luxembourg, Grand Duchy of Luxembourg

(352) 45-62-62

(Address, zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller reporting company		☐
Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01 per share		MX		New York Stock Exchange

As of April 30, 2019, the registrant had 34,224,247 shares of common stock outstanding.

 

 

 

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

						Page No.
PART I FINANCIAL INFORMATION							3
		Item 1.		Interim Consolidated Financial Statements (Unaudited)			3
				MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018			3
				MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018			4
				MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018			5
				MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018			6
				MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018			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			29
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			49
		Item 4.		Controls and Procedures			50
PART II OTHER INFORMATION							51
		Item 1.		Legal Proceedings			51
		Item 1A.		Risk Factors			51
		Item 6.		Exhibits			52
SIGNATURES							53

 

2

PART I—FINANCIAL INFORMATION

 

Item 1.

Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

 

		March 31, 2019				December 31, 2018
		(In thousands of US dollars, except share data)
Assets
Current assets
Cash and cash equivalents		$	105,812			$	132,438
Accounts receivable, net			92,056				80,003
Unbilled accounts receivable			27,885				38,181
Inventories, net			80,794				71,611
Other receivables			8,035				3,702
Prepaid expenses			13,781				11,133
Hedge collateral (Note 8)			3,560				5,810
Other current assets (Note 17)			7,293				9,867
Total current assets			339,216				352,745
Property, plant and equipment, net (Notes 4 and 6)			201,738				202,171
Operating lease right-of-use assets			13,046				—
Intangible assets, net			3,900				3,953
Long-term prepaid expenses			13,028				15,598
Other non-current assets			9,038				8,729
Total assets		$	579,966			$	583,196
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	76,031			$	55,631
Other accounts payable			18,884				15,168
Accrued expenses			43,481				46,250
Deferred revenue			6,907				6,477
Other current liabilities (Notes 6 and 8)			4,531				9,133
Total current liabilities			149,834				132,659
Long-term borrowings, net			303,016				303,577
Non-current operating lease liabilities			10,975				—
Accrued severance benefits, net			144,502				146,031
Other non-current liabilities (Note 6)			17,950				18,239
Total liabilities			626,277				600,506
Commitments and contingencies (Note 17)
Stockholders’ equity
Common stock, $0.01 par value, 150,000,000 shares authorized, 43,230,535 shares issued and 34,223,502 outstanding at March 31, 2019 and 43,054,458 shares issued and 34,441,232 outstanding at December 31, 2018			433				431
Additional paid-in capital			143,315				142,600
Accumulated deficit			(70,430	)			(36,305	)
Treasury stock, 9,007,033 shares at March 31, 2019 and 8,613,226 shares at December 31, 2018, respectively			(106,511	)			(103,926	)
Accumulated other comprehensive loss			(13,118	)			(20,110	)
Total stockholders’ deficit			(46,311	)			(17,310	)
Total liabilities and stockholders’ equity		$	579,966			$	583,196

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

 

3

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

		Three Months Ended
		March 31, 2019				March 31, 2018
		(In thousands of US dollars, except share data)
Net sales		$	157,380			$	165,819
Cost of sales			134,679				121,238
Gross profit			22,701				44,581
Operating expenses
Selling, general and administrative expenses			18,070				17,622
Research and development expenses			20,018				19,580
Restructuring and other charges			2,894				—
Total operating expenses			40,982				37,202
Operating income (loss)			(18,281	)			7,379
Interest expense			(5,637	)			(5,463	)
Foreign currency gain (loss), net			(9,997	)			1,318
Loss on early extinguishment of long-term borrowings, net			(42	)			—
Other income, net			673				519
Income (loss) before income taxes			(33,284	)			3,753
Income tax expenses			841				990
Net income (loss)		$	(34,125	)		$	2,763
Earnings (loss) per common share—
Basic		$	(1.00	)		$	0.08
Diluted		$	(1.00	)		$	0.08
Weighted average number of shares—
Basic			34,194,878				34,253,111
Diluted			34,194,878				35,154,693

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

.

 

4

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

 

		Three Months Ended
		March 31, 2019				March 31, 2018
		(In thousands of US dollars)
Net income (loss)		$	(34,125	)		$	2,763
Other comprehensive income (loss)
Foreign currency translation adjustments			7,304				(483	)
Derivative adjustments
Fair valuation of derivatives			(499	)			(67	)
Reclassification adjustment for loss (gain) on derivatives included in net income (loss)			187				(2,606	)
Total other comprehensive income (loss)			6,992				(3,156	)
Total comprehensive loss		$	(27,133	)		$	(393	)

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

.

 

5

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

 

										Additional Paid-In Capital												Accumulated Other Comprehensive Loss
		Common Stock												Accumulated Deficit				Treasury Stock								Total
(In thousands of US dollars, except share data)		Shares				Amount
Three Months Ended March 31, 2019:
Balance at December 31, 2018, as previously reported			34,441,232			$	431			$	142,600			$	(36,305	)		$	(103,926	)		$	(20,110	)		$	(17,310	)
Stock-based compensation			—				—				669				—				—				—				669
Exercise of stock options			8,624				0				48				—				—				—				48
Settlement of restricted stock units			167,453				2				(2	)			—				—				—				—
Acquisition of treasury stock			(393,807	)			—				—				—				(2,585	)			—				(2,585	)
Other comprehensive income, net			—				—				—				—				—				6,992				6,992
Net loss			—				—				—				(34,125	)			—				—				(34,125	)
Balance at March 31, 2019			34,223,502			$	433			$	143,315			$	(70,430	)		$	(106,511	)		$	(13,118	)		$	(46,311	)
Three Months Ended March 31, 2018:
Balance at December 31, 2017, as previously reported			34,189,599			$	426			$	136,259			$	(40,889	)		$	(102,319	)		$	(33,114	)		$	(39,637	)
Impact of adopting the new revenue standard			—				—				—				8,484				—				—				8,484
Balance at January 1, 2018, as adjusted			34,189,599			$	426			$	136,259			$	(32,405	)		$	(102,319	)		$	(33,114	)		$	(31,153	)
Stock-based compensation			—				—				1,469				—				—				—				1,469
Exercise of stock options			21,894				1				142				—				—				—				143
Settlement of restricted stock units			163,466				1				(1	)			—				—				—				—
Other comprehensive loss, net			—				—				—				—				—				(3,156	)			(3,156	)
Net income			—				—				—				2,763				—				—				2,763
Balance at March 31, 2018			34,374,959			$	428			$	137,869			$	(29,642	)		$	(102,319	)		$	(36,270	)		$	(29,934	)

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

.

