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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, 2024
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, Ltd.
15F, 76 Jikji-daero
436beon-gil
,
Heungdeok-gu
Cheongju-si,
Chungcheongbuk-do,
Republic of Korea 28581
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: +82 (2) 6903-3000
 
 
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
 
 
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, a 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
As of April 30, 2024, the registrant had 38,267,810 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, 2024 and December 31, 2023

     3  
  

Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three Months Ended March 31, 2024 and 2023

     4  
  

Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2024 and 2023

     5  
  

Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2024 and 2023

     6  
  

Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023

     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.

  

Quantitative and Qualitative Disclosures About Market Risk

     44  

Item 4.

  

Controls and Procedures

     45  

PART II OTHER INFORMATION

     46  

Item 1.

  

Legal Proceedings

     46  

Item 1A.

  

Risk Factors

     46  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     47  

Item 3.

  

Defaults Upon Senior Securities

     47  

Item 4.

  

Mine Safety Disclosures

     47  

Item 5.

  

Other Information

     47  

Item 6.

  

Exhibits

     48  

SIGNATURES

     49  

 

 

2


http://fasb.org/us-gaap/2023#OtherAssetsCurrenthttp://fasb.org/us-gaap/2023#OtherLiabilitiesCurrenthttp://fasb.org/us-gaap/2023#OtherLiabilitiesCurrent
PART I—FINANCIAL INFORMATION
 
Item 1.
Interim Consolidated Financial Statements (Unaudited)
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
    
March 31,
2024
   
December 31,
2023
 
    
(In thousands of U.S. dollars, except share data)
 
Assets
    
Current assets
    
Cash and cash equivalents
   $ 171,602     $ 158,092  
Accounts receivable, net
     30,288       32,641  
Inventories, net
     31,479       32,733  
Other receivables
     5,041       4,295  
Prepaid expenses
     10,255       7,390  
Hedge collateral (Note 6)
     1,000       1,000  
Other current assets (Note 16)
     8,550       9,283  
  
 
 
   
 
 
 
Total current assets
     258,215       245,434  
Property, plant and equipment, net
     92,868       100,122  
Operating lease
right-of-use
assets
     4,538       4,639  
Intangible assets, net
     1,391       1,537  
Long-term prepaid expenses
     9,297       5,736  
Deferred income taxes
     47,669       50,836  
Other
non-current
assets
     12,186       12,187  
  
 
 
   
 
 
 
Total assets
   $ 426,164     $ 420,491  
  
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
    
Current liabilities
    
Accounts payable
   $ 24,619     $ 24,443  
Other accounts payable
     5,650       5,292  
Accrued expenses (Note 5)
     7,951       10,457  
Accrued income taxes
     1,622       1,496  
Operating lease liabilities
     1,884       1,914  
Other current liabilities
     3,158       3,286  
  
 
 
   
 
 
 
Total current liabilities
     44,884       46,888  
Long-term borrowing
     29,700        
Accrued severance benefits, net
     15,503       16,020  
Non-current
operating lease liabilities
     2,808       2,897  
Other
non-current
liabilities
     11,384       10,088  
  
 
 
   
 
 
 
Total liabilities
     104,279       75,893  
  
 
 
   
 
 
 
Commitments and contingencies (Note 16)
    
Stockholders’ equity
    
Common stock, $0.01 par value, 150,000,000 shares authorized, 57,008,573 shares issued and 38,263,642 outstanding at March 31, 2024 and 56,971,394 shares issued and 38,852,742 outstanding at December 31, 2023
     569       569  
Additional
paid-in
capital
     274,156       273,256  
Retained earnings
     283,467       298,884  
Treasury stock, 18,744,931 shares at March 31, 2024 and 18,118,652 shares at December 31, 2023, respectively
     (217,607     (213,454
Accumulated other comprehensive loss
     (18,700     (14,657
  
 
 
   
 
 
 
Total stockholders’ equity
     321,885       344,598  
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 426,164     $ 420,491  
  
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial
statements
.
 
