Magnachip Semiconductor Earnings 2019-06-30

 

 

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 June 30, 2019

or     

 

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

For the transition period from                  to                 .

Commission File Number: 001-34791

 

 

MagnaChip Semiconductor Corporation

(Exact name of registrant as specified in its charter)

 

 

 

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

c/o MagnaChip Semiconductor S.A.

1, Allée Scheffer, L-2520

Luxembourg, Grand Duchy of Luxembourg

(352) 45-62-62

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

 

 

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, 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 July 31, 2019, the registrant had 34,369,590 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 June 30, 2019 and December 31, 2018			3
		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018			4
		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and 2018			5
		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018			6
		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018			7
		MagnaChip Semiconductor Corporation and Subsidiaries Notes to Consolidated Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			52
Item 4.		Controls and Procedures			53
PART II OTHER INFORMATION					54
Item 1.		Legal Proceedings			54
Item 1A.		Risk Factors			54
Item 6.		Exhibits			55
SIGNATURES					56

 

2

PART I—FINANCIAL INFORMATION

 

Item 1.

Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

 

		June 30, 2019				December 31, 2018
		(In thousands of US dollars, except share data)
Assets
Current assets
Cash and cash equivalents		$	123,753			$	132,438
Accounts receivable, net			96,766				80,003
Unbilled accounts receivable, net			30,689				38,181
Inventories, net			67,192				71,611
Other receivables			6,606				3,702
Prepaid expenses			13,110				11,133
Hedge collateral (Note 8)			9,510				5,810
Other current assets (Note 17)			8,026				9,867
Total current assets			355,652				352,745
Property, plant and equipment, net (Notes 4 and 6)			192,314				202,171
Operating lease right-of-use assets			12,518				—
Intangible assets, net			4,023				3,953
Long-term prepaid expenses			14,076				15,598
Other non-current assets			9,233				8,729
Total assets		$	587,816			$	583,196
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	86,003			$	55,631
Other accounts payable			12,628				15,168
Accrued expenses			49,146				46,250
Deferred revenue			5,312				6,477
Operating lease liabilities			2,151				—
Other current liabilities (Notes 6 and 8)			3,056				9,133
Total current liabilities			158,296				132,659
Long-term borrowings, net			303,577				303,577
Non-current operating lease liabilities			10,367				—
Accrued severance benefits, net			142,436				146,031
Other non-current liabilities (Note 6)			21,056				18,239
Total liabilities			635,732				600,506
Commitments and contingencies (Note 17)
Stockholders’ equity
Common stock, $0.01 par value, 150,000,000 shares authorized, 43,247,509 shares issued and 34,240,181 outstanding at June 30, 2019 and 43,054,458 shares issued and 34,441,232 outstanding at December 31, 2018			433				431
Additional paid-in capital			144,188				142,600
Accumulated deficit			(79,950	)			(36,305	)
Treasury stock, 9,007,328 shares at June 30, 2019 and 8,613,226 shares at December 31, 2018, respectively			(106,514	)			(103,926	)
Accumulated other comprehensive loss			(6,073	)			(20,110	)
Total stockholders’ deficit			(47,916	)			(17,310	)
Total liabilities and stockholders’ equity		$	587,816			$	583,196

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

 

3

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30, 2019				June 30, 2018				June 30, 2019				June 30, 2018
		(In thousands of US dollars, except share data)
Net sales		$	205,145			$	199,685			$	362,525			$	365,504
Cost of sales			161,305				145,831				295,984				267,069
Gross profit			43,840				53,854				66,541				98,435
Operating expenses
Selling, general and administrative expenses			16,975				18,935				35,045				36,557
Research and development expenses			18,989				21,005				39,007				40,585
Restructuring and other charges			1,130				—				4,024				—
Total operating expenses			37,094				39,940				78,076				77,142
Operating income (loss)			6,746				13,914				(11,535	)			21,293
Interest expense			(5,679	)			(5,489	)			(11,316	)			(10,952	)
Foreign currency loss, net			(10,431	)			(27,449	)			(20,428	)			(26,131	)
Loss on early extinguishment of long-term borrowings, net			—				—				(42	)			—
Other income (expense), net			656				(960	)			1,329				(441	)
Loss before income tax expense			(8,708	)			(19,984	)			(41,992	)			(16,231	)
Income tax expense			812				1,521				1,653				2,511
Net loss		$	(9,520	)		$	(21,505	)		$	(43,645	)		$	(18,742	)
Loss per common share—
Basic / Diluted		$	(0.28	)		$	(0.62	)		$	(1.28	)		$	(0.55	)
Weighted average number of shares—
Basic / Diluted			34,245,127				34,420,654				34,220,141				34,337,345

