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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 September 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 October 31, 2010, the registrant had 307,215,516 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 September  30, 2010 and December 31, 2009 (Successor Company)

    3   
    

MagnaChip Semiconductor LLC and Subsidiaries Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 (Successor Company) and September 27, 2009 (Predecessor Company)

    4   
    

MagnaChip Semiconductor LLC and Subsidiaries Consolidated Statements of Changes in Unitholders’ Equity for the Three and Nine Months Ended September 30, 2010 (Successor Company) and September 27, 2009 (Predecessor Company)

    5   
    

MagnaChip Semiconductor LLC and Subsidiaries Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 (Successor Company) and September 27, 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     35   
  Item 3.    Quantitative and Qualitative Disclosures About Market Risk     62   
  Item 4.    Controls and Procedures     62   
PART II OTHER INFORMATION     64   
  Item 1A.    Risk Factors     64   
  Item 6.    Exhibits     77   
SIGNATURES     78   

 

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  
     September 30,
2010
    December 31,
2009
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 161,429      $ 64,925   

Accounts receivable, net

     136,945        74,233   

Inventories, net

     65,029        63,407   

Other receivables

     4,476        3,433   

Prepaid expenses

     10,375        12,625   

Other current assets

     17,327        3,433   
                

Total current assets

     395,581        222,056   
                

Property, plant and equipment, net

     175,393        156,337   

Intangible assets, net

     31,500        50,158   

Long-term prepaid expenses

     9,685        10,542   

Other non-current assets

     22,135        14,238   
                

Total assets

   $ 634,294      $ 453,331   
                

Liabilities and Unitholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 71,958      $ 59,705   

Other accounts payable

     12,987        7,190   

Accrued expenses

     48,012        22,114   

Current portion of long-term borrowings

     —          618   

Current portion of capital lease obligations

     5,222        —     

Other current liabilities

     5,235        3,937   
                

Total current liabilities

     143,414        93,564   
                

Long-term borrowings, net

     246,814        61,132   

Long-term obligations under capital lease

     4,270        —     

Accrued severance benefits, net

     84,943        72,409   

Other non-current liabilities

     7,748        10,536   
                

Total liabilities

     487,189        237,641   
                

Commitments and contingencies

    

Unitholders’ equity

    

Common units, no par value, 375,000,000 units authorized, 307,215,516 and 307,083,996 units issued and outstanding at September 30, 2010 and December 31, 2009, respectively

     55,453        55,135   

Additional paid-in capital

     39,887        168,700   

Retained earnings (accumulated deficit)

     59,886        (1,963

Accumulated other comprehensive loss

     (8,121     (6,182
                

Total unitholders’ equity

     147,105        215,690   
                

Total liabilities and unitholders’ equity

   $ 634,294      $ 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
    Nine Months
Ended
           Three Months
Ended
    Nine Months
Ended
 
     September 30, 2010            September 27, 2009  

Net sales

   $ 209,448      $ 583,633           $ 156,627      $ 397,779   

Cost of sales

     140,133        400,426             104,465        276,387   
                                     

Gross profit

     69,315        183,207             52,162        121,392   
                                     

Selling, general and administrative expenses

     16,202        50,074             17,175        50,811   

Research and development expenses

     23,119        64,193             17,704        50,932   

Restructuring and impairment charges

     442        1,045             —          439   
                                     

Operating income from continuing operations

     29,552        67,895             17,283        19,210   
                                     

Other income (expenses)

             

