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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2010

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: 333-168516-09

 

 

MagnaChip Semiconductor LLC

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   26-1815025

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

c/o MagnaChip Semiconductor S.A.

74, rue de Merl, B.P. 709 L-2146

Luxembourg R.C.S.

Luxembourg B97483

(352) 45-62-62

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    ¨  Yes    ¨  No

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   þ  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    þ  Yes    ¨  No

As of July 31, 2010, the registrant had 307,233,996 common units outstanding.

 

 

 


Table of Contents

MAGNACHIP SEMICONDUCTOR LLC AND SUBSIDIARIES

TABLE OF CONTENTS

 

             Page No.
PART I FINANCIAL INFORMATION   3
  Item 1.    Interim Consolidated Financial Statements (Unaudited)   3
    

MagnaChip Semiconductor LLC and Subsidiaries Consolidated Balance Sheets as of June  30, 2010 and December 31, 2009 (Successor Company)

  3
    

MagnaChip Semiconductor LLC and Subsidiaries Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 (Successor Company) and June 28, 2009 (Predecessor Company)

  4
    

MagnaChip Semiconductor LLC and Subsidiaries Consolidated Statements of Changes in Unitholders’ Equity for the Three and Six Months Ended June 30, 2010 (Successor Company) and June 28, 2009 (Predecessor Company)

  5
    

MagnaChip Semiconductor LLC and Subsidiaries Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 (Successor Company) and June 28, 2009 (Predecessor Company)

  7
    

MagnaChip Semiconductor LLC and Subsidiaries Notes to Consolidated Financial Statements

  8
  Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations   33
  Item 3.    Quantitative and Qualitative Disclosures About Market Risk   60
  Item 4.    Controls and Procedures   60
PART II OTHER INFORMATION   62
  Item 1A.    Risk Factors   62
  Item 6.    Exhibits   75
SIGNATURES   76

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands of US dollars, except unit data)

 

     Successor  
     June 30,
2010
    December 31,
2009
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 141,310      $ 64,925   

Accounts receivable, net

     117,711        74,233   

Inventories, net

     59,972        63,407   

Other receivables

     3,702        3,433   

Prepaid expenses

     9,908        12,625   

Other current assets

     11,097        3,433   
                

Total current assets

     343,700        222,056   
                

Property, plant and equipment, net

     155,040        156,337   

Intangible assets, net

     34,837        50,158   

Long-term prepaid expenses

     10,883        10,542   

Other non-current assets

     21,491        14,238   
                

Total assets

   $ 565,951      $ 453,331   
                

Liabilities and Unitholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 69,379      $ 59,705   

Other accounts payable

     22,546        7,190   

Accrued expenses

     31,906        22,114   

Current portion of long-term borrowings

     —          618   

Other current liabilities

     7,826        3,937   
                

Total current liabilities

     131,657        93,564   
                

Long-term borrowings, net

     246,746        61,132   

Accrued severance benefits, net

     76,394        72,409   

Other non-current liabilities

     9,234        10,536   
                

Total liabilities

     464,031        237,641   
                

Commitments and contingencies

    

Unitholders’ equity

    

Common units, no par value, 375,000,000 units authorized, 307,233,996 and 307,083,996 units issued and outstanding at June 30, 2010 and December 31, 2009, respectively

     55,453        55,135   

Additional paid-in capital

     39,224        168,700   

Accumulated deficit

     (1,609     (1,963

Accumulated other comprehensive income (loss)

     8,852        (6,182
                

Total unitholders’ equity

     101,920        215,690   
                

Total liabilities and unitholders’ equity

   $ 565,951      $ 453,331   
                

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

 

3


Table of Contents

MAGNACHIP SEMICONDUCTOR LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands of US dollars, except unit data)

 

     Successor           Predecessor  
     Three Months
Ended
    Six Months
Ended
          Three Months
Ended
    Six Months
Ended
 
     June 30, 2010           June 28, 2009  

Net sales

   $ 194,700      $ 374,185           $ 139,693      $ 241,152   

Cost of sales

     130,166        260,293             91,362        171,922   
                                     

Gross profit

     64,534        113,892             48,331        69,230   
                                     

Selling, general and administrative expenses

     15,964        33,872             18,353        33,636   

Research and development expenses

     20,543        41,074             16,242        33,228   

Restructuring and impairment charges

     267        603             385        439   
                                     

Operating income from continuing operations

     27,760        38,343             13,351        1,927   
                                     

Other income (expenses)

             

Interest expense, net

     (6,557     (8,606          (12,837     (27,491

Foreign currency gain (loss), net

     (48,273     (26,657          30,791        (9,420

Reorganization items, net

     —          —               (340     (340

Others

     (950     (1,002          —          —     
                                     
     (55,780     (36,265          17,614        (37,251
                                     

Income (loss) from continuing operations before income taxes

     (28,020     2,078             30,965        (35,324
                                     

Income tax expenses

     2,727        1,724             2,387        5,005   
                                     

Income (loss) from continuing operations

     (30,747     354             28,578        (40,329
                                     

Loss from discontinued operations, net of taxes

     —          —               966        1,751   
                                     

Net income (loss)

   $ (30,747   $ 354           $ 27,612      $ (42,080
                                     

Dividends accrued on preferred units

     —          —               2,948        6,317   
                                     

Income (loss) from continuing operations attributable to common units

   $ (30,747   $ 354           $ 25,630      $ (46,646
                                     

Net income (loss) attributable to common units

   $ (30,747   $ 354           $ 24,664      $ (48,397
                                     

Earnings (loss) per common unit from continuing operations

             

- Basic and diluted

   $ (0.10   $ 0.00           $ 0.48      $ (0.88
                                     

Loss per common unit from discontinued operations

             

- Basic and diluted

   $ —        $ —             $ 0.02      $ 0.03   
                                     

Earnings (loss) per common unit—Basic and diluted

   $ (0.10   $ 0.00           $ 0.46      $ (0.91
                                     

Weighted average number of units—Basic

     302,558,556        302,501,374             52,923,483        52,923,483   

Weighted average number of units—Diluted

     302,558,556        312,480,377             52,923,483        52,923,483   

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

 

4


Table of Contents

MAGNACHIP SEMICONDUCTOR LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS’ EQUITY

(Unaudited; in thousands of US dollars, except unit data)

 

     Common Units    Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
deficit)
    Accumulated
Other
Comprehensive
Income (loss)
    Total  
     Units    Amount         

Three Months Ended June 30, 2010

              

Balance at April 1, 2010

   307,233,996    $ 55,453    $ 169,265      $ 29,138      $ (22,411   $ 231,445   

(Successor Company)

              

Unit-based compensation

   —        —        656        —          —          656   

Distribution to unitholders

   —        —        (130,697     —          —          (130,697

Comprehensive income:

              

Net loss

   —        —        —          (30,747     —          (30,747

Fair valuation of derivatives

   —        —        —          —          (2,090     (2,090

Foreign currency translation adjustments

   —        —        —          —          33,329        33,329   

Unrealized gains on investments

   —        —        —          —          24        24   
                    

Total comprehensive income

                 516   
                                            

Balance at June 30, 2010

   307,233,996    $ 55,453    $ 39,224      $ (1,609   $ 8,852      $ 101,920   
                                            

Six Months Ended June 30, 2010

              