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								Six Months Ended
		June 30, 2019				June 30, 2018				June 30, 2019				June 30, 2018
		(In thousands of US dollars)
Net loss		$	(9,520	)		$	(21,505	)		$	(43,645	)		$	(18,742	)
Other comprehensive income (loss)
Foreign currency translation adjustments			7,680				20,116				14,984				19,633
Derivative adjustments
Fair valuation of derivatives			(2,499	)			(1,870	)			(2,900	)			(1,937	)
Reclassification adjustment for loss (gain) on derivatives included in net loss			1,864				(2,035	)			1,953				(4,641	)
Total other comprehensive income			7,045				16,211				14,037				13,055
Total comprehensive loss		$	(2,475	)		$	(5,294	)		$	(29,608	)		$	(5,687	)

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)

 

		Common Stock								Additional Paid-In				Accumulated				Treasury				Accumulated Other Comprehensive
(In thousands of US dollars, except share data)		Shares				Amount				Capital				Deficit				Stock				Loss				Total
Three Months Ended June 30, 2019:
Balance at March 31, 2019			34,223,502			$	433			$	143,315			$	(70,430	)		$	(106,511	)		$	(13,118	)		$	(46,311	)
Stock-based compensation			—				—				772				—				—				—				772
Exercise of stock options			15,934				0				101				—				—				—				101
Settlement of restricted stock units			1,040				0				(0	)			—				—				—				—
Acquisition of treasury stock			(295	)			—				—				—				(3	)			—				(3	)
Other comprehensive income, net			—				—				—				—				—				7,045				7,045
Net loss			—				—				—				(9,520	)			—				—				(9,520	)
Balance at June 30, 2019			34,240,181			$	433			$	144,188			$	(79,950	)		$	(106,514	)		$	(6,073	)		$	(47,916	)
Three Months Ended June 30, 2018:
Balance at March 31, 2018			34,374,959			$	428			$	137,869			$	(29,642	)		$	(102,319	)		$	(36,270	)		$	(29,934	)
Stock-based compensation			—				—				1,341				—				—				—				1,341
Exercise of stock options			42,859				0				293				—				—				—				293
Settlement of restricted stock units			85,368				1				(1	)			—				—				—				—
Acquisition of treasury stock			(19,432	)			—				—				—				(199	)			—				(199	)
Other comprehensive income, net			—				—				—				—				—				16,211				16,211
Net loss			—				—				—				(21,505	)			—				—				(21,505	)
Balance at June 30, 2018			34,483,754			$	429			$	139,502			$	(51,147	)		$	(102,518	)		$	(20,059	)		$	(33,793	)

 