Interest expense, net

     (7,312     (15,918          (2,642     (30,133

Foreign currency gain, net

     41,400        14,743             45,449        36,029   

Reorganization items, net

     —          —               (4,135     (4,475

Others

     312        (690          —          —     
                                     
     34,400        (1,865          38,672        1,421   
                                     

Income from continuing operations before income taxes

     63,952        66,030             55,955        20,631   
                                     

Income tax expenses

     2,457        4,181             2,434        7,439   
                                     

Income from continuing operations

     61,495        61,849             53,521        13,192   
                                     

Income from discontinued operations, net of taxes

     —          —               8,916        7,165   
                                     

Net income

   $ 61,495      $ 61,849           $ 62,437      $ 20,357   
                                     

Dividends accrued on preferred units

     —          —               —          6,317   
                                     

Income from continuing operations attributable to common units

   $ 61,495      $ 61,849           $ 53,521      $ 6,875   
                                     

Net income attributable to common units

   $ 61,495      $ 61,849           $ 62,437      $ 14,040   
                                     

Earnings per common unit from continuing operations

             

- Basic and diluted

   $ 0.20      $ 0.20           $ 1.01      $ 0.13   
                                     

Earnings per common unit from discontinued operation

             

- Basic and diluted

   $ —        $ —             $ 0.17      $ 0.14   
                                     

Earnings per common unit—Basic and diluted

   $ 0.20      $ 0.20           $ 1.18      $ 0.27   
                                     

Weighted average number of units—Basic

     302,558,556        302,520,644             52,923,483        52,923,483   

Weighted average number of units—Diluted

     313,604,679        312,905,596             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 September 30, 2010

             

Balance at July 1, 2010

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

(Successor Company)

             

Forfeiture of restricted units

     (18,480 )     —           —          —          —          —     

Unit-based compensation

     —          —           663        —          —          663   

Comprehensive income:

             

Net Income

     —          —           —          61,495        —          61,495   

Fair valuation of derivatives

     —          —           —          —          8,207        8,207   

Reclassification to net income from accumulated other comprehensive loss related to hedge derivatives

     —          —           —          —          2,374        2,374   

Foreign currency translation adjustments

     —          —           —          —          (27,478     (27,478

Unrealized loss on investments

     —          —           —          —          (76     (76
                   

Total comprehensive income

                44,522   
                                                 

Balance at September 30, 2010

     307,215,516      $ 55,453       $ 39,887      $ 59,886      $ (8,121   $ 147,105   
                                                 

Nine Months Ended September 30, 2010

             

Balance at January 1, 2010

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

(Successor Company)

             

Forfeiture of restricted units

     (18,480     —           —          —          —          —     

Unit-based compensation

     150,000        318         1,884        —          —          2,202   

Distribution to unitholders

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

Comprehensive income:

             

Net income

     —          —           —          61,849        —          61,849   

Fair valuation of derivatives

     —          —           —          —          2,805        2,805   

Reclassification to net income from accumulated other comprehensive loss related to hedge derivatives

     —          —           —          —          4,252        4,252   

Foreign currency translation adjustments

     —          —           —          —          (9,056     (9,056

Unrealized gains on investments

     —          —           —          —          60        60   
                   

Total comprehensive income

                59,910   
                                                 

Balance at September 30, 2010

     307,215,516      $ 55,453       $ 39,887      $ 59,886      $ (8,121   $ 147,105   
                                                 

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 September 27, 2009

               

Balance at June 29, 2009

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

(Predecessor Company)

               

Unit-based compensation

     —           —           52         —          —          52   

Comprehensive income:

               

Net income

     —           —           —           62,437        —          62,437   

Foreign currency translation adjustments

     —           —           —           —          (29,559     (29,559

Unrealized loss on investments

     —           —           —           —          (40     (40
                     

Total comprehensive income

                  32,838   
                                                   

Balance at September 27, 2009

     52,923,483       $ 52,923       $ 3,369       $ (980,967   $ 125,901      $ (798,774
                                                   

Nine Months Ended September 27, 2009

               

Balance at January 1, 2009

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

(Predecessor Company)

               

Unit-based compensation

     —           —           219         —          —          219   

Dividends accrued on preferred units

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

Comprehensive loss:

               

Net income

     —           —           —           20,357        —          20,357   

Foreign currency translation adjustments

     —           —           —           —          (25,658     (25,658

Unrealized gains on investments

                424        424   
                     

Total comprehensive loss

                  (4,877
                                                   

Balance at September 27, 2009

     52,923,483       $ 52,923       $ 3,369       $ (980,967   $ 125,901      $ (798,774
                                                   