3

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIAR
IES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
    
Three Months Ended
 
    
March 31,
2024
   
March 31,
2023
 
    
(In thousands of U.S. dollars, except share data)
 
Revenues:
    
Net sales – standard products business
   $ 45,541     $ 51,514  
Net sales – transitional Fab 3 foundry services
     3,526       5,491  
  
 
 
   
 
 
 
Total revenues
     49,067       57,005  
Cost of sales:
    
Cost of sales – standard products business
     35,888       37,312  
Cost of sales – transitional Fab 3 foundry services
     4,211       7,599  
  
 
 
   
 
 
 
Total cost of sales
     40,099       44,911  
  
 
 
   
 
 
 
Gross profit
     8,968       12,094  
Operating expenses:
    
Selling, general and administrative expenses
     11,264       12,165  
Research and development expenses
     11,163       13,298  
Early termination charges
           8,449  
  
 
 
   
 
 
 
Total operating expenses
     22,427       33,912  
  
 
 
   
 
 
 
Operating loss
     (13,459     (21,818
Interest income
     2,213       2,842  
Interest expense
     (238     (256
Foreign currency loss, net
     (5,001     (3,430
Other income (expense), net
     44       (35
  
 
 
   
 
 
 
Loss before income tax expense
     (16,441     (22,697
Income tax benefit
     (1,024     (1,227
  
 
 
   
 
 
 
Net loss
   $ (15,417   $ (21,470
  
 
 
   
 
 
 
Basic loss per common share—
   $ (0.40   $ (0.49
Diluted loss per common share—
   $ (0.40   $ (0.49
Weighted average number of shares—
    
Basic
     38,544,781       43,390,832  
Diluted
     38,544,781       43,390,832  
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,
2024
   
March 31,
2023
 
    
(In thousands of U.S. dollars)
 
Net loss
   $ (15,417   $ (21,470
Other comprehensive loss
    
Foreign currency translation adjustments
     (3,497     (1,908
Derivative adjustments
    
Fair valuation of derivatives
     (605     (1,135
Reclassification adjustment for loss on derivatives included in net loss
     59       603  
  
 
 
   
 
 
 
Total other comprehensive loss
     (4,043     (2,440
  
 
 
   
 
 
 
Total comprehensive loss
   $ (19,460   $ (23,910
  
 
 
   
 
 
 
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
   
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
     38,852,742     $ 569      $ 273,256     $ 298,884     $ (213,454   $ (14,657   $ 344,598  
Stock-based compensation
     —        —         900       —        —        —        900  
Settlement of restricted stock units
     37,179       0        (0     —        —        —        —   
Acquisition of treasury stock
     (626,279     —         —        —        (4,153     —        (4,153
Other comprehensive loss, net
     —        —         —        —        —        (4,043     (4,043
Net loss
     —        —         —        (15,417     —        —        (15,417
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2024
     38,263,642     $ 569      $ 274,156     $ 283,467     $ (217,607   $ (18,700   $ 321,885  
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Three Months Ended March 31, 2023:
               
Balance at December 31, 2022
     43,824,575     $ 564      $ 266,058     $ 335,506     $ (161,422   $ (12,553   $ 428,153  
Stock-based compensation
     —        —         1,120       —        —        —        1,120  
Exercise of stock options
     1,400       0        9       —        —        —        9  
Settlement of restricted stock units
     3,333       0        (0     —        —        —        —   
Acquisition of treasury stock
     (1,239,993     —         —        —        (12,019     —        (12,019
Other comprehensive loss, net
     —        —         —        —        —        (2,440     (2,440
Net loss
     —        —         —        (21,470     —        —        (21,470
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2023
     42,589,315     $ 564      $ 267,187     $ 314,036     $ (173,441   $ (14,993   $ 393,353  
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
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,
2024
   
March 31,
2023
 
    
(In thousands of U.S. dollars)
 
Cash flows from operating activities
    
Net loss
   $ (15,417   $ (21,470
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
    
Depreciation and amortization
     4,099       4,357  
Provision for severance benefits
     1,405       2,330  
Loss on foreign currency, net
     10,226       9,082  
Provision for inventory reserves
     (947     1,138  
Stock-based compensation
     900       1,120  
Deferred income taxes
     1,313       (4
Other, net
     263       241  
Changes in operating assets and liabilities
    
Accounts receivable, net
     1,401       2,973  
Inventories
     801       1,062  
Other receivables
     (385     2,376  
Prepaid expenses
     905       860  
Other current assets
     331       596  
Accounts payable
     563       1,904  
Other accounts payable
     (5,256     (1,424
Accrued expenses
     (2,045     7,600  
Accrued income taxes
     167       (2,923
Other current liabilities
     (387     (596
Other
non-current
liabilities
     (624     (169
Payment of severance benefits
     (884     (871
Other, net
     (401     (306
  