		Common Stock								Additional Paid-In				Accumulated				Treasury				Accumulated Other Comprehensive				Total
(In thousands of US dollars, except share data)		Shares				Amount				Capital				Deficit				Stock				Loss
Six Months Ended June 30, 2019:
Balance at December 31, 2018			34,441,232			$	431			$	142,600			$	(36,305	)		$	(103,926	)		$	(20,110	)		$	(17,310	)
Stock-based compensation			—				—				1,441				—				—				—				1,441
Exercise of stock options			24,558				0				149				—				—				—				149
Settlement of restricted stock units			168,493				2				(2	)			—				—				—				—
Acquisition of treasury stock			(394,102	)			—				—				—				(2,588	)			—				(2,588	)
Other comprehensive income, net			—				—				—				—				—				14,037				14,037
Net loss			—				—				—				(43,645	)			—				—				(43,645	)
Balance at June 30, 2019			34,240,181			$	433			$	144,188			$	(79,950	)		$	(106,514	)		$	(6,073	)		$	(47,916	)
Six Months Ended June 30, 2018:
Balance at December 31, 2017, as previously reported			34,189,599			$	426			$	136,259			$	(40,889	)		$	(102,319	)		$	(33,114	)		$	(39,637	)
Impact of adopting the new revenue standard			—				—				—				8,484				—				—				8,484
Balance at January 1, 2018, as adjusted			34,189,599			$	426			$	136,259			$	(32,405	)		$	(102,319	)		$	(33,114	)		$	(31,153	)
Stock-based compensation			—				—				2,810				—				—				—				2,810
Exercise of stock options			64,753				1				435				—				—				—				436
Settlement of restricted stock units			248,834				2				(2	)			—				—				—				—
Acquisition of treasury stock			(19,432	)			—				—				—				(199	)			—				(199	)
Other comprehensive income, net			—				—				—				—				—				13,055				13,055
Net loss			—				—				—				(18,742	)			—				—				(18,742	)
Balance at June 30, 2018			34,483,754			$	429			$	139,502			$	(51,147	)		$	(102,518	)		$	(20,059	)		$	(33,793	)

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

 

6

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

		Six Months Ended
		June 30, 2019				June 30, 2018
		(In thousands of US dollars)
Cash flows from operating activities
Net loss		$	(43,645	)		$	(18,742	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization			16,505				15,970
Provision for severance benefits			6,406				9,165
Amortization of debt issuance costs and original issue discount			1,134				1,073
Loss on foreign currency, net			24,609				32,369
Restructuring and other charges			732				—
Stock-based compensation			1,441				2,810
Loss on early extinguishment of long-term borrowings, net			42				—
Other			(494	)			1,053
Changes in operating assets and liabilities
Accounts receivable, net			(20,974	)			5,305
Unbilled accounts receivable, net			6,201				887
Inventories, net			1,589				(16,797	)
Other receivables			(2,969	)			(4,508	)
Other current assets			5,929				2,253
Accounts payable			32,137				(4,473	)
Other accounts payable			(3,960	)			(5,229	)
Accrued expenses			2,880				(1,435	)
Deferred revenue			(929	)			5,413
Other current liabilities			(6,562	)			760
Other non-current liabilities			1,716				1,116
Payment of severance benefits			(4,579	)			(5,754	)
Other			(54	)			516
Net cash provided by operating activities			17,155				21,752
Cash flows from investing activities
Proceeds from settlement of hedge collateral			4,627				4,863
Payment of hedge collateral			(8,395	)			(7,490	)
Proceeds from disposal of plant, property and equipment			202				13
Purchase of plant, property and equipment			(15,000	)			(11,432	)
Payment for property related to water treatment facility arrangement (Note 4)			—				(4,283	)
Payment for intellectual property registration			(642	)			(574	)
Collection of guarantee deposits			388				659
Payment of guarantee deposits			(1,330	)			—
Other			(9	)			(38	)
Net cash used in investing activities			(20,159	)			(18,282	)
Cash flows from financing activities
Repurchase of long-term borrowings			(1,175	)			—
Proceeds from exercise of stock options			149				435
Acquisition of treasury stock			(2,588	)			—
Proceeds from property related to water treatment facility arrangement			—				4,283
Repayment of financing related to water treatment facility arrangement			(281	)			—
Repayment of principal portion of finance lease liabilities			(118	)			—
Net cash provided by (used in) financing activities			(4,013	)			4,718
Effect of exchange rates on cash, cash equivalents and restricted cash			(1,668	)			(5,081	)
Net increase (decrease) in cash, cash equivalents and restricted cash			(8,685	)			3,107
Cash, cash equivalents and restricted cash
Beginning of the period			132,438				128,575
End of the period		$	123,753			$	131,682
Supplemental cash flow information
Cash paid for interest		$	9,549			$	9,609
Cash paid for income taxes		$	1,811			$	668
Non-cash investing activities
Property, plant and equipment additions in other accounts payable		$	687			$	2,582
Non-cash financing activities
Acquisition of treasury stock to satisfy the tax withholding obligations in connection with equity-based compensation		$	—			$	(199	)