Balance at January 1, 2010

   307,083,996    $ 55,135    $ 168,700      $ (1,963   $ (6,182   $ 215,690   

(Successor Company)

              

Unit-based compensation

   150,000      318      1,221        —          —          1,539   

Distribution to unitholders

   —        —        (130,697     —          —          (130,697

Comprehensive income:

              

Net income

   —        —        —          354        —          354   

Fair valuation of derivatives

   —        —        —          —          (3,524     (3,524

Foreign currency translation adjustments

   —        —        —          —          18,422        18,422   

Unrealized gains on investments

   —        —        —          —          136        136   
                    

Total comprehensive income

                 15,388   
                                            

Balance at June 30, 2010

   307,233,996    $ 55,453    $ 39,224      $ (1,609   $ 8,852      $ 101,920   
                                            

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

 

5


Table of Contents

MAGNACHIP SEMICONDUCTOR LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS’ EQUITY

(Unaudited; in thousands of US dollars, except unit data)

 

     Common Units    Additional
Paid-In
Capital
   Retained
Earnings
(Accumulated
deficit)
    Accumulated
Other
Comprehensive
Income (loss)
    Total  
     Units    Amount          

Three Months Ended June 28, 2009

               

Balance at March 30, 2009

   52,923,483    $ 52,923    $ 3,261    $ (1,068,068   $ 176,814      $ (835,070

(Predecessor Company)

               

Unit-based compensation

   —        —        56      —          —          56   

Dividends accrued on preferred units

   —        —        —        (2,948     —          (2,948

Comprehensive income:

               

Net income

   —        —        —        27,612        —          27,612   

Foreign currency translation adjustments

   —        —        —        —          (21,778     (21,778

Unrealized gains on investments

   —        —        —        —          464        464   
                     

Total comprehensive income

                  6,298   
                                           

Balance at June 28, 2009

   52,923,483    $ 52,923    $ 3,317    $ (1,043,404   $ 155,500      $ (831,664
                                           

Six Months Ended June 28, 2009

               

Balance at January 1, 2009

   52,923,483      52,923      3,150      (995,007     151,135        (787,799

(Predecessor Company)

               

Unit-based compensation

   —        —        167      —          —          167   

Dividends accrued on preferred units

   —        —        —        (6,317     —          (6,317

Comprehensive loss:

               

Net loss

   —        —        —        (42,080     —          (42,080

Foreign currency translation adjustments

   —        —        —        —          3,901        3,901   

Unrealized gains on investments

                464        464   
                     

Total comprehensive loss

                  (37,715
                                           

Balance at June 28, 2009

   52,923,483    $ 52,923    $ 3,317    $ (1,043,404   $ 155,500      $ (831,664
                                           

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

 

6


Table of Contents

MAGNACHIP SEMICONDUCTOR LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands of US dollars)

 

     Six Months Ended  
     Successor           Predecessor  
     June 30,
2010
          June 28,
2009
 

Cash flows from operating activities

         

Net income (loss)

   $ 354           $ (42,080

Adjustments to reconcile net income (loss) to net cash provided by operating activities

         

Depreciation and amortization

     29,985             22,167   

Provision for severance benefits

     9,380             3,738   

Amortization of debt issuance costs and original issue discount

     449             499   

Loss on foreign currency translation, net

     29,975             9,758   

Loss (gain) on disposal of property, plant and equipment, net

     (9          82   

Loss on disposal of intangible assets, net

     7             74   

Restructuring and impairment charges

     603             —     

Unit-based compensation

     2,752             167   

Cash used for reorganization items

     1,475             —     

Noncash reorganization items

     —               340   

Other

     740             1,077   

Changes in operating assets and liabilities

         

Accounts receivable

     (45,243          (13,972

Inventories

     1,342             7,899   

Other receivables

     119             343   

Deferred tax assets

     618             1,623   

Accounts payable

     7,542             8,520   

Other accounts payable

     11,330             (2,884

Accrued expenses

     7,841             25,542   

Long term other payable

     (1,531          405   

Other current assets

     (92          517   

Other current liabilities

     (1,172          5,081   

Payment of severance benefits

     (2,760          (3,207

Other

     (1,324          (184
                     

Net cash provided by operating activities before reorganization items

     52,381             25,505   
                     

Cash used for reorganization items

     (1,475          —     
                     

Net cash provided by operating activities

     50,906             25,505   
                     

Cash flows from investing activities

         

Proceeds from disposal of plant, property and equipment

     13             282   

Proceeds from disposal of intangible assets

     —               1   

Purchase of plant, property and equipment

     (20,509          (2,082

Payment for intellectual property registration

     (245          (155

Increase in restricted cash

     —               (17,524

Decrease (increase) in short-term financial instruments

     329             (324

Decrease in guarantee deposits

     999             608   

Other

     (778          3   
                     

Net cash used in investing activities

     (20,191          (19,191
                     

Cash flows from financing activities

         

Proceeds from issuance of senior notes

     246,685             —     

Debt issuance costs paid

     (8,313          —     

Repayment of long-term borrowings

     (61,750          —     

Distribution to unitholders

     (130,697          —     
                     

Net cash provided by financing activities

     45,925             —     

Effect of exchange rates on cash and cash equivalents

     (255          (914
                     

Net increase in cash and cash equivalents

     76,385             5,400   
                     

Cash and cash equivalents

         

Beginning of the period

     64,925             4,037   
                     

End of the period

   $ 141,310           $ 9,437   
                     

Supplemental cash flow information

         

Cash paid for interest

   $ 3,333           $ 2,958   
                     

Cash paid (refunded) for income taxes

   $ (270        $ 4,896   
                     

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

 

7


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited; tabular dollars in thousands, except unit data)

1. General

The Company

MagnaChip Semiconductor LLC (together with its subsidiaries, the “Company”) is a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer applications. The Company’s business is comprised of three key segments: Display Solutions, Power Solutions and Semiconductor Manufacturing Services. The Company’s Display Solutions products include display drivers for use in a wide range of flat panel displays and mobile multimedia devices. The Company’s Power Solutions products include discrete and integrated circuit solutions for power management in high-volume consumer applications. The Company’s Semiconductor Manufacturing Services segment provides specialty analog and mixed-signal foundry services for fabless semiconductor companies that serve the consumer, computing and wireless end markets.

2. Significant Accounting Policies

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 all adjustments consisting only of normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair presentation of financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with ASC 270, “Interim Reporting,” (“ASC 270”) and, accordingly, do not include all of the information and note disclosures required by US GAAP for complete financial statements. The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results to be expected for a full year or for any other periods.

The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2010-06 (ASU 2010-06), which amends the disclosure requirements of ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) as of January 1, 2010. ASU 2010-06 requires new disclosures for any transfers of fair value into and out of Level 1 and 2 fair value measurements and separate presentation of purchases, sales, issuances and settlements within the reconciliation of Level 3 unobservable inputs. The Company previously adopted ASC 820 on January 1, 2008 and January 1, 2009 for financial assets and liabilities and for nonfinancial assets and liabilities, respectively. ASU 2010-06 is effective for annual and interim periods beginning after December 15, 2009, except for the Level 3 reconciliation which is effective for annual and interim periods beginning after December 15, 2010. The adoption of ASU 2010-06 as of January 1, 2010 did not have a material effect on the Company’s financial condition or results of operations. The Company does not expect the adoption of ASU 2010-06 in relation to the Level 3 reconciliation to have a material impact on the Company’s financial condition or results of operations.