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)

 

     Nine Months Ended  
     Successor            Predecessor  
     September 30,
2010
           September 27,
2009
 

Cash flows from operating activities

         

Net income

   $ 61,849           $ 20,357   

Adjustments to reconcile net income to net cash provided by operating activities

         

Depreciation and amortization

     44,332             34,608   

Provision for severance benefits

     15,123             7,831   

Amortization of debt issuance costs and original issue discount

     687             756   

Gain on foreign currency translation, net

     (16,704          (36,182

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

     (7          84   

Loss (gain) on disposal of intangible assets, net

     9             (9,139

Restructuring and impairment charges

     1,045             —     

Unit-based compensation

     4,072             219   

Cash used for reorganization items

     1,573             2   

Noncash reorganization items

     —               4,473   

Other

     951             1,997   

Changes in operating assets and liabilities

         

Accounts receivable

     (61,771          (17,961

Inventories

     193             (1,878

Other receivables

     (1,229          (455

Deferred tax assets

     1,133             1,874   

Accounts payable

     10,400             6,686   

Other accounts payable

     6,332             (11,534

Accrued expenses

     22,094             27,550   

Long term other payable

     (1,606          454   

Other current assets

     (221          4,873   

Other current liabilities

     516             60   

Payment of severance benefits

     (4,707          (4,085

Other

     (864          (476
                     

Net cash provided by operating activities before reorganization items

     83,200             30,114   
                     

Cash used for reorganization items

     (1,573          (2
                     

Net cash provided by operating activities

     81,627             30,112   
                     

Cash flows from investing activities

         

Proceeds from disposal of plant, property and equipment

     10             299   

Proceeds from disposal of intangible assets

     —               9,283   

Purchase of plant, property and equipment

     (29,739          (7,270

Payment for intellectual property registration

     (437          (317

Increase in restricted cash

     —               (34,067

Decrease (increase) in short-term financial instruments

     329             (326

Decrease in guarantee deposits

     1,011             632   

Other

     (807          (25
                     

Net cash used in investing activities

     (29,633          (31,791
                     

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          —     

Repayment of obligations under capital lease

     (1,812       

Distribution to unitholders

     (130,697          —     
                     

Net cash provided by financing activities

     44,113             —     

Effect of exchange rates on cash and cash equivalents

     397             3,047   
                     

Net increase in cash and cash equivalents

     96,504             1,368   
                     

Cash and cash equivalents

         

Beginning of the period

     64,925             4,037   
                     

End of the period

   $ 161,429           $ 5,405   
                     

Supplemental cash flow information

         

Cash paid for interest

   $ 3,499           $ 4,622   
                     

Cash paid (refunded) for income taxes

   $ (290        $ 7,359   
                     

Noncash investing and financing activities

         

Assets acquired under capital lease obligations

   $ 10,673           $ —     
                     

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 nine months ended September 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 US GAAP.

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.

 

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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 that 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 September 30, 2010 and December 31, 2009 consist of the following:

 

     Successor  
     September 30,
2010
    December 31,
2009
 

Finished goods

   $ 12,557      $ 19,474   

Semi-finished goods and work-in-process

     49,993        42,604   

Raw materials

     9,379        5,844   

Materials in-transit

     893        64   

Less: inventory reserve

     (7,793     (4,579
                

Inventories, net

   $ 65,029      $ 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 September 30, 2010 and December 31, 2009 comprise the following:

 

     Successor  
     September 30,
2010
    December 31,
2009
 

Buildings and related structures

   $ 73,692      $ 72,076   

Machinery and equipment

     100,844        71,505   

Vehicles and others

     5,611        3,043   

Equipment under capital lease

     11,270        —     
                
     191,417        146,624   

Less: accumulated depreciation

     (31,264     (5,388

accumulated depreciation on equipment under capital lease

     (199     —     

Land

     15,439        15,101   
                

Property, plant and equipment, net

   $ 175,393      $ 156,337   
                

6. Intangible Assets

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

 