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

 

7

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1. Business, Basis of Presentation and Significant Accounting Policies

Business

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

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). These interim consolidated financial statements include normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair statement of the Company’s financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with Accounting Standards Codification 270, “Interim Reporting” and, accordingly, do not include all of the information and note disclosures required by US GAAP for complete financial statements, except for the changes below. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for a full year or for any other periods.

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

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

Leases

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

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

 

8

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

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

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

Revenue Recognition

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

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

The Standards Products Group of the Company sells products manufactured based on the Company’s design. The Standard Products Group’s products are either standardized with an alternative use or the Company does not have an enforceable right to payment for the related manufacturing services completed to date. For those products, revenue is recognized when a customer obtains control of the product, which is generally upon product shipment, delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement.

A portion of the Company’s sales are made through distributors for which the Company applies the same revenue recognition guidance described above. The Company defers the recognition of revenue when it receives consideration from the customers prior to the fulfillment of performance obligations. These amounts are classified as deferred revenue on the consolidated balance sheets. Of the recorded deferred revenue of $6,477 thousand as of December 31, 2018, $126 thousand and $1,562 thousand were recognized as revenue during the three and six months ended June 30, 2019 and of the recorded deferred revenue of $8,335 thousand as of December 31, 2017, $136 thousand and $1,222 thousand were recognized as revenue during the three and six months ended June 30, 2018, respectively.

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

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

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

 

9

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

Unbilled accounts receivable represents the Company’s contractual right to consideration for manufacturing work performed on a customer contract or an individual purchase order, which has not been invoiced to the customer. Of the recorded unbilled accounts receivable of $38,181 thousand as of December 31, 2018, $7,317 thousand and $29,787 thousand were billed to customers upon shipment, upon product delivery or upon customer acceptance, depending on the terms of the related arrangement, during the three and six months ended June 30, 2019, respectively.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. In April 2019, the FASB ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2019-04”) which clarifies treatment of certain credit losses. ASU 2016-13 and ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of ASU 2016-13 and ASU 2019-04 to have a material effect on the Company’s consolidated financial statements.

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

Recently Adopted Accounting Pronouncements

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

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

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

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under US GAAP. ASU 2016-02 requires that a lessee recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The FASB issued Accounting Standards Update No 2018-01, “Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842” (“ASU 2018-01”). ASU 2018-01 permits an entity to elect an optional transition practical expedient not to evaluate land easements that exist or expired before the entity’s adoption of ASU 2016-02 and that were not accounted for as leases under previous

 

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lease guidance. In July 2018, the FASB issued Accounting Standards Update No 2018-10, “Codification Improvements to Topic 842 Leases” (“ASU 2018-10”). ASU 2018-10 provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued Accounting Standards Update No 2018-11, “Leases (Topic 842) Targeted Improvements” (“ASU 2018-11”). ASU 2018-11 allows an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings upon adoption of ASU 2016-02 (the “modified retrospective transition method”). In December 2018, the FASB issued Accounting Standards Update No 2018-20, “Leases (Topic 842) Narrow Scope Improvements for Lessors” (“ASU 2018-20”). ASU 2018-20 provides certain amendments that affect narrow aspects of the guidance issued in ASU 2016-02. In March 2019, the FASB issued Accounting Standards Update No 2019-01 “Codification Improvements” (“ASU 2019-01”) .The effective date and transition requirements for ASU 2016-02, ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 are the same.