 
 
   
 
 
 
Net cash provided by (used in) operating activities
     (3,972     7,876  
Cash flows from investing activities
    
Proceeds from settlement of hedge collateral
           1,155  
Payment of hedge collateral
           (1,093
Purchase of property, plant and equipment
     (668     (135
Payment for intellectual property registration
     (60     (74
Collection guarantee deposits
     1,133       19  
Payment of guarantee deposits
     (1,874     (3,482
Other, net
     1        
  
 
 
   
 
 
 
Net cash used in investing activities
     (1,468     (3,610
Cash flows from financing activities
    
Proceeds from long-term borrowing
     30,059        
Proceeds from exercise of stock options
           9  
Acquisition of treasury stock
     (4,659     (12,264
Repayment of financing related to water treatment facility arrangement
     (121     (126
Repayment of principal portion of finance lease liabilities
     (35     (24
  
 
 
   
 
 
 
Net cash provided by (used in) financing activities
     25,244       (12,405
Effect of exchange rates on cash and cash equivalents
     (6,294     (5,253
  
 
 
   
 
 
 
Net increase (decrease) in cash and cash equivalents
     13,510       (13,392
Cash and cash equivalents at beginning of period
     158,092       225,477  
  
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 171,602     $ 212,085  
  
 
 
   
 
 
 
Supplemental cash flow information
    
Cash paid for income taxes
   $ 270     $ 2,644  
Non-cash
investing activities
    
Property, plant and equipment additions in other accounts payable
   $ 285     $ 629  
Non-cash
financing activities
    
Unsettled common stock repurchases
   $ —    $ 401  
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 communication, Internet of Things (“IoT”), consumer, computing, industrial and automotive applications.
The Company’s standard products business consists of two business lines: one is the Mixed-Signal Solutions (“MSS”) business line, which comprises the display integrated circuit (“IC”) and power IC businesses that are fabless, and the other is the Power Analog Solutions (“PAS”) business line, which comprises the power discrete business which is an integrated device manufacturing (“IDM”) business.
Display IC products provide panel display solutions to major suppliers of large and small rigid and flexible panel displays, and 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. Power IC products provide power IC solutions to major television suppliers and large panel display suppliers.
The PAS business line produces power management semiconductor products, including power discrete solutions for power management in communication, consumer, computing, servers, automotive and industrial applications.
On September 1, 2020, the Company completed the sale of the Company’s Foundry Services Group business and its fabrication facility located in Cheongju, Korea, known as “Fab 4”, to SK keyfoundry Inc., a Korean company (“SK keyfoundry”). Following the consummation of the sale, the Company provided SK keyfoundry with transitional foundry services associated with its fabrication facility located in Gumi, Korea, known as “Fab 3”, at an agreed upon cost plus
mark-up
(the “Transitional Fab 3 Foundry Services”). The contractual obligation to provide the Transitional Fab 3 Foundry Services ended on August 31, 2023, and the Company is winding down these foundry services and planning to convert portions of the idle capacity to PAS standard products beginning around the second half of 2024. Because these foundry services during the wind-down period are still being provided to SK keyfoundry by the Company using Fab 3 based on mutually agreed terms and conditions, the Company will continue to report its revenue from these foundry services and related cost of sales within the Transitional Fab 3 Foundry Services line in its consolidated statement of operations until such wind-down is completed.
On May 30, 2023, the Company announced a plan to regroup the business lines in its standard products business, originally grouped as Display Solutions and Power Solutions business lines, into MSS and PAS business lines to better align its product strategies (the “Reorganization”). On January 10, 2024, the Company transferred the MSS business line into a newly formed Korean limited liability company named “Magnachip Mixed-Signal, Ltd.” Currently, the MSS business line is primarily operated by Magnachip Mixed-Signal, Ltd., and the PAS business line is primarily operated by Magnachip Semiconductor, Ltd., Magnachip’s already existing Korean operating company. Both companies are indirect wholly owned subsidiaries of the Company.
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 (“U.S. 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 (“ASC”) 270, “Interim Reporting” and, accordingly, do not include all of the information and note disclosures required by U.S. GAAP for complete financial statements, except for the changes below. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for a full year or for any other periods.
 