In June 2009, the FASB issued ASC 810, “Consolidation,” (“ASC 810”), which (1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, (2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity and (3) requires additional disclosures about an enterprise’s involvement in variable interest entities. The Company was required to adopt ASC 810 as of the beginning of 2010. The adoption of ASC 810 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

8


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

3. Voluntary Reorganization under Chapter 11

On June 12, 2009, MagnaChip Semiconductor LLC (the “Parent”), MagnaChip Semiconductor B.V., MagnaChip Semiconductor S.A. and certain other subsidiaries of the Parent in the U.S. (the “Debtors”), filed a voluntary petition for relief in the U.S. Bankruptcy Court for the District of Delaware under Chapter 11 of the U.S. Bankruptcy Code. The court approved a plan of reorganization proposed by the Creditors’ Committee on September 25, 2009 (the “Plan of Reorganization”), and the Plan of Reorganization became effective and the Debtors emerged from Chapter 11 reorganization proceedings (the “Reorganization Proceedings”) on November 9, 2009 (the “Reorganization Effective Date”). On the Reorganization Effective Date, the Company implemented fresh-start reporting in accordance with Accounting Standards Codification (“ASC”) 852, “Reorganizations,” (“ASC 852”).

All conditions required for the adoption of fresh-start reporting were met upon emergence from the Reorganization Proceedings on the Reorganization Effective Date. The Company is permitted to select an accounting convenience date (“the Fresh-Start Adoption Date”) proximate to the emergence date for purposes of fresh-start reporting, provided that an analysis of the activity between the date of emergence and an accounting convenience date does not result in a material difference in the fresh-start reporting results. The Company evaluated transaction activity between October 25, 2009 and the Reorganization Effective Date and concluded an accounting convenience date of October 25, 2009 which was the Company’s October accounting period end was appropriate.

As a result, the fair value of the Predecessor Company’s assets became the new basis for the Successor Company’s consolidated statement of financial position as of the Fresh-Start Adoption Date, and all operations beginning on or after October 26, 2009 are related to the Successor Company.

As a result of the application of fresh-start reporting in accordance with ASC 852, the financial statements prior to and including October 25, 2009 represent the operations of the Predecessor Company and are not comparable with the financial statements for periods on or after October 25, 2009. References to the “Successor Company” refer to the Company on or after October 25, 2009, after giving effect to the application of fresh-start reporting. References to the “Predecessor Company” refer to the Company prior to and including October 25, 2009.

4. Inventories

Inventories as of June 30, 2010 and December 31, 2009 consist of the following:

 

     Successor  
     June 30,
2010
    December 31,
2009
 

Finished goods

   $ 8,338      $ 19,474   

Semi-finished goods and work-in-process

     47,353        42,604   

Raw materials

     8,999        5,844   

Materials in-transit

     213        64   

Less: inventory reserve

     (4,931     (4,579
                

Inventories, net

   $ 59,972      $ 63,407   
                

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

5. Property, Plant and Equipment

Property, plant and equipment as of June 30, 2010 and December 31, 2009 comprise the following:

 

     Successor  
     June 30,
2010
    December 31,
2009
 

Buildings and related structures

   $ 69,533      $ 72,076   

Machinery and equipment

     87,196        71,505   

Vehicles and others

     4,245        3,043   
                
     160,974        146,624   

Less: accumulated depreciation

     (20,502     (5,388

Land

     14,568        15,101   
                

Property, plant and equipment, net

   $ 155,040      $ 156,337   
                

6. Intangible Assets

Intangible assets as of June 30, 2010 and December 31, 2009 are as follows:

 

     Successor  
     June 30,
2010
    December 31,
2009
 

Technology

   $ 17,499      $ 14,942   

Customer relationships

     25,516        26,448   

Intellectual property assets

     4,867        4,779   

In-process research and development

     5,836        9,829   

Less: accumulated amortization

     (18,881     (5,840
                

Intangible assets, net

   $ 34,837      $ 50,158   
                

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

7. Derivative Financial Instruments

Effective January 11, 2010, the Company’s Korean subsidiary entered into option 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. Total notional amounts for the options and forward contracts were $50 million and $135 million, respectively, and monthly settlements for the contracts were and will be made from February to December 2010.

Effective May 25, 2010, the Company’s Korean subsidiary entered into another option 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. Total notional amounts for the options and forward contracts were $30 million and $78 million, respectively, and monthly settlements for the contracts will be made from January to June 2011.

The option and forward contracts qualify as cash flow hedges under ASC 815, “Derivatives and Hedging,” (“ASC 815”), 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 Company is utilizing the “hypothetical derivative” method to measure the effectiveness by comparing the changes in value of the actual derivative versus the change in fair value of the “hypothetical derivative.”

The fair values of the Company’s outstanding option and forward contracts recorded as assets and liabilities are as follows:

 

Derivatives designated as hedging instruments under ASC 815:

        June 30,
2010

Asset Derivatives:

     

Options

   Other current assets    $ 205

Forwards

   Other current assets    $ 1,696

Liability Derivatives:

     

Forwards

   Other current liabilities    $ 5,021

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is 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 either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the three months ended June 30, 2010:

 

Derivatives in ASC 815 Cash Flow

Hedging Relationships

   Amount of Loss
Recognized in
AOCI on
Derivatives
(Effective Portion)
    Location of
Loss
Reclassified from
AOCI into
Statements of
Operations

(Effective Portion)
   Amount of Loss
Reclassified from
AOCI into
Statements of
Operations
(Effective Portion)
   

Location of

Loss

Recognized in

Statements of Operations on

Derivative

(Ineffective

Portion and

Amount

Excluded from

Effectiveness

Testing)

   Amount of Loss
Recognized in
Statements of
Operations on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 

Options

   $ (622   Net sales    $ (167   Other income (expenses) — Others    $ (28

Forwards

     (1,468 )   Net sales      (1,092   Other income (expenses) — Others      (922
                              

Total

   $ (2,090 )      $ (1,259      $ (950
                              

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the six months June 30, 2010:

 

Derivatives in ASC 815 Cash Flow

Hedging Relationships

   Amount of Loss
Recognized in
AOCI on
Derivatives
(Effective Portion)
    Location of
Gain (Loss)
Reclassified from
AOCI into
Statements of
Operations
(Effective Portion)
   Amount of Loss
Reclassified from
AOCI into
Statements of
Operations
(Effective Portion)
   

Location of

Loss

Recognized in

Statements of Operations on

Derivative

(Ineffective

Portion and

Amount

Excluded from

Effectiveness

Testing)

   Amount of Loss
Recognized in
Statements of
Operations on
Derivatives
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 

Options

   $ (1,138   Net sales    $ (183   Other income (expenses) — Others    $ (62

Forwards

     (2,386 )   Net sales      (1,695   Other income (expenses) — Others      (945
                              

Total

   $ (3,524 )      $ (1,878      $ (1,007
                              

The Company’s option and forward contracts are subject to termination upon the occurrence of the following events:

(i) On the last day of a fiscal quarter, the sum of qualified and unrestricted cash and cash equivalents held by the Company is less than $30 million.