     Successor  
     September 30,
2010
    December 31,
2009
 

Technology

   $ 19,108      $ 14,942   

Customer relationships

     27,042        26,448   

Intellectual property assets

     5,319        4,779   

In-process research and development

     5,171        9,829   

Less: accumulated amortization

     (25,140     (5,840
                

Intangible assets, net

   $ 31,500      $ 50,158   
                

As part of its application of fresh-start reporting, the Company recognized in-process research and development (“IPR&D) of $9,700 thousand. The Company accounted for IPR&D as an indefinite-lived intangible asset until completion or abandonment of the associated research and development (“R&D”) projects. If a project is completed, the carrying amount of the related intangible asset is amortized over the remaining estimated life of the asset beginning in the period in which the project is completed and sales of related product commenced.

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

 

IPR&D assets are reviewed at least annually for impairment or more frequently if changes in circumstances indicate the asset may be impaired. If a project becomes impaired or abandoned, the carrying amount of the related intangible asset would be written down to its fair value and an impairment charge would be taken in the period in which the impairment occurs. The Company performed its annual impairment test as of September 30, 2010. The impairment test consists of a comparison of the fair value of the IPR&D with its carrying amount. The excess earnings method was applied as a valuation method that establishes the business value based on a stream of future economic benefits, such as net cash flows, discounted to their present value. This calculation is highly sensitive to both the estimated future cash flows from each R&D project and the discount rate assumed in these calculations. These components are discussed below:

 

   

Estimated future cash flows

The key variables that the Company must estimate to determine future cash flows include assumptions for sales volume, selling prices, raw material costs, labor and other employee benefit costs, capital additions and other economic or market-related factors. Significant management judgment is involved in estimating these variables, and they include inherent uncertainties since they are forecasting future events. For example, unanticipated changes in competition, customer sourcing requirements and product maturity would all have a significant impact on these estimates.

 

   

Discount rate

The Company employs a Weighted Average Cost of Capital (“WACC”) approach to determine the Company’s discount rate for IPR&D impairment testing. The Company’s WACC calculation includes factors such as the risk free rate of return, cost of debt and expected equity premiums. The factors in this calculation are largely external to the Company, and therefore are beyond the Company’s control.

When the carrying amount of any IPR&D project exceeds its estimated fair value on a project by project basis, an impairment charge must be recognized in an amount equal to that excess. Accordingly, the Company recorded an impairment charges for $391 thousand in the third quarter of 2010. Additional impairment charges of $51 thousand were recognized for one abandoned IPR&D in the third quarter of 2010. The Company recognized $1,045 thousand of impairment charges for the nine months ended September 30, 2010, which consists of $391 thousand from IPR&D annual impairment test and $654 thousand from five abandoned IPR&D projects.

 

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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.

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.

The option, forward and zero cost collar 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, forward and zero cost collar contracts recorded as assets and liabilities as of September 30, 2010 are as follows:

 

Derivatives designated as hedging instruments under ASC 815:

        September 30,
2010
 

Asset Derivatives:

     

Options

   Other current assets    $ 6,156   

Forwards

   Other current assets    $ 187   

Zero cost collars

   Other current assets    $ 552   

Zero cost collars

   Other non current assets    $ 561   

Liability Derivatives:

     

Forwards

   Other current liabilities    $ 528   

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 September 30, 2010:

 

Derivatives in ASC 815 Cash Flow

Hedging Relationships

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

Location of

Gain

Recognized in

Statement of

Operations on

Derivative

(Ineffective

Portion and

Amount

Excluded from

Effectiveness

Testing)

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

Options

   $ (24     Net sales       $ (230   Other income (expenses) — Others    $ —     

Forwards

     7,108        Net sales         (2,144   Other income (expenses) — Others      281   