8

The December 31, 2023 balance sheet data was derived from the Company’s audited financial statements, but does not include all disclosures required by U.S. GAAP. The interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2023.
There have been no material changes to the Company’s significant accounting policies as of and for the three months ended March 31, 2024 as compared to the significant accounting policies described in the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2023.
Recent Accounting Pronouncements Not Yet Adopted
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2023-07,
“Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which will require an entity to provide more detailed information about its reportable segment expenses that are included within management’s measurement of profit and loss and will require certain annual disclosures to be provided on an interim basis. The amendments in this ASU are effective for the Company in 2024 for annual reporting and in 2025 for interim reporting, with early adoption permitted beginning in 2024, and is required to be applied using the full retrospective method of transition. The Company is currently evaluating the impact of this accounting standard update on the Company’s segment disclosures.
In December 2023, the FASB issued ASU
No. 2023-09,
“Income Taxes (Topic 740): Improvements to Income Tax Disclosures”
(“ASU 2023-09”),
which intends to enhance the transparency and decision usefulness of income tax disclosures. It requires public business entities to disclose additional information in specified categories with respect to the reconciliation of the effective tax rate to the statutory rate for federal, state, and foreign income taxes. It also requires greater detail about individual reconciling items in the rate reconciliation to the extent the impact of those items exceeds a specified threshold. ASU
2023-09
is effective for annual periods beginning after December 15, 2024, though early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements and related disclosures.
 
9

2. Inventories
Inventories as of March 31, 2024 and December 31, 2023 consist of the following (in thousands):
 
    
March 31,
2024
    
December 31,
2023
 
Finished goods
   $ 7,268      $ 8,432  
Semi-finished goods and
work-in-process
     28,379        29,339  
Raw materials
     4,579        5,543  
Materials
in-transit
     200        18  
Less: inventory reserve
     (8,947      (10,599
  
 
 
    
 
 
 
Inventories, net
   $ 31,479      $ 32,733  
  
 
 
    
 
 
 
Changes in inventory reserve for the three months ended March 31, 2024 and 2023 are as follows (in thousands):
 
    
Three Months Ended
 
    
March 31,
2024
    
March 31,
2023
 
Beginning balance
   $ (10,599    $ (14,677
Change in reserve
     
Inventory reserve charged to costs of sales
     (1,550      (2,584
Sale of previously reserved inventory
     2,661        1,476  
  
 
 
    
 
 
 
     1,111        (1,108
Write off
     266        415  
Translation adjustments
     275        429  
  
 
 
    
 
 
 
Ending balance
   $ (8,947    $ (14,941
  
 
 
    
 
 
 
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.
 
10

3. Property, Plant and Equipment
Property, plant and equipment as of March 31, 2024 and December 31, 2023 are comprised of the following (in thousands):
 
    
March 31,
2024
    
December 31,
2023
 
Buildings and related structures
   $ 23,487      $ 24,532  
Machinery and equipment
     133,844        139,710  
Finance lease
right-of-use
assets
     585        902  
Others
     34,373        35,471  
  
 
 
    
 
 
 
     192,289        200,615  
Less: accumulated depreciation
     (113,829      (115,889
Land
     12,265        12,811  
Construction in progress
     2,143        2,585  
  
 
 
    
 
 
 
Property, plant and equipment, net
   $ 92,868      $ 100,122  
  
 
 
    
 
 
 
Aggregate depreciation expenses totaled $3,957 thousand and $4,193 thousand for the three months ended March 31, 2024 and 2023, respectively.
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 in favor of KDB. See “Note 9. Long-Term Borrowing” to these consolidated financial statements below for more information regarding the Loan Agreement.
4. Intangible Assets
Intangible assets as of March 31, 2024 and December 31, 2023 are comprised of the following (in thousands):
 
    
March 31, 2024
 
    
Gross
amount
    
Accumulated
amortization
    
Net
amount
 
Intellectual property assets
   $ 8,817      $ (7,426    $ 1,391  
  
 
 
    
 
 
    
 
 
 
Intangible assets
   $ 8,817      $ (7,426    $ 1,391  
  
 
 
    
 
 
    
 
 
 
 
    
December 31, 2023
 
    
Gross
amount
    
Accumulated
amortization
    
Net
amount
 
Intellectual property assets
   $ 9,150      $ (7,613    $ 1,537  
  
 
 
    
 
 
    
 
 
 
Intangible assets
   $ 9,150      $ (7,613    $ 1,537  
  
 
 
    
 
 
    
 
 
 
Aggregate amortization expenses for intangible assets totaled $142 thousand and $164 thousand for the three months ended March 31, 2024 and 2023, respectively.
 