(ii) The rating of the Company’s debt is B- or lower by Standard & Poor’s Ratings Group or any successor rating agency thereof (“S&P”) or B3 or lower by Moody’s Investor Services, Inc. or any successor rating agency thereof (“Moody’s”) or the Company’s debt ceases to be assigned a rating by either S&P or Moody’s.

In addition, the Company is required to deposit cash collateral with Goldman Sachs International Bank, the counterparty to the option and forward contracts, for any exposure in excess of $5 million.

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

8. Fair Value Measurements

ASC 820 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820 requires, among other things, the Company’s valuation techniques used to measure fair value to maximize the use of observable inputs and minimize the use of unobservable inputs.

The valuation techniques required by ASC 820 are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the Company. These two types of inputs create the following fair value hierarchy:

 

Level 1    Unadjusted quoted prices for identical instruments in active markets.
Level 2    Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations for which inputs are observable or for which significant value drivers are observable.
Level 3    Significant inputs to the valuation model are unobservable.

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and the basis for that measurement:

 

     Carrying Value
June 30,  2010
   Fair Value
Measurement
June 30, 2010
   Quoted Prices in
Active  Markets

for
Identical Asset
(Level 1)
   Significant
Other
Observable

Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)

Assets:

              

Current derivative assets

   $ 1,901    $ 1,901    $ —      $ 1,901    $ —  

Available-for-sale securities

     691      691      691      —        —  

Liabilities:

              

Current derivative liabilities

     5,021      5,021      —        5,021      —  

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

9. Long-Term Borrowings

Long-term borrowings as of June 30, 2010 and December 31, 2009 are as follows:

 

     Successor  
     June 30,
2010
    December 31,
2009
 

New term loan

   $ —        $ 61,750   

10.5% senior notes due April 2018

     250,000        —     

Current portion of long-term borrowings

     —          (618
                
     250,000        61,132   

Discount on 10.5% senior notes due April 2018

     (3,254     —     
                

Long-term borrowings, net of unamortized discount

   $ 246,746      $ 61,132   
                

New Term Loan

In connection with the Predecessor Company’s reorganization in 2009, in complete satisfaction of the first lien lender claims arising from the senior secured credit facility (included in short-term borrowings) of $95 million, the Company made a cash payment of $33,250 thousand to the senior secured credit facility lenders and, together with its subsidiaries, including MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, as borrowers, entered into a $61,750 thousand Amended and Restated Credit Agreement (the “Credit Agreement” or the “new term loan”) with Avenue Investments, LP, Goldman Sachs Lending Partners LLC and Citicorp North America, Inc.

Long-term borrowings as of December 31, 2009 consisted of Eurodollar loans at an annual interest rate of 6 month LIBOR + 12% to Avenue Investments, LP, Goldman Sachs Lending Partners LLC and Citicorp North America, Inc. in the principal amount of $42,055 thousand, $12,285 thousand and $7,410 thousand, respectively.

On April 9, 2010, the new term loan of $61,596 thousand was fully repaid by the Company with the proceeds from issuance of new 10.5% senior notes. In connection with the repayment of the new term loan, $210 thousand of relevant debt issuance costs were written off.

As of the early repayment date, the Company and all of its subsidiaries except for MagnaChip Semiconductor (Shanghai) Company Limited jointly and severally guaranteed, as a primary obligor, the payment and performance of the borrower’s obligations under the Credit Agreement.

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

10.5% Senior Notes

On April 9, 2010, two of the Company’s wholly-owned subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, issued $250 million aggregate principal amount of 10.5% senior notes due April 15, 2018 at a price of 98.674%. Interest on the notes will accrue at a rate of 10.5% per annum, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2010. $250 million of principle amount will be paid in full at April 15, 2018. The obligations under the senior notes are fully and unconditionally guaranteed on an unsecured senior basis by the Company and all of its subsidiaries except for MagnaChip Semiconductor, Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited.

Of the $238,372 thousand of net proceeds, which represents $250 million of principal amount net of $3,315 thousand of original issue discount and $8,313 thousand of debt issuance costs, $130,697 thousand was used to make a distribution to the Company’s stockholders and $61,596 thousand was used to repay all outstanding borrowings under the new term loan. The remaining proceeds of $46,079 thousand were retained to fund working capital and for general corporate purposes.

The Company can optionally redeem all or a part of the notes according to the following schedule: (i) at any time prior to April 15, 2013, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of notes issued under the indenture at a redemption price equal to 110.5% of the principal amount of the notes redeemed, plus accrued and unpaid interest and special interest, if any, to the date of redemption; (ii) at any time prior to April 15, 2014, the Company may on any one or more occasions redeem all or a part of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed, plus the applicable premium as of, and accrued and unpaid interest and special interest, if any, to the date of redemption; and (iii) on or after April 15, 2014, the Company may on any one or more occasions redeem all or a part of the notes, at a redemption price equal to 105.25%, 102.625% and 100% of the principal amount of the notes redeemed in 2014, 2015 and 2016 and thereafter, respectively, plus accrued and unpaid interest and special interest, if any, on the notes redeemed, to the applicable date of redemption.

The indenture relating to the Company’s $250 million senior notes contains covenants that limit ability of the Parent, co-issuers and the restricted subsidiaries to: (i) declare or pay any dividend or make any payment or distribution on account of or purchase or redeem the Company’s capital stock or equity interests of the restricted subsidiaries; (ii) make any principal payment on, or redeem or repurchase, prior to any scheduled repayment, sinking fund payment or maturity, any subordinated indebtedness; (iii) make certain investments, including capital expenditures; (iv) incur additional indebtedness and issue certain types of capital stock; (v) create or incur any lien (except for permitted liens) that secures obligations under any indebtedness or related guarantee; (vi) merge with or into or sell all or substantially all of the Company’s assets to other companies; (vii) enter into certain types of transactions with affiliates; (viii) guarantee the payment of any indebtedness; (ix) enter into sale-leaseback transactions; (x) enter into agreements that would restrict the ability of the restricted subsidiaries to make distributions with respect to their equity, to make loans to the Parent, co-issuers or other restricted subsidiaries or to transfer assets to the Parent, co-issuers or other restricted subsidiaries; and (xi) designate unrestricted subsidiaries.

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

As of June 30, 2010, the Company is compliant with all of its covenant requirements.

Of the $250 million aggregate principal amount, funds affiliated with Avenue Capital Management II, L.P. purchased $35 million principal amount.

In connection with the issuance of the senior notes, the Company capitalized certain costs and fees, which are being amortized using the effective interest method over its respective term, 2010 to 2018. Amortization costs, which were included in interest expense in the accompanying statements of operations, amounted to $153 thousand for the three and six months ended June 30, 2010. The remaining capitalized costs as of June 30, 2010 were $8,160 thousand.

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

10. Accrued Severance Benefits

The majority of accrued severance benefits is for employees in the Company’s Korean subsidiary, MagnaChip Semiconductor Ltd. (Korea). Pursuant to the Employee Retirement Benefit Security Act of Korea, most 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 June 30, 2010, 98.5% of all employees of the Company were eligible for severance benefits.