Zero cost collars

     1,123        Net sales         —        Other income (expenses) — Others      31   
                              

Total

   $ 8,207         $ (2,374      $ 312   
                              

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

 

Derivatives in ASC 815 Cash Flow
Hedging Relationships

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

Location of

Gain (Loss)

Recognized in

Statement of

Operations on

Derivative

(Ineffective

Portion and

Amount

Excluded from

Effectiveness

Testing)

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

Options

   $ (1,345     Net sales       $ (413   Other income (expenses) — Others    $ (62

Forwards

     3,027        Net sales         (3,839   Other income (expenses) — Others      (663

Zero cost collars

     1,123        Net sales         —        Other income (expenses) — Others      31   
                              

Total

   $ 2,805         $ (4,252      $ (694
                              

The Company’s option, forward and zero cost collar 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, forward and zero cost collar 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 September 30, 2010 and the basis for that measurement:

 

     Carrying Value
September 30, 2010
     Fair Value
Measurement
September 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

   $ 6,895       $ 6,895       $ —         $ 6,895       $ —     

Non current derivative assets

     561         561         —           561         —     

Available-for-sale securities

     652         652         652         —           —     

Liabilities:

              

Current derivative liabilities

     528         528         —           528         —     

 

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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 September 30, 2010 and December 31, 2009 are as follows:

 

     Successor  
     September 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

     (3,186     —     
                

Long-term borrowings, net of unamortized discount

   $ 246,814      $ 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 plus 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 accrues 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 principal amount will be due 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 unitholders 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 are 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 September 30, 2010, the Company is compliant with all of its covenant requirements in the indenture governing the senior notes.

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 $170 and $323 thousand for the three and nine months ended September 30, 2010. The remaining capitalized costs as of September 30, 2010 were $7,990 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 September 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
    Nine
Months
Ended
           Three
Months
Ended
    Nine
Months
Ended
 
     September 30, 2010            September 27, 2009  

Beginning balance

   $ 77,538      $ 73,646           $ 62,612      $ 63,147   

Provisions

     5,743        15,123             4,094        7,831   

Severance payments

     (1,947     (4,707          (877     (4,085

Translation adjustments

     4,802        2,074             4,836        3,772   
                                       
     86,136        86,136             70,665        70,665   
                                       

Less:

  Cumulative contributions to the National Pension Fund      (487     (487          (529     (529
 

Group Severance insurance plan

     (706     (706          (675     (675
                                       

Accrued severance benefits, net

   $ 84,943      $ 84,943           $ 69,461      $ 69,461   
                                       

The severance benefits are funded approximately 1.39% and 1.70% as of September 30, 2010 and September 27, 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

   $ 34   

2011

     —     

2012

     148   

2013

     —     

2014

     300   

2015

     338   

2016 – 2020

     11,379   

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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MagnaChip Semiconductor LLC and Subsidiaries

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      Nine Months Ended  
     September 27,
2009
     September 27,
2009
 
     Units      Amount      Units      Amount  

Beginning of period

     93,997       $ 148,986         93,997       $ 142,669   

Accrual of preferred dividends

     —           —           —           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
    Nine Months
Ended
 
     September 27, 2009  

Net sales

   $ 299      $ 2,553   

Cost of sales

     70        3,447   

Selling, general and administrative expenses

     (7,578     (6,950

Restructuring and impairment charges

     (1,109     (1,109
                

Income from discontinued operations, net of taxes

   $ 8,916      $ 7,165   
                

 

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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)

 

 

13. Restructuring and Impairment Charges

Successor Company

2010 Restructuring and Impairment Charges

The Company recognized $442 thousand of impairment charges for the three months ended September 30, 2010, which consists of $391 thousand from IPR&D annual impairment test performed on September 30, 2010 and $51 thousand from one abandoned IPR&D project. The Company recognized $1,045 thousand of impairment charges for the nine months ended September 30, 2010, which consists of $391 thousand from IPR&D annual impairment test and $654 thousand from five abandoned IPR&D projects.