 

6

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

		Three Months Ended
		March 31, 2019				March 31, 2018
		(In thousands of US dollars)
Cash flows from operating activities
Net income (loss)		$	(34,125	)		$	2,763
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization			8,303				7,958
Provision for severance benefits			3,117				4,512
Amortization of debt issuance costs and original issue discount			571				532
Loss (gain) on foreign currency, net			11,720				(1,682	)
Restructuring and other charges			2,894				—
Stock-based compensation			669				1,469
Loss on early extinguishment of long-term borrowings, net			42				—
Other			96				(337	)
Changes in operating assets and liabilities
Accounts receivable, net			(12,844	)			3,115
Unbilled accounts receivable			9,726				(639	)
Inventories, net			(10,585	)			(13,150	)
Other receivables			(4,205	)			(3,746	)
Other current assets			1,836				(1,071	)
Accounts payable			20,874				3,168
Other accounts payable			2,725				(2,759	)
Accrued expenses			(5,365	)			(7,129	)
Deferred revenue			555				4,809
Other current liabilities			(6,848	)			(570	)
Other non-current liabilities			1,085				618
Payment of severance benefits			(2,263	)			(2,247	)
Other			347				465
Net cash used in operating activities			(11,675	)			(3,921	)
Cash flows from investing activities
Proceeds from settlement of hedge collateral			2,242				4,863
Purchase of plant, property and equipment			(11,207	)			(7,329	)
Payment for intellectual property registration			(232	)			(409	)
Collection of guarantee deposits			298				14
Payment of guarantee deposits			(892	)			—
Other			(10	)			(36	)
Net cash used in investing activities			(9,801	)			(2,897	)
Cash flows from financing activities
Repurchase of long-term borrowings			(1,175	)			—
Proceeds from exercise of stock options			48				142
Acquisition of treasury stock			(2,353	)			—
Repayment of financing related to water treatment facility arrangement			(143	)			—
Repayment of principal portion of finance lease liabilities			(59	)			—
Net cash provided by (used in) financing activities			(3,682	)			142
Effect of exchange rates on cash, cash equivalents and restricted cash			(1,468	)			1,237
Net decrease in cash, cash equivalents and restricted cash			(26,626	)			(5,439	)
Cash, cash equivalents and restricted cash
Beginning of the period			132,438				128,575
End of the period		$	105,812			$	123,136
Supplemental cash flow information
Cash paid for interest		$	9,549			$	9,609
Cash paid for income taxes		$	1,556			$	6
Non-cash investing activities
Property, plant and equipment additions in other accounts payable		$	2,643			$	1,202
Non-cash financing activities
Acquisition of treasury stock to satisfy the tax withholding obligations in connection with equity-based compensation		$	(232	)		$	—

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

 

7

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1. Business, Basis of Presentation and Significant Accounting Policies

Business

MagnaChip Semiconductor Corporation (together with its subsidiaries, the “Company”) is a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, Internet of Things (“IoT”) applications, consumer, industrial and automotive applications. The Company provides technology platforms for analog, mixed signal, power, high voltage, non-volatile memory and Radio Frequency (“RF”) applications. The Company’s business is comprised of two operating segments: Foundry Services Group and Standard Products Group. The Company’s Foundry Services Group provides specialty analog and mixed-signal foundry services mainly for fabless and Integrated Device Manufacturer (“IDM”) semiconductor companies that primarily serve communications, IoT, consumer, industrial and automotive applications. The Company’s Standard Products Group is comprised of two business lines: Display Solutions and Power Solutions. The Company’s Display Solutions products provide panel display solutions to major suppliers of large and small rigid and flexible panel displays, and mobile, automotive applications and home appliances. The Company’s Power Solutions products include discrete and integrated circuit solutions for power management in communications, consumer and industrial applications.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). These interim consolidated financial statements include normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair statement of the Company’s financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with Accounting Standards Codification 270, “Interim Reporting” and, accordingly, do not include all of the information and note disclosures required by US GAAP for complete financial statements, except for the changes below. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for a full year or for any other periods.

The December 31, 2018 balance sheet data was derived from the Company’s audited financial statements, but does not include all disclosures required by US GAAP.

Upon the adoption of Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) effective on January 1, 2019 (the “new lease standard”), the Company has updated its accounting policy for leases as detailed below.

Leases

The Company determines if an arrangement is a lease at inception of a contract considering whether the arrangement conveys the right to control the use of an identified asset over the period of use. Control of an underlying asset is conveyed if the Company has the right to direct the use of, and to obtain substantially all of the economic benefits from the use of, the identified asset. The Company accounts for lease transactions as either an operating or a finance lease, depending on the terms of the underlying lease arrangement. Assets related to operating leases are recorded on the balance sheet as operating lease right-of-use assets; the related liabilities are recorded as other current liabilities for the current portion and other non-current operating lease liabilities for the non-current portion. Finance lease right-of-use assets are included in property and equipment, net and the related lease liabilities are included in other current liabilities and other non-current liabilities on the consolidated balance sheets.

Right-of-use assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term. As most of the Company’s leases do not provide a readily determinable implicit rate, the Company estimates its incremental borrowing rates in determining the present value of future payments based on the lease term of each lease and market information available at commencement date. Fixed lease expenses for operating leases and depreciation expenses for finance leases are recognized on a straight-line basis over the respective lease term.

An extension or contraction of a lease term is considered if the related option to extend or early terminate the lease is reasonably certain to be exercised by the Company. Operating lease right-of-use assets may also include any advance lease payments made and exclude lease incentives and initial direct costs incurred. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, lease and non-lease components are accounted for as a single lease component.