Changes in accrued severance benefits for each period are as follows:

 

     Successor           Predecessor  
     Three
Months
Ended
    Six
Months
Ended
          Three
Months
Ended
    Six
Months
Ended
 
     June 30, 2010           June 28, 2009  

Beginning balance

   $ 78,106      $ 73,646           $ 58,546      $ 63,147   

Provisions

     6,214        9,380             2,749        3,738   

Severance payments

     (1,668     (2,760          (1,521     (3,207

Translation adjustments

     (5,114     (2,728          2,838        (1,066
                                       
     77,538        77,538             62,612        62,612   
                                       

Less:

 

Cumulative contributions to the National Pension Fund

     (476     (476          (496     (496
 

Group Severance insurance plan

     (668     (668          (634     (634
                                       

Accrued severance benefits, net

   $ 76,394      $ 76,394           $ 61,482      $ 61,482   
                                       

The severance benefits are funded approximately 1.48% and 1.80% as of June 30, 2010 and June 28, 2009, respectively, through the Company’s National Pension Fund and group severance insurance plan which will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.

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

 

     Severance benefit

Remainder of 2010

   $ 32

2011

     —  

2012

     132

2013

     —  

2014

     275

2015

     304

2016 – 2020

     10,225

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.

 

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Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

11. Redeemable Convertible Preferred Units

Predecessor Company

Changes in Series B units for each period are as follows:

 

     Three Months Ended    Six Months Ended
     June 28,
2009
   June 28,
2009
     Units    Amount    Units    Amount

Beginning of period

   93,997    $ 146,038    93,997    $ 142,669

Accrual of preferred dividends

   —        2,948    —        6,317
                       

End of period

   93,997    $ 148,986    93,997    $ 148,986
                       

The Series B units were retired without consideration as part of the Company’s reorganization in 2009.

12. Discontinued Operations

On October 6, 2008, the Company announced the closure of its Imaging Solutions business segment. As of December 31, 2008, Imaging Solutions business segment qualified as a discontinued operation component of the Company under ASC 360, “Property, Plant and Equipment,” (“ASC 360”). As a result, the results of operations of the Imaging Solutions business segment were classified as discontinued operations.

The results of operations of the Company’s discontinued Imaging Solutions business consist of the following:

 

     Predecessor
     Three Months
Ended
   Six Months
Ended
     June 28, 2009

Net sales

   $ 1,341    $ 2,254

Cost of sales

     2,071      3,377

Selling, general and administrative expenses

     236      628
             

Loss from discontinued operations, net of taxes

   $ 966    $ 1,751
             

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

13. Restructuring and Impairment Charges

Successor Company

2010 Restructuring and Impairment Charges

The Company recognized $267 and $603 thousand of impairment charge for the three and six months ended June 30, 2010, respectively, for the two and four abandoned IPR&D projects which were recorded as a result of its adoption of fresh-start reporting as of October 25, 2009.

Predecessor Company

2009 Restructuring and Impairment Charges

On March 31, 2009, the Company announced the closure of the Tokyo office of its subsidiary, MagnaChip Semiconductor Inc. (Japan). In connection with this closure, the Company recognized $385 thousand and $439 thousand of restructuring charges, which consisted of one-time termination benefits and other related costs under ASC 420, “Exit or Disposal Cost Obligations,” (“ASC 420”), for the three and six months ended June 28, 2009. There was no remaining accrual as of June 28, 2009.

14. Uncertainty in Income Taxes

The Company’s subsidiaries file income tax returns in Korea, Japan, Taiwan, the U.S. and in various other jurisdictions. The Company is subject to income tax examinations by tax authorities of these jurisdictions for the applicable statute of limitations since the beginning of its operation as an independent company in October 2004.

As of June 30, 2010 and December 31, 2009, the Company recorded $867 thousand and $1,997 thousand of liabilities for unrecognized tax benefits, respectively. For the six months ended June 30, 2010, the Company reversed $1,640 thousand of liabilities due to the lapse of the applicable statute of limitations.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expenses. The Company recognized $88 thousand and $64 thousand of interest and penalties as income tax expenses for the three and six months ended June 30, 2010, respectively. And it also recognized $55 thousand and $147 thousand of interest and penalties as income tax expenses for the three and six months ended June 28, 2009, respectively. Total interest and penalties accrued as of June 30, 2010 and December 31, 2009 were $194 thousand and $946 thousand, respectively.

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

15. Geographic and Segment Information

The following sets forth information relating to the reportable segments:

 

     Three Months Ended  
     Successor          Predecessor  
     June 30,
2010
         June 28,
2009
 

Net Sales

          

Display Solutions

   $ 80,584         $ 74,187   

Semiconductor Manufacturing Services

     101,564           62,963   

Power Solutions

     12,040           1,685   

All other

     512           858   
                    

Total segment net sales

   $ 194,700         $ 139,693   
                    

Gross Profit

          

Display Solutions

   $ 22,122         $ 22,435   

Semiconductor Manufacturing Services

     39,452           25,816   

Power Solutions

     2,448           (778

All other

     512           858   
                    

Total segment gross profit

   $ 64,534         $ 48,331   
                    

 

     Six Months Ended  
     Successor          Predecessor  
     June 30,
2010
         June 28,
2009
 

Net Sales

          

Display Solutions

   $ 157,314         $ 133,807   

Semiconductor Manufacturing Services

     194,765           103,100   

Power Solutions

     21,074           2,618   

All other

     1,032           1,627   
                    

Total segment net sales

   $ 374,185         $ 241,152   
                    

Gross Profit

          

Display Solutions

   $ 36,553         $ 36,109   

Semiconductor Manufacturing Services

     72,296           31,993   

Power Solutions

     4,011           (499

All other

     1,032           1,627   
                    

Total segment gross profit

   $ 113,892         $ 69,230   
                    

 

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Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

The following is a summary of net sales by region, based on the location of the customer:

 

     Three Months Ended
     Successor          Predecessor
     June 30,
2010
         June 28,
2009

Korea

   $ 101,310         $ 74,909

Asia Pacific

     52,687           43,529

Japan

     12,796           9,254

North America

     23,686           11,126

Europe

     4,003           875

Africa

     218           —  
                  

Total

   $ 194,700         $ 139,693
                  

 

     Six Months Ended
     Successor          Predecessor
     June 30,
2010
         June 28,
2009

Korea

   $ 198,970         $ 134,607

Asia Pacific

     101,161           65,288

Japan

     22,991           16,769

North America

     44,066           19,708

Europe

     6,779           4,780

Africa

     218           —  
                  

Total

   $ 374,185         $ 241,152
                  

Net sales from the Company’s top ten largest customers accounted for 64.3% and 68.4% for the three months ended June 30, 2010 and June 28, 2009, respectively, and 64.2% and 70.1% for the six months ended June 30, 2010 and June 28, 2009, respectively.

The Company recorded $35,315 thousand and $40,178 thousand of sales to one customer within its Display Solutions segment, which represents greater than 10% of net sales, for the three months ended June 30, 2010 and June 28, 2009, respectively, and $70,893 thousand and $73,962 thousand for the six months ended June 30, 2010 and June 28, 2009, respectively.

Over 99% of the Company’s property, plant and equipment are located in Korea as of June 30, 2010.