11

5. Accrued Expenses
Accrued expenses as of March 31, 2024 and December 31, 2023 are comprised of the following (in thousands):
 
    
March 31,
2024
    
December 31,
2023
 
Payroll, benefits and related taxes, excluding severance benefits
   $ 5,259      $ 5,947  
Withholding tax attributable to intercompany interest income
     355        1,671  
Outside service fees
     1,451        1,953  
Others
     886        886  
  
 
 
    
 
 
 
Accrued expenses
   $ 7,951      $ 10,457  
  
 
 
    
 
 
 
6. Derivative Financial Instruments
The Company’s Korean subsidiary, Magnachip Semiconductor, Ltd., from time to time has entered into zero cost collar 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 the zero cost collar contracts as of March 31, 2024 are as follows (in thousands):
 
Date of transaction
  
Total notional amount
    
Month of settlement
April 03, 2023
   $ 9,000      April 2024 to June 2024
August 09, 2023
   $ 18,000      April 2024 to September 2024
Details of the zero cost collar contracts as of December 31, 2023 are as follows (in thousands):
 
Date of transaction
  
Total notional amount
    
Month of settlement
April 03, 2023
   $ 18,000      January 2024 to June 2024
August 09, 2023
   $ 27,000      January 2024 to September 2024
The zero cost collar 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 contracts recorded as assets and liabilities as of March 31, 2024 and December 31, 2023 are as follows (in thousands):
 
Derivatives designated as hedging instruments:
       
March 31,
2024
    
December 31,
2023
 
Asset Derivatives:
        
Zero cost collars
   Other current assets    $      $ 152  
Liability Derivatives:
        
Zero cost collars
   Other current liabilities    $ 397      $ 1  
Offsetting of derivative liabilities as of March 31, 2024 is as follows (in thousands):
 
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
   $ 397      $      $ 397      $      $      $ 397  
 
12

Offsetting of derivative assets and liabilities as of December 31, 2023 is as follows (in thousands):
 
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
   $ 152      $      $ 152      $      $      $ 152  
Liability Derivatives:
                 
Zero cost collars
   $ 1      $      $ 1      $      $      $ 1  
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 or loss (“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 statements of operations for the three months ended March 31, 2024 and 2023 (in thousands):
 
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
   $ (605   $ (1,135   Net sales    $ (59   $ (603   Other income, net    $ 25      $ (54
  
 
 
   
 
 
      
 
 
   
 
 
      
 
 
    
 
 
 
   $ (605   $ (1,135      $ (59   $ (603      $ 25      $ (54
  
 
 
   
 
 
      
 
 
   
 
 
      
 
 
    
 
 
 
As of March 31, 2024, the amount expected to be reclassified from accumulated other comprehensive income into earnings within the next 12 months is $145 thousand.
The Company has set aside a cash deposit to the counterparty, Standard Chartered Bank Korea Limited (“SC”), as required for the zero cost collar contracts. This cash deposit is recorded as hedge collateral on the consolidated balance sheets. Cash deposits as of March 31, 2024 and December 31, 2023 are as follows (in thousands):
 
Counterparty
  
March 31,
2024
    
December 31,
2023
 
SC
   $ 1,000      $ 1,000  
  
 
 
    
 
 
 
Total
   $ 1,000      $ 1,000  
  
 
 
    
 
 
 
The Company is required to deposit additional cash collateral with Nomura Financial Investment (Korea) Co., Ltd. (“NFIK”) and SC for any exposure in excess of $500 thousand, respectively, but no such excess exposure existed as of March 31, 2024 and December 31, 2023.
These zero cost collar contracts may be terminated by the counterparties if the Company’s total cash and cash equivalents is less than $30,000 thousand at the end of a fiscal quarter, unless a waiver is obtained.
 