 

8

Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates are not included in the right-of-use assets or liabilities. These variable lease payments are expensed as incurred.

The Company does not recognize operating lease right-of-use assets and operating lease liabilities that arise from short-term leases but rather recognizes fixed lease payments in the statements of operations on a straight-line basis and variable payments in the period in which the related obligations incur.

Revenue Recognition

The Company recognizes revenue when it satisfies the performance obligation of transferring control over a product or service to a customer. Revenue is measured based on the consideration specified in a contract with a customer, which consideration is paid in exchange for a product or service.

The Foundry Services Group of the Company manufactures products, which we refer to as foundry products, based on customers’ specific product designs. The Company recognizes revenue over time for foundry products that do not have an alternative use when the Company has an enforceable right to payment. Revenue recognized over time is in proportion of wafer manufacturing costs incurred relative to total estimated costs for completion. However, in certain circumstances, pursuant to a customer contract or an individual purchase order, the Company may not have an enforceable right to payment for services performed at a given time. In this situation, the Company recognizes revenue at the time 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.

The Standards Products Group of the Company sells products manufactured based on the Company’s design. The Standard Products Group’s products are either standardized with an alternative use or the Company does not have an enforceable right to payment for the related manufacturing services completed to date. For those products, revenue is recognized 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.

A portion of the Company’s sales are made through distributors for which the Company applies the same revenue recognition guidance described above. The Company defers the recognition of revenue when a distributor receives consideration from the customers prior to the fulfillment of performance obligations. These amounts are classified as deferred revenue on the consolidated balance sheets. Of the recorded deferred revenue of $6,477 thousand as of December 31, 2018, $1,436 thousand were recognized as revenue during the three months ended March 31, 2019 and of the recorded deferred revenue of $8,335 thousand as of December 31, 2017, $1,086 thousand was recognized as revenue during the three months ended March 31, 2018, respectively.

In accordance with revenue recognition guidance, any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction, and that is collected by the Company from a customer, is excluded from revenue and presented in the statement of operations on a net basis.

The Company provides warranties under which customers can return defective products. The Company also provides allowances for additional products that may have to be provided free of charge to compensate customers for not meeting previously agreed upon yield criteria, which the Company refers to as the low yield compensation reserve. The Company estimates the costs related to warranty claims, repair or replacements and low yield compensation reserves, and records them as components of cost of sales.

In addition, the Company offers sales returns (other than those that relate to defective products under warranty), cash discounts for early payments, volume discounts and certain allowances to the Company’s customers, including the Company’s distributors. The Company records reserves for those returns, discounts and allowances as a deduction from sales, based on historical experience and other quantitative and qualitative factors.

Substantially all of the Company’s contracts are one year or less in duration. The standard payment terms with customers are generally thirty to sixty days from the time of shipment, product delivery to the customer’s location or customer acceptance, depending on the terms of the related arrangement.

 

9

Unbilled accounts receivable represents the Company’s contractual right to consideration for manufacturing work performed on a customer contract or an individual purchase order, which has not been invoiced to the customer. Of the recorded unbilled accounts receivable of $38,181 thousand as of December 31, 2018, $22,470 thousand were billed to customers upon shipment, upon product delivery or upon customer acceptance, depending on the terms of the related arrangement, during the three months ended March 31, 2019.

 

10

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. The Company does not expect that the adoption will have an impact on the Company’s consolidated financial statements.

Recently Adopted Accounting Pronouncements

In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income which allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The Company adopted ASU 2018-02 in the first quarter of 2019, and the adoption did not impact the Company’s consolidated financial statements and related disclosures.

In August 2017, the FASB issued Accounting Standards Update No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). ASU 2017-12 provides new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (OCI) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. The Company adopted ASU 2017-12 in the first quarter of 2019, and the adoption of ASU 2017-12 did not have a material impact to the Company’s consolidated financial statements.

In July 2017, the FASB issued Accounting Standards Update No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)” (“ASU 2017-11”), which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. The Company adopted ASU 2017-11 in the first quarter of 2019, and the adoption did not impact the Company’s consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under US GAAP. ASU 2016-02 requires that a lessee recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The FASB issued Accounting Standards Update No 2018-01, “Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842” (“ASU 2018-01”). ASU 2018-01 permits an entity to elect an optional transition practical expedient not to evaluate land easements that exist or expired before the entity’s adoption of ASU 2016-02 and that were not accounted for as leases under previous lease guidance. In July 2018, the FASB issued Accounting Standards Update No 2018-10, “Codification Improvements to Topic 842 Leases” (“ASU 2018-10”). ASU 2018-10 provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued Accounting Standards Update No 2018-11, “Leases (Topic 842) Targeted Improvements” (“ASU 2018-11”). ASU 2018-11 allows an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings upon adoption of ASU 2016-02 (the “modified retrospective transition method”). In December 2018, the FASB issued Accounting Standards Update No 2018-20, “Leases (Topic 842) Narrow Scope Improvements for Lessors” (“ASU 2018-20”). ASU 2018-20 provides certain amendments that affect narrow aspects of the guidance issued in ASU 2016-02. In March 2019, the FASB issued Accounting Standards Update No 2019-01 “Codification Improvements” (“ASU 2019-01”) .The effective date and transition requirements for ASU 2016-02, ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 are the same.

The Company adopted the new lease standard as of January 1, 2019, using the modified retrospective transition method, which requires a cumulative effect adjustment, if any, to the Company’s beginning equity to be recognized on the date of adoption. There was no cumulative effect adjustment recorded on January 1, 2019. Accordingly, all periods prior to January 1, 2019 were presented in accordance with the previous ASC Topic 840, Leases, and no retrospective adjustments were made to the comparative periods presented. The impact from the adoption was the balance sheet recognition of ROU assets and lease liabilities for operating and finance leases as a lessee, which resulted in an increase of $16,387 thousand in the total assets and liabilities of the Company’s consolidated balance sheets as of January 1, 2019. In addition, the adoption did not materially impact the Company’s consolidated statements of operations or cash flows for the three months ended March 31, 2019. For further information regarding these impacts, see Note 6 “Leases.”