The Company adopted the new lease standard as of January 1, 2019, using the modified retrospective transition method, which requires a cumulative effect adjustment, if any, to the Company’s beginning equity to be recognized on the date of adoption. There was no cumulative effect adjustment recorded on January 1, 2019. Accordingly, all periods prior to January 1, 2019 were presented in accordance with the previous ASC Topic 840, Leases, and no retrospective adjustments were made to the comparative periods presented. The impact from the adoption was the balance sheet recognition of right-of-use assets and lease liabilities for operating and finance leases as a lessee, which resulted in an increase of $16,387 thousand in the total assets and liabilities of the Company’s consolidated balance sheets as of January 1, 2019. In addition, the adoption did not materially impact the Company’s consolidated statements of operations or cash flows for the six months ended June 30, 2019. For further information regarding these impacts, see Note 6 “Leases.”

2. Sales of Accounts Receivable and Receivable Discount Program

The Company has entered into an agreement to sell selected trade accounts receivable to a financial institution from time to time since March 2012. After the sale, the Company does not retain any interest in the receivables and the applicable financial institution collects these accounts receivable directly from the customer. The proceeds from the sales of these accounts receivable totaled $13,637 thousand and $4,733 thousand for the six months ended June 30, 2019 and 2018, respectively, and these sales resulted in pre-tax losses of $42 thousand and $5 thousand for the six months ended June 30, 2019 and 2018, respectively, which are included in selling, general and administrative expenses in the consolidated statements of operations. Net proceeds of this accounts receivable sale program are recognized in the consolidated statements of cash flows as part of operating cash flows.

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

 

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3. Inventories

Inventories as of June 30, 2019 and December 31, 2018 consist of the following (in thousands):

 

		June 30, 2019				December 31, 2018
Finished goods		$	12,553			$	14,334
Semi-finished goods and work-in-process			45,476				39,135
Raw materials			19,852				21,150
Materials in-transit			1,564				1,890
Less: inventory reserve			(12,253	)			(4,898	)
Inventories, net		$	67,192			$	71,611

Changes in inventory reserve for the three and six months ended June 30, 2019 and 2018 are as follows (in thousands):

 

		Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
		June 30, 2019								June 30, 2018
Beginning balance		$	(8,751	)		$	(4,898	)		$	(4,672	)		$	(6,391	)
Change in reserve
Inventory reserve charged to costs of sales			(4,932	)			(9,619	)			(1,504	)			(2,515	)
Sale of previously reserved inventory			547				649				898				1,118
			(4,385	)			(8,970	)			(606	)			(1,397	)
Write off			678				1,341				339				2,863
Translation adjustments			205				274				240				226
Ending balance		$	(12,253	)		$	(12,253	)		$	(4,699	)		$	(4,699	)

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.

For the three and six months ended June 30, 2019, the Company recorded inventory reserves of $2,171 thousand and $5,475 thousand, respectively, which related to certain legacy display products.

 

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4. Property, Plant and Equipment

Property, plant and equipment as of June 30, 2019 and December 31, 2018 are comprised of the following (in thousands):

 

		June 30, 2019				December 31, 2018
Buildings and related structures		$	68,398			$	70,665
Machinery and equipment			323,729				323,325
Finance lease right-of-use assets			2,459				—
Others			42,208				44,724
			436,794				438,714
Less: accumulated depreciation			(259,383	)			(251,962	)
Land			14,903				15,419
Property, plant and equipment, net		$	192,314			$	202,171

Aggregate depreciation expenses totaled $16,065 thousand and $15,562 thousand for the six months ended June 30, 2019 and 2018, respectively.

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

5. Intangible Assets

Intangible assets as of June 30, 2019 and December 31, 2018 are comprised of the following (in thousands):

 

		June 30, 2019
		Gross amount				Accumulated amortization				Net amount
Technology		$	18,703			$	(18,703	)		$	—
Customer relationships			26,861				(26,861	)			—
Intellectual property assets			11,825				(7,802	)			4,023
Intangible assets, net		$	57,389			$	(53,366	)		$	4,023

 

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

Aggregate amortization expenses for intangible assets totaled $440 thousand and $408 thousand for the six months ended June 30, 2019 and 2018, respectively.