13

7. Fair Value Measurements
Fair Value of Financial Instruments
As of March 31, 2024, 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, 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:
              
Derivative liabilities
(other current liabilities)
   $ 397      $ 397        —       $ 397        —   
As of December 31, 2023, the following table represents the Company’s assets and liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):
 
    
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:
              
Derivative assets
(other current assets)
   $ 152      $ 152        —       $ 152        —   
Liabilities:
              
Derivative liabilities
(other current liabilities)
   $ 1      $ 1        —       $ 1        —   
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.
 
14

8. Accrued Severance Benefits
The majority of accrued severance benefits are for employees in the Company’s Korean subsidiaries. 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, 2024, 96% of all employees of the Company were eligible for severance benefits.
Changes in accrued severance benefits are as follows (in thousands):
 
    
Three Months Ended
 
    
March 31,
2024
    
March 31,
2023
 
Beginning balance
   $ 45,932      $ 48,496  
Provisions
     1,405        2,330  
Severance payments
     (884      (871
Translation adjustments
     (1,969      (1,381
  
 
 
    
 
 
 
     44,484        48,574  
Less: Cumulative contributions to severance insurance deposit accounts
     (28,954      (24,747
The National Pension Fund
     (27      (40
Group severance insurance plan
            (179
  
 
 
    
 
 
 
Accrued severance benefits, net
   $ 15,503      $ 23,608  
  
 
 
    
 
 
 
The severance benefits funded through the Company’s National Pension Fund and group severance insurance plan have been and 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 contributes to certain severance insurance deposit accounts a certain percentage of severance benefits that are accrued for eligible employees for their services from January 1, 2018 pursuant to Employee Retirement Benefit Security Act of Korea. 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 2024
   $ 306  
2025
   $ 324  
2026
   $ 543  
2027
   $ 386  
2028
   $ 3,125  
2029
   $ 3,509  
2030 — 2034
   $ 16,631  
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 years of age or older under the Employment Promotion for the Aged Act. The Company sets the retirement age of employees at 60.
 
15

9. Long-Term Borrowing
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 $29,835 thousand 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.
As of March 31, 2024, approximately $29,700 thousand aggregate principal amount of the Term Loan was outstanding.
10. Foreign Currency 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 MSK, one of the Company’s Korean subsidiaries. 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, 2024 and December 31, 2023, the outstanding intercompany loan balances including accrued interest between MSK and the Dutch subsidiary were $258,291 thousand and $285,136 thousand, respectively. The Korean won to U.S. dollar exchange rates were 1,346.8:1 and 1,289.4:1 using the first base rate as of March 31, 2024 and December 31, 2023, respectively, as quoted by the KEB Hana Bank.
11. Income Taxes
The Company and its subsidiaries file income tax returns in Korea, Japan, Taiwan, the U.S. and in various other jurisdictions. The Company is subject to income or
non-income
tax examinations by tax authorities of these jurisdictions for all open tax years.
For the three months ended March 31, 2024, the Company recorded an income tax benefit of $1,024 thousand, primarily related to one of its operating entities in Korea based on the estimated taxable loss for the respective period.
For the three months ended March 31, 2023, the Company recorded an income tax benefit of $1,227 thousand, primarily related to its then primary operating entity in Korea based on the estimated taxable loss for the respective period.
 
16

12. Geographic and Other Information
The Company operates within the operating segment, standard products business, and also reports Transitional Fab 3 Foundry Services revenue.
In previous reporting periods, the Company categorized revenues from two business lines in its standard products business: the Display Solutions business line and the Power Solutions business line. As part of the Reorganization, the Company regrouped its standard products business into the Mixed-Signal Solutions business line and the Power Analog Solutions business line. Accordingly, effective as of the first quarter of fiscal 2024, the Company categorizes its standard product business revenue by those two regrouped business lines. See “Note 1. Business, Basis of Presentation and Significant Accounting Policies — Business” for additional information regarding the Reorganization.
Revenues for the three months ended March 31, 2023 from its
previous
product categories have been reclassified in order to conform to the current period presentation as follows (in thousands):
 
           
MSS
    
PAS
    
Total
 
Display Solutions
   $ 10,841      $ 10,841      $    $ 10,841  
Power Solutions
     40,673        1,966        38,707        40,673  
  
 
 
    
 
 
    
 
 
    
 
 
 
   $ 51,514      $ 12,807      $ 38,707      $ 51,514  
  
 
 
    
 