 

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2. Sales of Accounts Receivable and Receivable Discount Program

The Company has entered into an agreement to sell selected trade accounts receivable to a financial institution from time to time since March 2012. After the sale, the Company does not retain any interest in the receivables and the applicable financial institution collects these accounts receivable directly from the customer. The proceeds from the sales of these accounts receivable totaled $7,989 thousand and $3,662 thousand for the three months ended March 31, 2019 and 2018, respectively, and these sales resulted in pre-tax losses of $25 thousand and $2 thousand for the three months ended March 31, 2019 and 2018, respectively, which are included in selling, general and administrative expenses in the consolidated statements of operations. Net proceeds of this accounts receivable sale program are recognized in the consolidated statements of cash flows as part of operating cash flows.

The Company uses receivable discount programs with certain customers. These discount arrangements allow the Company to accelerate collection of customers’ receivables.

3. Inventories

Inventories as of March 31, 2019 and December 31, 2018 consist of the following (in thousands):

 

		March 31, 2019				December 31, 2018
Finished goods		$	17,519			$	14,334
Semi-finished goods and work-in-process			49,191				39,135
Raw materials			22,145				21,150
Materials in-transit			690				1,890
Less: inventory reserve			(8,751	)			(4,898	)
Inventories, net		$	80,794			$	71,611

Changes in inventory reserve for the three months ended March 31, 2019 and 2018 are as follows (in thousands):

 

		Three Months Ended
		March 31, 2019				March 31, 2018
Beginning balance		$	(4,898	)		$	(6,391	)
Change in reserve
Inventory reserve charged to costs of sales			(5,174	)			(1,620	)
Sale of previously reserved inventory			474				831
			(4,700	)			(789	)
Write off			664				2,530
Translation adjustments			183				(21	)
Ending balance		$	(8,751	)		$	(4,671	)

Inventory reserve represents the Company’s best estimate in value lost due to excessive inventory level, physical deterioration, obsolescence, changes in price levels, or other causes based on individual facts and circumstances. Inventory reserve relates to inventory items including finished goods, semi-finished goods, work-in-process and raw materials. Write off of this reserve is recognized only when the related inventory has been disposed or scrapped.

 

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4. Property, Plant and Equipment

Property, plant and equipment as of March 31, 2019 and December 31, 2018 are comprised of the following (in thousands):

 

		March 31, 2019				December 31, 2018
Buildings and related structures		$	69,539			$	70,665
Machinery and equipment			322,352				323,325
Finance lease right-of-use assets			2,500				—
Others			47,794				44,724
			442,185				438,714
Less: accumulated depreciation			(255,599	)			(251,962	)
Land			15,152				15,419
Property, plant and equipment, net		$	201,738			$	202,171

Aggregate depreciation expenses totaled $8,087 thousand and $7,757 thousand for the three months ended March 31, 2019 and 2018, respectively.

As of June 29, 2018, the Company’s Korean subsidiary entered into an arrangement whereby it acquired a water treatment facility to support its fab in Gumi, Korea from SK Hynix for $4,172 thousand, and sold it for $4,172 thousand to a third party management company that the Company has engaged to run the facility for a 10-year term. This arrangement is accounted for as a financing due to the Company’s Korean subsidiary’s continuing involvement with the facility. As a result, on an acquisition date, the Company recorded the water treatment facility of $4,172 thousand as property, plant and equipment, net, which is depreciated over its estimated useful life. The Company also recorded the related liabilities of $553 thousand as other current liabilities and $3,619 thousand as other non-current liabilities, which relates to the financing and service portion of the arrangement and is amortized using the effective interest method over the contract period.

5. Intangible Assets

Intangible assets as of March 31, 2019 and December 31, 2018 are comprised of the following (in thousands):

 

		March 31, 2019
		Gross amount				Accumulated amortization				Net amount
Technology		$	19,015			$	(19,015	)		$	—
Customer relationships			27,310				(27,310	)			—
Intellectual property assets			11,601				(7,701	)			3,900
Intangible assets, net		$	57,926			$	(54,026	)		$	3,900

 

		December 31, 2018
		Gross amount				Accumulated amortization				Net amount
Technology		$	19,350			$	(19,350	)		$	—
Customer relationships			27,791				(27,791	)			—
Intellectual property assets			11,571				(7,618	)			3,953
Intangible assets, net		$	58,712			$	(54,759	)		$	3,953

Aggregate amortization expenses for intangible assets totaled $216 thousand and $201 thousand for the three months ended March 31, 2019 and 2018, respectively.

 

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6. Leases

The Company has operating and finance leases for land, buildings and other assets such as vehicles and office equipment. The Company’s leases have remaining lease terms ranging from 1 year to 15 years. For certain leases, the Company has options to extend the lease term for additional periods ranging from 1 year to 10 years. The Company used hindsight for determining the remaining lease term and assessing the likelihood of whether these renewal options are reasonably certain to be exercised by the Company.

The Company’s land lease payment is subject to a biennial adjustment (based on change of the Consumer Price Index), the impact of which is treated as a variable lease payment.

The Company adopted the new lease accounting standard as of January 1, 2019 using the modified retrospective transition method. The tables below present financial information related to the Company’s leases as of, and for the three months ended, March 31, 2019.