 

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6. Leases

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

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

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

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

 

Leases		Classification		As of June 30, 2019
Assets
Operating lease		Operating lease right-of-use assets		$	12,518
Finance lease		Property, plant and equipment, net			2,305
Total leased assets				$	14,823
Liabilities
Current
Operating		Operating lease liabilities		$	2,151
Finance		Other current liabilities			243
Non-current
Operating		Non-current operating lease liabilities			10,367
Finance		Other non-current liabilities			2,100
Total lease liabilities				$	14,861

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

 

		Three Months Ended				Six Months Ended
		June 30, 2019
Operating lease cost		$	800			$	1,628
Finance lease cost
Amortization of right-of-use assets			76				154
Interest on lease liabilities			45				92
Total lease cost		$	921			$	1,874

The above table does not include an immaterial cost of short-term leases and there were no variable lease payments during the three and six months ended June 30, 2019

 

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Other lease information is as follows (in thousands):

 

		Three Months Ended				Six Months Ended
		June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	800			$	1,628
Operating cash flows from finance leases			45				92
Financing cash flows from finance leases			59				118

 

		As of June 30, 2019
Weighted average remaining lease term
Operating leases			12.2 years
Finance leases			10.7 years
Weighted average remaining lease term
Operating leases			7.92	%
Finance leases			7.94	%

The aggregate future lease payments for operating and finance leases as of June 30, 2019 are as follows (in thousands):

 

		Operating Leases				Finance Leases
2019		$	1,564			$	207
2020			2,768				414
2021			1,356				414
2022			1,097				414
2023			1,089				414
Thereafter			11,716				1,613
Total future lease payments			19,590				3,476
Less: Present value adjustment			(7,072	)			(1,133	)
Present value of future payments		$	12,518			$	2,343

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

 

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

7. Accrued Expenses

Accrued expenses as of June 30, 2019 and December 31, 2018 are comprised of the following (in thousands):

 

		June 30, 2019				December 31, 2018
Payroll, benefits and related taxes, excluding severance benefits		$	14,366			$	14,548
Withholding tax attributable to intercompany interest income			21,835				20,879
Interest on senior notes			8,205				8,226
Outside service fees			922				935
Others			3,818				1,662
Accrued expenses		$	49,146			$	46,250

 

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8. Derivative Financial Instruments

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

Details of derivative contracts as of June 30, 2019 are as follows (in thousands):

 

Date of transaction		Type of derivative				Total notional amount				Month of settlement
April 2, 2019			Zero cost collar			$	30,000			July 2019 to December 2019
April 9, 2019			Zero cost collar			$	30,000			July 2019 to December 2019
April 25, 2019			Zero cost collar			$	30,000			July 2019 to December 2019

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

 

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

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

The fair values of the Company’s outstanding zero cost collar and forward contracts recorded as liabilities as of June 30, 2019 and December 31, 2018 are as follows (in thousands):

 

Derivatives designated as hedging instruments:						June 30, 2019				December 31, 2018
Liability Derivatives:
Zero cost collars			Other current liabilities			$	1,054			$	117
Forward			Other current liabilities			$	—			$	607

Offsetting of derivative liabilities as of June 30, 2019 is as follows (in thousands):

 

As of June 30, 2019		Gross amounts of recognized liabilities				Gross amounts offset in the balance sheets				Net amounts of liabilities presented in the balance sheets				Gross amounts not offset in the balance sheets								Net amount
														Financial instruments				Cash collateral pledged
Liability Derivatives:
Zero cost collars		$	1,054			$	—			$	1,054			$	—			$	(910	)		$	144

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

 