 
    
 
 
    
 
 
 
The following sets forth information relating to the operating segment, standard products business, as well as the Transitional Fab 3 Foundry Services (in thousands):
 
    
Three Months Ended
 
    
March 31,
2024
    
March 31,
2023
 
Revenues
     
Standard products business
     
Mixed-Signal Solutions
   $ 9,006      $ 12,807  
Power Analog Solutions
     36,535        38,707  
  
 
 
    
 
 
 
Total standard products business
   $ 45,541      $ 51,514  
Transitional Fab 3 foundry services
     3,526        5,491  
  
 
 
    
 
 
 
Total revenues
   $ 49,067      $ 57,005  
  
 
 
    
 
 
 
 
    
Three Months Ended
 
    
March 31,
2024
    
March 31,
2023
 
Gross Profit
     
Standard products business
     
Mixed-Signal Solutions
   $ 4,019      $ 3,868  
Power Analog Solutions
     5,634        10,334  
  
 
 
    
 
 
 
Total standard products business
   $ 9,653      $ 14,202  
Transitional Fab 3 foundry services
     (685      (2,108
  
 
 
    
 
 
 
Total gross profit
   $ 8,968      $ 12,094  
  
 
 
    
 
 
 
The following is a summary of net sales — standard products business (which does not include the Transitional Fab 3 Foundry Services) by geographic region, based on the location to which the products are billed (in thousands):
 
    
Three Months Ended
 
    
March 31,
2024
    
March 31,
2023
 
Korea
   $ 18,144      $ 16,496  
Asia Pacific (other than Korea)
     25,665        31,901  
United States
     338        1,045  
Europe
     1,394        2,072  
  
 
 
    
 
 
 
Total
   $ 45,541      $ 51,514  
  
 
 
    
 
 
 
 
17

For the three months ended March 31, 2024 and 2023, of the Company’s net sales — standard products business in Asia Pacific (other than Korea), net sales — standard products business in China and Hong Kong together represented 73.0% and 57.9%, respectively, and net sales — standard products business in Vietnam represented 5.8% and 17.8%, respectively.
Net sales from the Company’s top ten largest customers in the standard products business (which does not include the Transitional Fab 3 Foundry Services) accounted for 74% and 71% for the three months ended March 31, 2024 and 2023, respectively.
For the three months ended March 31, 2024, the Company had one customer that represented 24.7% of its net sales — standard products business. For the three months ended March 31, 2023, the Company had two customers that represented 16.4% and 13.7% of its net sales — standard products business, respectively.
As of March 31, 2024, one customer of the Company’s standard products business accounted for 42.1% of its accounts receivable — standard products business (which does not include the Transitional Fab 3 Foundry Services). As of December 31, 2023, three customers of the Company’s standard products business accounted for 34.9%, 14.4% and 13.9% of its accounts receivable — standard products business (which does not include the Transitional Fab 3 Foundry Services), respectively.
 
18

13. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following as of March 31, 2024 and December 31, 2023, respectively (in thousands):
 
    
March 31,
2024
    
December 31,
2023
 
Foreign currency translation adjustments
   $ (18,845    $ (15,348
Derivative adjustments
     145        691  
  
 
 
    
 
 
 
Total
   $ (18,700    $ (14,657
  
 
 
    
 
 
 
Changes in accumulated other comprehensive loss for the three months ended March 31, 2024 and 2023 are as follows (in thousands):
 
Three Months Ended March 31, 2024
  
Foreign
currency
translation
adjustments
    
Derivative
adjustments
    
Total
 
Beginning balance
   $ (15,348    $ 691      $ (14,657
  
 
 
    
 
 
    
 
 
 
Other comprehensive loss before reclassifications
     (3,497      (605      (4,102
Amounts reclassified from accumulated other comprehensive loss
            59        59  
  
 
 
    
 
 
    
 
 
 
Net current-period other comprehensive loss
     (3,497      (546      (4,043
  
 
 
    
 
 
    
 
 
 
Ending balance
   $ (18,845    $ 145      $ (18,700
  
 
 
    
 
 
    
 
 
 
 
Three Months Ended March 31, 2023
  
Foreign
currency
translation
adjustments
    
Derivative
adjustments
    
Total
 
Beginning balance
   $ (11,328    $ (1,225    $ (12,553
  
 
 