Supplemental balance sheet information related to leases is as follows (in thousands):

 

Leases		Classification		As of March 31, 2019
Assets
Operating lease		Operating lease right-of-use assets		$	13,046
Finance lease		Property, plant and equipment, net			2,422
Total leased assets				$	15,468
Liabilities
Current
Operating		Other current liabilities		$	2,072
Finance		Other current liabilities			242
Non-current
Operating		Non-current operating lease liabilities			10,975
Finance		Other non-current liabilities			2,199
Total lease liabilities				$	15,488

The components of lease cost included in the Company’s consolidated statements of operations, are as follows (in thousands):

 

		Three Months Ended
		March 31, 2019
Operating lease cost		$	828
Finance lease cost
Amortization of right-of-use assets			78
Interest on lease liabilities			47
Total lease cost		$	953

 

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The above table does not include an immaterial cost of short-term leases and there was no variable lease payment during the three months ended March 31, 2019

Other lease information is as follows (in thousands):

 

		Three Months Ended
		March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	828
Operating cash flows from finance leases			47
Financing cash flows from finance leases			59
Weighted average remaining lease term
Operating leases			12.3 years
Finance leases			10.8 years
Weighted average discount rate
Operating leases			7.93	%
Finance leases			7.94	%

The aggregate future lease payments for operating and finance leases as of March 31, 2019 are as follows (in thousands):

 

		Operating Leases				Finance Leases
2019		$	2,289			$	316
2020			2,705				421
2021			1,346				421
2022			1,113				421
2023			1,107				421
Thereafter			11,913				1,639
Total future lease payments			20,473				3,639
Less: Present value adjustment			(7,426	)			(1,198	)
Present value of future payments		$	13,047			$	2,441

As of December 31, 2018, the minimum aggregate rental payments due under non-cancelable operating lease contracts are as follows (in thousands):

 

2019		$	4,319
2020			3,569
2021			1,570
2022			1,319
2023			1,309
2024 and thereafter			13,978
		$	26,064

 

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7. Accrued Expenses

Accrued expenses as of March 31, 2019 and December 31, 2018 are comprised of the following (in thousands):

 

		March 31, 2019				December 31, 2018
Payroll, benefits and related taxes, excluding severance benefits		$	15,782			$	14,548
Withholding tax attributable to intercompany interest income			21,030				20,879
Interest on senior notes			3,444				8,226
Outside service fees			1,064				935
Others			2,161				1,662
Accrued expenses		$	43,481			$	46,250

8. Derivative Financial Instruments

The Company’s Korean subsidiary from time to time has entered into zero cost collar and forward contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues.

Details of derivative contracts as of March 31, 2019 are as follows (in thousands):

 

Date of transaction		Type of derivative		Total notional amount				Month of settlement
June 27, 2018		Zero cost collar		$	9,000			April 2019 to June 2019
June 27, 2018		Forward		$	18,000			April 2019 to June 2019

Details of derivative contracts as of December 31, 2018 are as follows (in thousands):

 

Date of transaction		Type of derivative		Total notional amount				Month of settlement
June 27, 2018		Zero cost collar		$	18,000			January 2019 to June 2019
June 27, 2018		Forward		$	36,000			January 2019 to June 2019

The zero cost collar and forward contracts qualify as cash flow hedges under ASC 815, “Derivatives and Hedging,” since at both the inception of the contracts and on an ongoing basis, the hedging relationship was and is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the contracts.

The fair values of the Company’s outstanding zero cost collar and forward contracts recorded as assets and liabilities as of March 31, 2019 and December 31, 2018 are as follows (in thousands):

 

Derivatives designated as hedging instruments:						March 31, 2019				December 31, 2018
Liability Derivatives:
Zero cost collars			Other current liabilities			$	67			$	117
Forward			Other current liabilities			$	654			$	607

Offsetting of derivative liabilities as of March 31, 2019 is as follows (in thousands):

 

As of March 31, 2019		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		$	67			$	—			$	67			$	—			$	(50	)		$	17
Forward		$	654			$	—			$	654			$	—			$	(210	)		$	444

 

16

Offsetting of derivative liabilities as of December 31, 2018 is as follows (in thousands):

 

As of December 31, 2018		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		$	117			$	—			$	117			$	—			$	(360	)		$	(243	)
Forward		$	607			$	—			$	607			$	—			$	(1,450	)		$	(843	)

For derivative instruments that are designated and qualify as cash flow hedges, gains or losses on the derivative aside from components excluded from the assessment of effectiveness, are reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the three months ended March 31, 2019 and 2018 (in thousands):

 

Derivatives in ASC 815 Cash Flow Hedging Relationships		Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)								Location /Amount of Gain (Loss) Reclassified from AOCI Into Statement of Operations (Effective Portion) (1)										Location /Amount of Gain (Loss) Recognized in Statement of Operations on Derivatives (Ineffective Portion) (1)
		Three Months Ended March 31,										Three Months Ended March 31,												Three Months Ended March 31,
		2019				2018						2019				2018								2019				2018
Zero cost collars		$	34			$	(132	)		Net sales		$	—			$	1,326				Other income, net			$	—			$	(71	)
Forwards		$	(533	)		$	65			Net sales		$	(89	)		$	1,280				Other income, net			$	(56	)		$	22
Forwards—excluded time value (1)		$	—			$	—			Net sales		$	(98	)		$	—				Other income, net			$	—			$	(27	)
		$	(499	)		$	(67	)				$	(187	)		$	2,606							$	(56	)		$	(76	)
										Total Revenue		$	157,380			$	165,819

 

(1)

The FASB issued the new guidance about hedging activities (ASU 2017-12), which provides new rule about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. In addition, under the same guidance, excluded time value for forward contracts is presented in earnings in the same income statement line item that is used to present the earnings effect of the hedged item. The Company adopted the new guidance in the first quarter of 2019 and the comparative prior period amounts were not restated and continued to be reported under the accounting standards in effect for such period.

As of March 31, 2019, the amount expected to be reclassified from accumulated other comprehensive loss into loss within the next twelve months is $361 thousand.

The Company set aside $3,300 thousand and $4,000 thousand in cash deposits to the counterparty, Nomura Financial Investment (Korea) Co., Ltd. (“NFIK”) as required for the zero cost collar and forward contracts outstanding as of March 31, 2019 and December 31, 2018, respectively. These cash deposits are recorded as hedge collateral on the consolidated balance sheets.

The Company is required to deposit additional cash collateral with NFIK for any exposure in excess of $500 thousand, and $260 thousand and $1,810 thousand of additional cash collateral were required and recorded as hedge collateral on the consolidated balance sheets as of March 31, 2019 and December 31, 2018, respectively. These outstanding zero cost collar and forward contracts are subject to termination if the sum of qualified and unrestricted cash and cash equivalents held by the Company is less than $30,000 thousand on the last day of a fiscal quarter.