As of December 31, 2018		Gross amounts of recognized liabilities				Gross amounts offset in the balance sheets				Net amounts of liabilities presented in the balance sheets				Gross amounts not offset in the balance sheets								Net amount
														Financial instruments				Cash collateral pledged
Liability Derivatives:
Zero cost collars		$	117			$	—			$	117			$	—			$	(360	)		$	(243	)
Forward		$	607			$	—			$	607			$	—			$	(1,450	)		$	(843	)

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

 

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The following table summarizes the impact of derivative instruments on the consolidated statements of operations for the three months ended June 30, 2019 and 2018 (in thousands):

 

Derivatives in ASC 815 Cash Flow Hedging Relationships		Amount of Loss Recognized in AOCI on Derivatives (Effective Portion)								Location /Amount of Gain (Loss) Reclassified from AOCI Into Statement of Operations (Effective Portion)										Location /Amount of Loss Recognized in Statement of Operations on Derivatives (Ineffective Portion) (1)
		Three Months Ended June 30,										Three Months Ended June 30,												Three Months Ended June 30,
		2019				2018						2019				2018								2019				2018
Zero cost collars		$	(1,136	)		$	(1,009	)		Net sales		$	(203	)		$	865				Other income	(expense), net		$	(11	)		$	(247	)
Forwards		$	(1,363	)		$	(861	)		Net sales		$	(1,661	)		$	1,170				Other income	(expense), net		$	(69	)		$	(81	)
Forwards—excluded time value (1)																					Other income	(expense), net		$	—			$	(1,304	)
		$	(2,499	)		$	(1,870	)				$	(1,864	)		$	2,035							$	(80	)		$	(1,632	)
										Total Revenue		$	205,145			$	199,685
The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the six months ended June 30, 2019 and 2018 (in thousands):
Derivatives in ASC 815 Cash Flow Hedging Relationships		Amount of Loss Recognized in AOCI on Derivatives (Effective Portion)								Location /Amount of Gain (Loss) Reclassified from AOCI Into Statement of Operations (Effective Portion)										Location /Amount of Loss Recognized in Statement of Operations on Derivatives (Ineffective Portion) (1)
		Six Months Ended June 30,										Six Months Ended June 30,												Six Months Ended June 30,
		2019				2018						2019				2018								2019				2018
Zero cost collars		$	(1,102	)		$	(1,142	)		Net sales		$	(203	)		$	2,191				Other income	(expense), net		$	(11	)		$	(318	)
Forwards		$	(1,798	)		$	(795	)		Net sales		$	(1,750	)		$	2,450				Other income	(expense), net		$	(125	)		$	(59	)
Forwards—excluded time value (1)																					Other income	(expense), net		$	—			$	(1,331	)
		$	(2,900	)		$	(1,937	)				$	(1,953	)		$	4,641							$	(136	)		$	(1,708	)
										Total Revenue		$	362,525			$	365,504

 

(1)

The FASB issued the new guidance about hedging activities (ASU 2017-12), which provides new rules about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. In addition, under the same guidance, excluded time value for forward contracts is presented in earnings in the same income statement line item that is used to present the earnings effect of the hedged item. The Company adopted the new guidance in the first quarter of 2019 and recorded $98 thousand as a reduction of net sales for the same period, and the comparative prior period amounts were not restated and continued to be reported under the accounting standards in effect for such period.

As of June 30, 2019, the amount expected to be reclassified from accumulated other comprehensive loss into loss within the next twelve months is $996 thousand.

The Company set aside $8,600 thousand and $4,000 thousand in cash deposits to the counterparties, Nomura Financial Investment (Korea) Co., Ltd. (“NFIK”) and Deutsche Bank AG, Seoul Branch (“DB”) as required for the zero cost collar and forward contracts outstanding as of June 30, 2019 and December 31, 2018, respectively. These cash deposits are recorded as hedge collateral on the consolidated balance sheets.

The Company is required to deposit additional cash collateral with NFIK and DB for any exposure in excess of $500 thousand, and $910 thousand and $1,810 thousand of additional cash collateral were required and recorded as hedge collateral on the consolidated balance sheets as of June 30, 2019 and December 31, 2018, respectively.

 

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