    
 
 
    
 
 
 
Other comprehensive loss before reclassifications
     (1,908      (1,135      (3,043
Amounts reclassified from accumulated other comprehensive loss
            603        603  
  
 
 
    
 
 
    
 
 
 
Net current-period other comprehensive loss
     (1,908      (532      (2,440
  
 
 
    
 
 
    
 
 
 
Ending balance
   $ (13,236    $ (1,757    $ (14,993
  
 
 
    
 
 
    
 
 
 
 
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14. Stock Repurchases
Expanded Stock Repurchase Program
On August 31, 2022, the Board of Directors authorized an expansion of the Company’s previously announced stock repurchase program from $75 million to $87.5 million of its common stock. The Company has already repurchased shares worth $37.5 million under the program through an accelerated stock repurchase agreement on December 21, 2021 with JPMorgan Chase Bank, National Association. The remaining $50 million of the expanded $87.5 million program was planned to be repurchased in the open market or through privately negotiated transactions.
From September 2022 to December 2022, the Company repurchased 1,235,650 shares of its common stock in the open market for an aggregate purchase price of $12.5 million and a weighted average price per share of $10.13 under the stock repurchase program.
During the first half of 2023, the Company repurchased 3,705,443 shares of its common stock in the open market for an aggregate purchase price of $37.4 million and a weighted average price per share of $10.10 under the expanded stock repurchase program. As of the end of June 2023, the Company had completed the repurchase of its common stock under its expanded stock repurchase program.
New Stock Repurchase Program
On July 19, 2023, the 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, the Company repurchased 1,730,173 shares of its 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, the Company repurchased 626,279 shares of its 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.
 
20

15. Loss Per Share
The following table illustrates the computation of basic and diluted loss per common share for the three months ended March 31, 2024 and 2023:
 
    
Three Months Ended
 
    
March 31,
2024
    
March 31,
2023
 
    
(In thousands of U.S. dollars, except share data)
 
Basic Loss per Share
     
Net loss
   $ (15,417    $ (21,470
  
 
 
    
 
 
 
Basic weighted average common stock outstanding
     38,544,781        43,390,832  
Basic loss per share
   $ (0.40    $ (0.49
Diluted Loss per Share
     
Net loss
   $ (15,417    $ (21,470
  
 
 
    
 
 
 
Basic weighted average common stock outstanding
     38,544,781        43,390,832  
Net effect of dilutive equity awards
             
  
 
 
    
 
 
 
Diluted weighted average common stock outstanding
     38,544,781        43,390,832  
Diluted loss per share
   $ (0.40    $ (0.49
Diluted loss per share adjusts basic loss per share for the potentially dilutive impact of stock options and restricted stock units. As the Company has reported loss for the three months ended March 31, 2024 and 2023, all potentially dilutive securities are antidilutive and accordingly not considered, therefore basic net loss per share equals diluted net loss per share.
The following outstanding instruments were excluded from the computation of diluted loss per share, as they have an anti-dilutive effect on the calculation:
 
    
Three Months Ended
 
    
March 31,
2024
    
March 31,
2023
 
Options
     757,858        1,116,158  
Restricted Stock Units
     922,307        1,434,827  
 
21

16. Commitments and Contingencies
Advances to Suppliers
The Company, from time to time, may make advances in form of prepayments or deposits to suppliers, including external foundries, to meet its planned production. The Company recorded advances of $3,030 thousand and $3,883 thousand as other current assets as of March 31, 2024 and December 31, 2023, respectively.
17. Subsequent Events
Derivative contracts
In April 2024, the Company and NFIK entered into derivative contracts of
zero
cost collars for the period from October 2024 to March 2025. The total notional amounts are $18,000 thousand.
 
22


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.

 

29


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.

 

30


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.

 

31


(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.

 

32


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.

 

34


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.

 

35


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
       
     Amount     % of
Total Revenues
    Amount     % of
Total Revenues
    Change
Amount
 
     (Dollars in millions)  

Revenues

          

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
  

 

 

     

 

 

     

 

 

 

Total revenues

     49.1       100.0       57.0       100.0       (7.9

Cost of sales

          

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
  

 

 

     

 

 

     

 

 

 

Total cost of sales

     40.1       81.7       44.9       78.8       (4.8
  

 

 

     

 

 

     

 

 

 

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 ch