 

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9. Fair Value Measurements

Fair Value of Financial Instruments

As of March 31, 2019, the following table represents the Company’s liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):

 

		Carrying Value March 31, 2019				Fair Value Measurement March 31, 2019				Quoted Prices in Active Markets for Identical Asset (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Liabilities:
Derivative liabilities (other current liabilities)		$	721			$	721				—			$	721				—

As of December 31, 2018, the following table represents the Company’s liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):

 

		Carrying Value December 31, 2018				Fair Value Measurement December 31, 2018				Quoted Prices in Active Markets for Identical Asset (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Liabilities:
Derivative liabilities (other current liabilities)		$	724			$	724				—			$	724				—

Items not reflected in the table above include cash equivalents, accounts receivable, other receivables, accounts payable, and other accounts payable, fair value of which approximate carrying values due to the short-term nature of these instruments. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs.

Fair Value of Long-term Borrowings

 

		March 31, 2019								December 31, 2018
		Carrying Value				Fair Value				Carrying Value				Fair Value
		(In thousands of US dollars)
Long-term Borrowings:
5.0% Exchangeable Senior Notes due March 2021 (Level 2)		$	80,889			$	97,666			$	81,418			$	86,835
6.625% Senior Notes due July 2021 (Level 2)		$	222,126			$	213,038			$	222,159			$	202,046

On January 17, 2017, the Company’s wholly-owned subsidiary, MagnaChip Semiconductor S.A., closed an offering (the “Exchangeable Notes Offering”) of 5.0% Exchangeable Senior Notes due March 1, 2021 (the “Exchangeable Notes”) of $86,250 thousand, which represents the principal amount, excluding $5,902 thousand of debt issuance costs. In December 2018 and In February 2019, MagnaChip Semiconductor S.A repurchased a principal amount equal to $1,590 thousand and $920 thousand, respectively, of the Exchangeable Notes in the open market. The Company estimates the fair value of the Exchangeable Notes using the market approach, which utilizes quoted market prices that fall under Level 2. For further description of the Exchangeable Notes, see Note 10, “Long-term Borrowings.”

On July 18, 2013, the Company issued 6.625% senior notes due July 15, 2021 (the “2021 Notes”) of $225.0 million, which represents the principal amount, excluding $1.1 million of original issue discount and $5.0 million of debt issuance costs. In December 2018 and In January 2019, the Company repurchased a principal amount equal to $500 thousand and $250 thousand, respectively, of the 2021 Notes in the open market. The Company estimates the fair value of the 2021 Notes using the market approach, which utilizes quoted market prices that fall under Level 2. For further description of the 2021 Notes, see Note 10, “Long-term Borrowings.”

Fair Values Measured on a Non-recurring Basis

The Company’s non-financial assets, such as property, plant and equipment, and intangible assets are recorded at fair value upon acquisition and are remeasured at fair value only if an impairment charge is recognized. As of March 31, 2019 and 2018, the Company did not have any assets or liabilities measured at fair value on a non-recurring basis.

 

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10. Long-Term Borrowings

Long-term borrowings as of March 31, 2019 and December 31, 2018 are as follows (in thousands):

 

		March 31, 2019				December 31, 2018
5.0% Exchangeable Senior Notes due March 2021		$	83,740			$	84,660
6.625% Senior Notes due July 2021		$	224,250			$	224,500
Less: unamortized discount and debt issuance costs			(4,974	)			(5,583	)
Long-term borrowings, net of unamortized discount and debt issuance costs		$	303,016			$	303,577

5.0% Exchangeable Senior Notes

On January 17, 2017, MagnaChip Semiconductor S.A. closed the Exchangeable Notes Offering of $86,250 thousand aggregate principal amount of 5.0% Exchangeable Notes. Interest on the Exchangeable Notes accrues at a rate of 5.0% per annum, payable semi-annually on March 1 and September 1 of each year, beginning on March 1, 2017. The Exchangeable Notes will mature on March 1, 2021, unless earlier repurchased or converted. Holders may convert their notes at their option at any time prior to the close of business on the business day immediately preceding the stated maturity date.

The Company used a portion of the net proceeds from the issuance to repurchase 1,795,444 shares of common stock under its stock repurchase program at an aggregate cost of $11,401 thousand.

Upon conversion, the Company will deliver for each $1,000 principal amount of converted notes a number of shares equally to the exchange rate, which will initially be 121.1387 shares of common stock per $1,000 principal amount of Exchangeable Notes, equivalent to an initial exchange price of approximately $8.26 per share of common stock. The exchange rate will be subject to adjustment in some circumstances, but will not be adjusted for any accrued and unpaid interest. In addition, if a “make-whole fundamental change” (as defined in the Exchangeable Notes indenture (the “Exchangeable Notes Indenture”)) occurs prior to the stated maturity date, the Company will increase the exchange rate for a holder who elects to convert its notes in connection with such make-whole fundamental change in certain circumstances. MagnaChip Semiconductor S.A. may also, under certain circumstances, be required to pay additional amounts to holders of Exchangeable Notes if withholding or deduction is required in a relevant tax jurisdiction.

If the Company undergoes a fundamental change, subject to certain conditions, holders may require the Company to repurchase for cash all or part of their notes at a purchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date. In addition, upon certain events of default described in the Exchangeable Notes Indenture, the trustee or holders of at least 25% principal amount of the Exchangeable Notes may declare 100% of the then outstanding Exchangeable Notes due and payable in full, together with all accrued and unpaid interest thereon. Payment of principal on the Exchangeable Notes may also accelerate and become automatically due and payable upon certain events of default involving bankruptcy or insolvency proceedings involving the Company, MagnaChip Semiconductor S.A. and their significant subsidiaries. The Exchangeable Notes are not redeemable at the option of MagnaChip Semiconductor S.A. prior to the maturity date.