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

16. Commitments and Contingencies

Samsung Fiber Optics has made a claim against the Company for the infringement of the certain patent rights of Caltech in relation to imaging sensor products provided by the Company to Samsung Fiber Optics. The Company believes it is probable that the pending claim will have an unfavorable outcome and further believes the associated loss can be reasonably estimated according to ASC 450 “Contingencies” (“ASC 450”). The Company recorded $718 thousand of estimated liabilities as of June 30, 2010 and December 31, 2009 in accrued expenses in the accompanying balance sheets, as the Company believes its accrual is its best estimate if the final outcome is unfavorable. Estimation was based on the most recent communication with Samsung Fiber Optics. Accordingly, the Company cannot provide assurance that the estimated liabilities will be realized, and actual results could vary materially.

17. Earnings (loss) per Unit

The following table illustrates the computation of basic and diluted earnings (loss) per common unit:

 

     Three Months Ended  
     Successor           Predecessor  
     June 30,
2010
          June 28,
2009
 

Income (loss) from continuing operations

   $ (30,747        $ 28,578   

Loss from discontinued operations, net of taxes

     —               (966
                     

Net income (loss)

     (30,747          27,612   

Dividends accrued on preferred unitholders

     —               (2,948
                     

Income (loss) from continuing operations attributable to common units

   $ (30,747        $ 25,630   
                     

Net income (loss) attributable to common units

   $ (30,747        $ 24,664   
                     

Weighted average common units outstanding-basic and diluted

     302,558,556             52,923,483   
                     

Basic and diluted earnings (loss) per unit from continuing operations

   $ (0.10        $ 0.48   
                     

Basic and diluted loss per unit from discontinued operations

   $ —             $ (0.02
                     

Basic and diluted net earnings (loss) per unit

   $ (0.10        $ 0.46   
                     

 

21


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

     Six Months Ended  
     Successor         Predecessor  
     June 30,
2010
        June 28,
2009
 

Income (loss) from continuing operations

   $ 354        $ (40,329

Loss from discontinued operations, net of taxes

     —            (1,751
                   

Net income (loss)

     354          (42,080

Dividends accrued on preferred unitholders

     —            (6,317
                   

Income (loss) from continuing operations attributable to common units

   $ 354        $ (46,646
                   

Net income (loss) attributable to common units

   $ 354        $ (48,397
                   

Weighted average common units outstanding-basic

     302,501,374          52,923,483   
                   

Weighted average common units outstanding-diluted

     312,480,377          52,923,483   
                   

Basic and diluted earnings (loss) per unit from continuing operations

   $ 0.00        $ (0.88
                   

Basic and diluted earnings (loss) per unit from discontinued operations

   $ —          $ (0.03
                   

Basic and diluted net earnings (loss) per unit

   $ 0.00        $ (0.91
                   

The following outstanding unit options and warrants were excluded from the computation of diluted earnings (loss) per unit of Successor Company, as they would have an anti-dilutive effect on the calculation. The following outstanding redeemable convertible preferred units and unit options were excluded from the computation of diluted earnings (loss) per unit of Predecessor Company as they were out of money position considering the Reorganization Proceedings of Predecessor Company:

 

     Six Months Ended
     Successor          Predecessor
     June 30,
2010
         June 28,
2009

Redeemable convertible preferred units

   —           93,997

Options

   914,000         3,882,506

Warrants

   15,000,000         —  

 

22


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

18. Subsequent Events

The Company has evaluated subsequent events requiring recognition or disclosure in the consolidated financial statements during the period from July 1, 2010 through September 3, 2010, the date the unaudited interim consolidated financial statements were available to be issued.

A. Form S-4 Filing in Connection With the 10.5% Senior Notes

On August 4, 2010, the Company filed a registration statement on Form S-4 that set forth the terms and conditions under which the Company offered to exchange up to $250 million aggregate principal amount of 10.5% Senior Notes due 2018, which will be registered under the Securities Act (the “new notes”), for an equal principal amount of the Company’s outstanding unregistered 10.5% Senior Notes due 2018, which the Company issued on April 9, 2010 (the “old notes”). The terms of the new notes are substantially identical to the terms of the old notes (including principal amount, interest rate, maturity and redemption rights), except that the new notes will be registered under the Securities Act and will bear a separate CUSIP number, and the transfer restrictions, registration rights and related special interest terms applicable to the old notes will not apply to the new notes. The new notes will evidence the same indebtedness as the old notes which they will replace, and both the old notes and the new notes are governed by the same indenture.

B. Cash Flow Hedge Transactions

Effective August 12, 2010, the Company’s Korean subsidiary 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. Total notional amounts for the zero cost collar contracts were $108 million and monthly settlements for the contracts will be made from July to December 2011. Under the Company’s hedge strategy utilizing these zero cost collar contracts, appreciation of the Korean won against the U.S. dollar beyond 1,100:1 and depreciation of Korean won against U.S. dollar below 1,348:1 were designated as the risk being hedged.

C. Capital Lease Agreement

On August 31, 2010, the Company’s Korean subsidiary (the “lessee”) entered into a capital lease agreement with MMT First Company Limited for the use of semiconductor equipment. The lease term is two years, and the total amount of lease payments to be paid on a quarterly basis over the lease term is $11,437 thousand. The lease was categorized as a capital lease because the lease provides that the ownership of the equipment transfers to the lessee upon expiration of the lease term.

 

23


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

19. Condensed Consolidating Financial Information

The $250 million senior notes are fully and unconditionally, jointly and severally guaranteed by the Company and all of its subsidiaries, except for MagnaChip Semiconductor, Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited.

The senior notes are structurally subordinated to the creditors of the Company’s principal manufacturing and selling subsidiary, MagnaChip Semiconductor, Ltd. (Korea), which accounts for substantially all of the Company’s net sales and assets.

Below are condensed consolidating balance sheets as of June 30, 2010 and December 31, 2009, condensed consolidating statements of operations for the three months and six months ended June 30, 2010 and June 28, 2009 and condensed consolidating statement of cash flows for the six months ended June 30, 2010 and June 28, 2009 of those entities that guarantee the senior notes, those that do not, MagnaChip Semiconductor LLC, and the co-issuers.

For the purpose of the guarantor financial information, the investments in subsidiaries are accounted for under the equity method.

 

24


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Balance Sheet

June 30, 2010

(Successor Company)

 

     MagnaChip
Semiconductor
LLC
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Assets

            

Current assets

            

Cash and cash equivalents

   $ 73      $ 46,596      $ 82,448      $ 12,193      $ —        $ 141,310   

Accounts receivable, net

     —          —          155,751        55,483        (93,523     117,711   

Inventories, net

     —          —          59,956        174        (158     59,972   

Other receivables

     710        718        19,786        2,774        (20,286     3,702   

Prepaid expenses

     37        5        12,658        105        (2,897     9,908   

Short-term intercompany loan

     —          95,000        —          95,000        (190,000     —     

Other current assets

     5,509        102,276        3,479        97,524        (197,691     11,097   
                                                

Total current assets

     6,329        244,595        334,078        263,253        (504,555     343,700   
                                                

Property, plant and equipment, net

     —          —          154,683        357        —          155,040   

Intangible assets, net

     —          —          34,223        614        —          34,837   

Long-term prepaid expenses

     —          —          21,480        —          (10,597     10,883   

Investment in subsidiaries

     (594,889     (667,901     —          (520,778     1,783,568        —     

Long-term intercompany loan

     697,125        778,693        —          621,000        (2,096,818     —     

Other non-current assets

     —          8,160        5,987        7,344        —          21,491   
                                                

Total Assets

   $ 108,565      $ 363,547      $ 550,451      $ 371,790      $ (828,402   $ 565,951   
                                                