The Exchangeable Notes Indenture contains covenants that limit the ability of the Company, MagnaChip Semiconductor S.A. and the Company’s other restricted subsidiaries to: (i) declare or pay any dividend or make any payment or distribution on account of or purchase or redeem the Company’s capital stock or equity interests of the restricted subsidiaries; (ii) make any principal payment on, or redeem or repurchase, prior to any scheduled repayment or maturity, any subordinated indebtedness; (iii) make certain investments; (iv) incur additional indebtedness and issue certain types of capital stock; (v) create or incur any lien (except for permitted liens) that secures obligations under any indebtedness; (vi) merge with or into or sell all or substantially all of the Company’s assets to other companies; (vii) enter into certain types of transactions with affiliates; (viii) guarantee the payment of any indebtedness; and (ix) designate unrestricted subsidiaries.

These covenants are subject to a number of exceptions and qualifications. Certain of these restrictive covenants will terminate if the Exchangeable Notes are rated investment grade at any time.

 

19

The Company incurred debt issuance costs of $5,902 thousand related to the issuance of the Exchangeable Notes. The debt issuance costs are recorded as a direct deduction from the long-term borrowings in the consolidated balance sheets and amortized to interest expense using the effective interest method over the term of the Exchangeable Notes. Interest expense related to the Exchangeable Notes for the three months ended March 31, 2019 and 2018 was $1,408 thousand and $1,411 thousand, respectively.

In December 2018, the Company repurchased a principal amount equal to $1,590 thousand of the Exchangeable Notes in the open market, resulting in a loss of $234 thousand, which was recorded as loss on early extinguishment of long-term borrowings, net in the consolidated statements of operations for the year ended December 31, 2018. In February 2019, the Company repurchased a principal amount equal to $920 thousand of the Exchangeable Notes in the open market, resulting in a loss of $63 thousand, which was recorded as loss on early extinguishment of long-term borrowings, net in the consolidated statements of operations for the three months ended March 31, 2019.

6.625% Senior Notes

On July 18, 2013, the Company issued a $225,000,000 aggregate principal amount of the 2021 Notes at a price of 99.5%. Interest on the 2021 Notes accrues at a rate of 6.625% per annum, payable semi-annually on January 15 and July 15 of each year, beginning on January 15, 2014.

The Company can optionally redeem all or a part of the 2021 Notes according to the following schedule: on or after July 15, 2017, the Company may on any one or more occasions redeem all or a part of the 2021 Notes, at a redemption price equal to 101.656% and 100% of the principal amount of the notes redeemed on or after July 15, 2018 and 2019, respectively, plus accrued and unpaid interest and special interest, if any, on the notes redeemed, to the applicable date of redemption.

The Indenture relating to the 2021 Notes contains covenants that limit the ability of the Company and its restricted subsidiaries to: (i) declare or pay any dividend or make any payment or distribution on account of or purchase or redeem the Company’s capital stock or equity interests of the restricted subsidiaries; (ii) make any principal payment on, or redeem or repurchase, prior to any scheduled repayment or maturity, any subordinated indebtedness; (iii) make certain investments; (iv) incur additional indebtedness and issue certain types of capital stock; (v) create or incur any lien (except for permitted liens) that secures obligations under any indebtedness; (vi) merge with or into or sell all or substantially all of the Company’s assets to other companies; (vii) enter into certain types of transactions with affiliates; (viii) guarantee the payment of any indebtedness; (ix) enter into sale-leaseback transactions; (x) enter into agreements that would restrict the ability of the restricted subsidiaries to make distributions with respect to their equity to the Company or other restricted subsidiaries, to make loans to the Company or other restricted subsidiaries or to transfer assets to the Company or other restricted subsidiaries; and (xi) designate unrestricted subsidiaries.

These covenants are subject to a number of exceptions and qualifications. Certain of these restrictive covenants will terminate if the 2021 Notes are rated investment grade at any time.

The Company incurred original issue discount of $1,125 thousand and debt issuance costs of $5,039 thousand related to the issuance of the 2021 Notes. The original issue discount and the debt issuance costs are recorded as a direct deduction from the long-term borrowings in the consolidated balance sheets and amortized to interest expense using the effective interest method over the term of the 2021 Notes. Interest expenses related to the 2021 Notes for the three months ended March 31, 2019 and 2018 were $3,930 thousand and $3,926 thousand, respectively.

In December 2018, the Company repurchased a principal amount equal to $500 thousand of the 2021 Notes in the open market, resulting in a net gain of $28 thousand, which was recorded as loss on early extinguishment of long-term borrowings, net in the consolidated statements of operations for the year ended December 31, 2018. In January 2019, the Company repurchased a principal amount equal to $250 thousand of the 2021 Notes in the open market, resulting in a net gain of $21 thousand, which was recorded as loss on early extinguishment of long-term borrowings, net in the consolidated statements of operations for the three months ended March 31, 2019.

 

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11. Accrued Severance Benefits

The majority of accrued severance benefits are for employees in the Company’s Korean subsidiary. Pursuant to the Employee Retirement Benefit Security Act of Korea, eligible employees and executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of March 31, 2019, 98% of employees of the Company were eligible for severance benefits.

Changes in accrued severance benefits are as follows (in thousands):

 

		Three Months Ended
		March 31, 2019				March 31, 2018
Beginning balance		$	149,408			$	149,795
Provisions			3,117				4,512
Severance payments			(2,263	)			(2,247	)
Translation adjustments			(2,589	)			719
			147,673				152,779
Less: Cumulative contributions to severance insurance deposit accounts			(2,358	)			—
The National Pension Fund			(227	)			(255	)
Group severance insurance plan			(586	)			(635	)
Accrued severance benefits, net		$	144,502			$	151,889

The severance benefits funded through the Company’s National Pension Fund and group severance insurance plan will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.

Beginning in July 2018, the Company has contributed a certain percentage of severance benefits, accrued for eligible employees for their services from January 1, 2018, to certain severance insurance deposit accounts. These accounts consist of time deposits and other guaranteed principal and interest, and are maintained at insurance companies, banks or security companies for the benefit of employees. The Company deducts the contributions made to these severance insurance deposit accounts from its accrued severance benefits.

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

 

		Severance benefit
Remainder of 2019		$	578
2020			1,057
2021			1,522
2022			1,298
2023			1,743
2024			2,633
2025 – 2029			35,076

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

Korea’s mandatory retirement age is 60 under the Employment Promotion for the Aged Act.