Liabilities and Unitholders’ Equity

            

Current liabilities

            

Accounts payable

   $ —        $ —        $ 123,934      $ 38,913      $ (93,468   $ 69,379   

Other accounts payable

     6,545        7,730        23,145        5,412        (20,286     22,546   

Accrued expenses

     100        5,985        119,304        104,263        (197,746     31,906   

Short-term intercompany borrowings

     —          —          95,000        95,000        (190,000     —     

Other current liabilities

     —          —          6,913        3,810        (2,897     7,826   
                                                

Total current liabilities

     6,645        13,715        368,296        247,398        (504,397     131,657   
                                                

Long-term borrowings

     —          943,871        621,000        778,693        (2,096,818     246,746   

Accrued severance benefits, net

     —          —          75,173        1,221        —          76,394   

Other non-current liabilities

     —          —          6,707        13,124        (10,597     9,234   
                                                

Total liabilities

     6,645        957,586        1,071,176        1,040,436        (2,611,812     464,031   
                                                

Commitments and contingencies

            

Unitholders’ equity

            

Common units

     55,453        136,229        39,005        51,976        (227,210     55,453   

Additional paid-in capital

     39,224        (735,016     (538,379     (733,394     2,006,789        39,224   

Retained earnings (accumulated deficit)

     (1,609     (4,104     (29,773     3,938        29,939        (1,609

Accumulated other comprehensive income

     8,852        8,852        8,422        8,834        (26,108     8,852   
                                                

Total unitholders’ equity

     101,920        (594,039     (520,725     (668,646     1,783,410        101,920   
                                                

Total liabilities and unitholders’ equity

   $ 108,565      $ 363,547      $ 550,451      $ 371,790      $ (828,402   $ 565,951   
                                                

 

25


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Balance Sheet

December 31, 2009

(Successor Company)

 

     MagnaChip
Semiconductor
LLC
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Assets

            

Current assets

            

Cash and cash equivalents

   $ 136      $ 24      $ 45,443      $ 19,322      $ —        $ 64,925   

Accounts receivable, net

     —          —          122,500        66,872        (115,139     74,233   

Inventories, net

     —          —          59,914        4,098        (605     63,407   

Other receivables

     710        718        7,061        3,617        (8,673     3,433   

Prepaid expenses

     165        85        14,122        1,150        (2,897     12,625   

Short-term intercompany loan

     —          95,000        —          95,000        (190,000     —     

Other current assets

     16        72,614        776        72,868        (142,841     3,433   
                                                

Total current assets

     1,027        168,441        249,816        262,927        (460,155     222,056   
                                                

Property, plant and equipment, net

     —          —          155,951        386        —          156,337   

Intangible assets, net

     —          —          49,459        699        —          50,158   

Long-term prepaid expenses

     —          —          22,576        —          (12,034     10,542   

Investment in subsidiaries

     (608,843     (690,259     —          (517,520     1,816,622        —     

Long-term intercompany loan

     824,091        806,355        —          621,000        (2,251,446     —     

Other non-current assets

     —          234        5,753        8,251        —          14,238   
                                                

Total Assets

   $ 216,275      $ 284,771      $ 483,555      $ 375,743      $ (907,013   $ 453,331   
                                                

Liabilities and Unitholders’ Equity

            

Current liabilities

            

Accounts payable

   $ —        $ —        $ 106,792      $ 67,975      $ (115,062   $ 59,705   

Other accounts payable

     485        5,551        6,337        3,490        (8,673     7,190   

Accrued expenses

     100        1,134        89,045        74,753        (142,918     22,114   

Short-term intercompany borrowings

     —          —          95,000        95,000        (190,000     —     

Current portion of long-term debt

     —          618        —          —          —          618   

Other current liabilities

     —          —          2,935        3,899        (2,897     3,937   
                                                

Total current liabilities

     585        7,303        300,109        245,117        (459,550     93,564   
                                                

Long-term borrowings

     —          885,224        621,000        806,354        (2,251,446     61,132   

Accrued severance benefits, net

     —          —          71,362        1,047        —          72,409   

Other non-current liabilities

     —          —          8,550        14,020        (12,034     10,536   
                                                

Total liabilities

     585        892,527        1,001,021        1,066,538        (2,723,030     237,641   
                                                

Commitments and contingencies

            

Unitholders’ equity

            

Common units

     55,135        136,229        39,005        51,976        (227,210     55,135   

Additional paid-in capital

     168,700        (735,940     (539,175     (734,525     2,009,640        168,700   

Accumulated deficit

     (1,963     (1,871     (11,636     (2,056     15,563        (1,963

Accumulated other comprehensive income

     (6,182     (6,174     (5,660     (6,190     18,024        (6,182
                                                

Total unitholders’ equity

     215,690        (607,756     (517,466     (690,795     1,816,017        215,690   
                                                

Total liabilities and unitholders’ equity

   $ 216,275      $ 284,771      $ 483,555      $ 375,743      $ (907,013   $ 453,331   
                                                

 

26


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Statement of Operations

For the three months ended June 30, 2010

(Successor Company)

 

     MagnaChip
Semiconductor
LLC
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 194,845      $ 6,923      $ (7,068   $ 194,700   

Cost of sales

     —          —          130,178        1,224        (1,236     130,166   
                                                

Gross profit

     —          —          64,667        5,699        (5,832     64,534   
                                                

Selling, general and administrative expenses

     615        389        15,591        2,167        (2,798     15,964   

Research and development expenses

     —          —          21,457        2,112        (3,026     20,543   

Restructuring and impairment charges

     —          —          267        —          —          267   
                                                

Operating income (loss)

     (615     (389     27,352        1,420        (8     27,760   
                                                

Other income (expense)

     3,734        (9,540     (64,123     14,149        —          (55,780
                                                

Income (loss) before income taxes, equity in loss of related equity investment

     3,119        (9,929     (36,771     15,569        (8     (28,020
                                                

Income tax expenses

     —          —          12        2,715        —          2,727   
                                                

Income (loss) before equity in loss of related investment

     3,119        (9,929     (36,783     12,854        (8     (30,747
                                                

Loss of related investment

     (33,866     (24,098     —          (36,791     94,755        —     
                                                

Net loss

   $ (30,747   $ (34,027   $ (36,783   $ (23,937   $ 94,747      $ (30,747
                                                

Net loss attributable to common units

   $ (30,747   $ (34,027   $ (36,783   $ (23,937   $ 94,747      $ (30,747
                                                

 

27


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Statement of Operations

For the six months ended June 30, 2010

(Successor Company)

 

     MagnaChip
Semiconductor
LLC
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 369,659      $ 18,605      $ (14,079   $ 374,185   

Cost of sales

     —          —          256,682        6,917        (3,306     260,293   
                                                

Gross profit

     —          —          112,977        11,688        (10,773     113,892   
                                                

Selling, general and administrative expenses

     1,178        525        32,855        4,754        (5,440     33,872   

Research and development expenses

     —          —          42,857        4,282        (6,065     41,074   

Restructuring and impairment charges

     —          —          603        —          —          603   
                                                

Operating income (loss)