 

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12. Foreign Currency Gain (Loss), Net

Net foreign currency gain or loss includes non-cash translation gain or loss associated with intercompany balances. A substantial portion of the Company’s net foreign currency gain or loss is non-cash translation gain or loss associated with intercompany long-term loans to our Korean subsidiary. The loans 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, 2019 and December 31, 2018, the outstanding intercompany loan balances including accrued interest between the Korean subsidiary and the Dutch subsidiary were $665,858 thousand and $666,597 thousand, respectively. The Korean won to U.S. dollar exchange rates were 1,137.8:1, 1,118.1:1 using the first base rate as of March 31, 2019 and December 31, 2018, respectively, as quoted by the KEB Hana Bank.

13. Income Taxes

The Company files income tax returns in the U.S., Korea, Japan, Taiwan and various other jurisdictions. The Company is subject to income- or non-income-based tax examinations by tax authorities of the U.S., Korea and multiple other foreign jurisdictions, where applicable, for all open tax years.

Income tax expenses recorded for three months ended March 31, 2019 and 2018 were $841 thousand and $990 thousand, respectively, primarily attributable to interest on intercompany loan balances. The Company’s Korean subsidiary is the primary operating subsidiary of the Company. For the three months ended March 31, 2019, no income tax expense for the Korean subsidiary was recorded due to net operating loss carry-forwards available to offset taxable income and full allowance for deferred tax assets.

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act, was enacted in the U.S. (the “Tax Reform Act”). The Tax Reform Act reduces the U.S. federal statutory rate to 21.0% from 35.0% effective January 1, 2018. The Tax Reform Act contains several key provisions, including global intangible low tax income and foreign derived intangible income provisions. For the year ended December 31, 2018, the Company analyzed the mandatory deemed repatriation tax and concluded that the Company has no tax liability on previously untaxed accumulated earnings and profits of its foreign subsidiaries. The Company also reviewed the other components of the Tax Reform Act and, based on its evaluation, no significant impact on the Company’s consolidated financial statements for the three months ended March 31, 2019.

 

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14. Geographic and Segment Information

The Company has two operating segments: its Foundry Services Group and Standard Products Group. The Company’s chief operating decision maker is its Chief Executive Officer, who allocates resources and assesses performance of the business and other activities based on gross profit.

The following sets forth information relating to the operating segment (in thousands):

 

		Three Months Ended
		March 31, 2019				March 31, 2018
Net Sales
Foundry Services Group		$	57,075			$	77,429
Standard Products Group
Display Solutions			58,230				49,696
Power Solutions			42,030				38,667
Total Standard Products Group		$	100,260			$	88,363
All other			45				27
Total net sales		$	157,380			$	165,819

 

		Three Months Ended
		March 31, 2019				March 31, 2018
Gross Profit
Foundry Services Group		$	3,637			$	20,664
Standard Products Group			19,020				24,039
All other			44				(122	)
Total gross profit		$	22,701			$	44,581

The Company’s revenue for Foundry Services Group is disaggregated depending on the timing of revenue recognition (in thousands):

 

		Three Months Ended March 31, 2019												Three Months Ended March 31, 2018
		Revenue recognized at the time of shipment or delivery				Revenue recognized over time				Total				Revenue recognized at the time of shipment or delivery				Revenue recognized over time				Total
Net Sales
Foundry Services Group		$	28,111			$	28,964			$	57,075			$	2,797			$	74,632			$	77,429

 

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The following is a summary of net sales by geographic region, based on the location to which the products are billed (in thousands):

 

		Three Months Ended
		March 31, 2019				March 31, 2018
Korea		$	57,005			$	54,689
Asia Pacific (other than Korea)			84,164				89,706
U.S.A.			6,364				9,818
Europe			9,423				10,978
Others			424				628
Total		$	157,380			$	165,819

For the three months ended March 31, 2019 and 2018, of the Company’s net sales in Asia Pacific (other than Korea), net sales in Greater China (China, Hong Kong and Macau) represented 75.6% and 67.6%, respectively, and net sales in Taiwan represented 20.3% and 24.5%, respectively.

Net sales from the Company’s top ten largest customers accounted for 68% and 59% for the three months ended March 31, 2019 and 2018, respectively.

For the three months ended March 31, 2019, the Company had one customer that represented 28.7% of its net sales. For the three months ended March 31, 2018, the Company had two customers that represented 17.9% and 10.4% of its net sales.

98% of the Company’s property, plant and equipment are located in Korea as of March 31, 2019.

 

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15. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of the following as of March 31, 2019 and December 31, 2018, respectively (in thousands):

 

		March 31, 2019				December 31, 2018
Foreign currency translation adjustments		$	(12,757	)		$	(20,061	)
Derivative adjustments			(361	)			(49	)
Total		$	(13,118	)		$	(20,110	)

Changes in accumulated other comprehensive loss for the three months ended March 31, 2019 and 2018 are as follows (in thousands):

 

Three Months Ended March 31, 2019		Foreign currency translation adjustments				Derivative adjustments				Total
Beginning balance		$	(20,061	)		$	(49	)		$	(20,110	)
Other comprehensive income (loss) before reclassifications			7,304				(499	)			6,805
Amounts reclassified from accumulated other comprehensive loss			—				187				187
Net current-period other comprehensive income (loss)			7,304				(312	)			6,992
Ending balance		$	(12,757	)		$	(361	)		$	(13,118	)
Three Months Ended March 31, 2018		Foreign currency translation adjustments				Derivative adjustments				Total
Beginning balance		$	(38,413	)		$	5,299			$	(33,114	)
Other comprehensive loss before reclassifications			(483	)			(67	)			(550	)
Amounts reclassified from accumulated other comprehensive income			—				(2,606	)			(2,606	)
Net current-period other comprehensive loss			(483	)			(2,673	)			(3,156	)
Ending balance		$	(38,896	)		$	2,626			$	(36,270	)

There was no income tax impact related to changes in accumulated other comprehensive loss for the three months ended March 31, 2019 and 2018 due to net operating loss carry-forwards available to offset taxable income and full allowance for deferred tax assets.

 

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