     (1,178     (525     36,662        2,652        732        38,343   
                                                

Other income (expense)

     3,734        (8,117     (56,746     24,864        —          (36,265
                                                

Income (loss) before income taxes, equity in earnings (loss) of related equity investment

     2,556        (8,642     (20,084     27,516        732        2,078   
                                                

Income tax expenses (benefits)

     —          —          (1,947     3,671        —          1,724   
                                                

Income (loss) before equity in earnings (loss) of related investment

     2,556        (8,642     (18,137     23,845        732        354   
                                                

Earnings (loss) of related investment

     (2,202     6,409        —          (17,851     13,644        —     
                                                

Net income (loss)

   $ 354      $ (2,233   $ (18,137   $ 5,994      $ 14,376      $ 354   
                                                

Net income (loss) attributable to common units

   $ 354      $ (2,233   $ (18,137   $ 5,994      $ 14,376      $ 354   
                                                

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Statement of Operations

For the three months ended June 28, 2009

(Predecessor Company)

 

     MagnaChip
Semiconductor
LLC
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 137,819      $ 51,317      $ (49,443   $ 139,693   

Cost of sales

     —          —          91,940        44,216        (44,794     91,362   
                                                

Gross profit

     —          —          45,879        7,101        (4,649     48,331   
                                                

Selling, general and administrative expenses

     2,178        (10     14,693        3,204        (1,712     18,353   

Research and development expenses

     —          —          15,771        2,404        (1,933     16,242   

Restructuring and impairment charges

     —          —          —          385        —          385   
                                                

Operating income (loss)

     (2,178     10        15,415        1,108        (1,004     13,351   
                                                

Other income (expense)

     —          8,757        14,057        (5,200     —          17,614   
                                                

Income (loss) before income taxes, equity in earnings of related equity investment

     (2,178     8,767        29,472        (4,092     (1,004     30,965   
                                                

Income tax expenses (benefits)

     —          —          26        2,361        —          2,387   
                                                

Income (loss) before equity in earnings of related investment

     (2,178     8,767        29,446        (6,453     (1,004     28,578   
                                                

Earnings of related investment

     29,790        20,751        —          28,132        (78,673     —     
                                                

Income from continuing operations

     27,612        29,518        29,446        21,679        (79,677     28,578   
                                                

Income (loss) from discontinued operation, net of tax

     —          —          (1,107     271        (130     (966
                                                

Net income

   $ 27,612      $ 29,518      $ 28,339      $ 21,950      $ (79,807   $ 27,612   
                                                

Dividends accrued on preferred units

     2,948        —          —          —          —          2,948   
                                                

Income from continuing operations attributable to common units

   $ 24,664      $ 29,518      $ 29,446      $ 21,679      $ (79,677   $ 25,630   
                                                

Net income attributable to common units

   $ 24,664      $ 29,518      $ 28,339      $ 21,950      $ (79,807   $ 24,664   
                                                

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Statement of Operations

For the six months ended June 28, 2009

(Predecessor Company)

 

     MagnaChip
Semiconductor
LLC
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 233,645      $ 91,708      $ (84,201   $ 241,152   

Cost of sales

     —          —          171,059        76,146        (75,283     171,922   
                                                

Gross profit

     —          —          62,586        15,562        (8,918     69,230   
                                                

Selling, general and administrative expenses

     2,661        41        26,702        6,610        (2,378     33,636   

Research and development expenses

     —          —          33,338        5,909        (6,019     33,228   

Restructuring and impairment charges

     —          —          —          439        —          439   
                                                

Operating income (loss)

     (2,661     (41     2,546        2,604        (521     1,927   
                                                

Other income (expense)

     —          2,485        (43,029     3,293        —          (37,251
                                                

Income (loss) before income taxes, equity in loss of related equity investment

     (2,661     2,444        (40,483     5,897        (521     (35,324
                                                

Income tax expenses

     —          —          52        4,953        —          5,005   
                                                

Income (loss) before equity in loss of related investment

     (2,661     2,444        (40,535     944        (521     (40,329
                                                

Loss of related investment

     (39,419     (42,091     —          (42,258     123,768        —     
                                                

Loss from continuing operation

     (42,080     (39,647     (40,535     (41,314     123,247        (40,329
                                                

Income (loss) from discontinued operation, net of taxes

     —          —          (1,616     45        (180     (1,751
                                                

Net loss

   $ (42,080   $ (39,647   $ (42,151   $ (41,269   $ 123,067      $ (42,080
                                                

Dividends accrued on preferred units

     6,317        —          —          —          —          6,317   
                                                

Loss from continuing operations attributable to common units

   $ (48,397   $ (39,647   $ (40,535   $ (41,314   $ 123,247      $ (46,646
                                                

Net loss attributable to common units

   $ (48,397   $ (39,647   $ (42,151   $ (41,269   $ 123,067      $ (48,397
                                                

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Statement of Cash Flows

For the six months ended June 30, 2010

(Successor Company)

 

     MagnaChip
Semiconductor
LLC
(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Cash flow from operating activities

            

Net income (loss)

   $ 354      $ (2,233   $ (18,137   $ 5,994      $ 14,376      $ 354   

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

            

Depreciation and amortization

     —          —          29,846        139        —          29,985   

Provision for severance benefits

     —          —          9,225        155        —          9,380   

Amortization of debt issuance costs

     —          449        —          —          —          449   

Loss (gain) on foreign currency translation, net

     —          27,659        29,510        (27,194     —          29,975   

Gain on disposal of property, plant and equipment, net

     —          —          (9     —          —          (9

Loss on disposal of intangible assets, net

     —          —          7        —          —          7   

Restructuring and impairment charges

     —          —          603        —          —          603   

Unit-based compensation

     407        —          2,010        335        —          2,752   

Cash used for reorganization items

     —          —          51        1,424        —          1,475   

Loss (earnings) of related investment

     2,202        (6,409     —          17,851        (13,644     —     

Other

     13        (11     757        (19     —          740   

Changes in operating assets and liabilities

            

Accounts receivable, net

     —          —          (35,220     11,593        (21,616     (45,243

Inventories, net

     —          —          (2,189     4,290        (759     1,342   

Other receivables

     —          —          (12,339     845        11,613        119   

Deferred tax assets

     —          —          —          618        —          618   

Accounts payable

     —          —          15,050        (29,102     21,594        7,542   

Other accounts payable

     5,510        2,181        13,022        2,230        (11,613     11,330   

Accrued expenses

     —          4,851        28,509        29,443        (54,962     7,841   

Long term other payable

     —          —          —          72        (1,603     (1,531

Other current assets

     (4,805     (29,584     3,737        (24,144     54,704        (92

Other current liabilities

     —          —          (1,043     (129     —          (1,172

Payment of severance benefits

     —          —          (2,731     (29     —          (2,760

Other

     —          —          467        (1,791     —          (1,324
                                                

Net cash provided by (used in) operating activities before reorganization items

     3,681        (3,097     61,126        (7,419     (1,910     52,381   
                                                

Cash used for reorganization items

     —          —          (51     (1,424     —          (1,475