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 $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 nine months ended September 27, 2009. There was no remaining accrual as of September 27, 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 September 30, 2010 and December 31, 2009, the Company recorded $891 thousand and $1,997 thousand of liabilities for unrecognized tax benefits, respectively. For the nine months ended September 30, 2010, the Company reversed $1,640 thousand of liabilities due to the lapse of the applicable statute of limitations and recorded this gain as reduction of income tax expenses in the accompanying statement of operations.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expenses. The Company recognized $4 thousand and $68 thousand of interest and penalties as income tax expenses for the three and nine months ended September 30, 2010, respectively. And the Company also recognized $47 thousand and $194 thousand of interest and penalties as income tax expenses for the three and nine months ended September 27, 2009, respectively. Total interest and penalties accrued as of September 30, 2010 and December 31, 2009 were $198 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  
     September 30,
2010
            September 27,
2009
 

Net Sales

          

Display Solutions

   $ 77,989            $ 75,588   

Semiconductor Manufacturing Services

     113,171              76,354   

Power Solutions

     17,801              3,812   

All other

     487              873   
                      

Total segment net sales

   $ 209,448            $ 156,627   
                      

Gross Profit

          

Display Solutions

   $ 22,732            $ 20,740   

Semiconductor Manufacturing Services

     44,396              28,975   

Power Solutions

     1,700              1,574   

All other

     487              873   
                      

Total segment gross profit

   $ 69,315            $ 52,162   
                      
     Nine Months Ended  
     Successor             Predecessor  
     September 30,
2010
            September 27,
2009
 

Net Sales

          

Display Solutions

   $ 235,303            $ 209,395   

Semiconductor Manufacturing Services

     307,936              179,454   

Power Solutions

     38,875              6,430   

All other

     1,519              2,500   
                      

Total segment net sales

   $ 583,633            $ 397,779   
                      

Gross Profit

          

Display Solutions

   $ 59,285            $ 56,849   

Semiconductor Manufacturing Services

     116,692              60,968   

Power Solutions

     5,711              1,075   

All other

     1,519              2,500   
                      

Total segment gross profit

   $ 183,207            $ 121,392   
                      

 

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

 

     Three Months Ended  
     Successor             Predecessor  
     September 30,
2010
            September 27,
2009
 

Korea

   $ 98,614            $ 83,494   

Asia Pacific

     62,279              40,359   

Japan

     18,885              11,363   

North America

     24,719              19,637   

Europe

     4,040              1,774   

Africa

     911              —     
                      

Total

   $ 209,448            $ 156,627   
                      

 

     Nine Months Ended  
     Successor             Predecessor  
     September 30,
2010
            September 27,
2009
 

Korea

   $ 297,584            $ 218,101   

Asia Pacific

     163,440              105,647   

Japan

     41,876              28,132   

North America

     68,785              39,345   

Europe

     10,819              6,554   

Africa

     1,129              —     
                      

Total

   $ 583,633            $ 397,779   
                      

Net sales from the Company’s top ten largest customers accounted for 62.9% and 67.8% for the three months ended September 30, 2010 and September 27, 2009, respectively, and 63.8% and 69.2% for the nine months ended September 30, 2010 and September 27, 2009, respectively.

The Company recorded $28,976 thousand and $36,951 thousand of sales to one customer within its Display Solutions segment, which represents greater than 10% of net sales, for the three months ended September 30, 2010 and September 27, 2009, respectively, and $99,869 thousand and $110,913 thousand for the nine months ended September 30, 2010 and September 27, 2009, respectively.

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

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

 

16. Commitments and Contingencies

On August 31, 2010, the Company’s Korean subsidiary (the “lessee”) entered into a lease agreement with MMT First Company Limited (the “lessor”) for the use of semiconductor equipment. The lease term is two years, and the ownership of the equipment will be transferred to the lessee upon expiration of the lease term and therefore the lease agreement is accounted for as a capital lease. Future minimum payments under the capital lease as of September 30, 2010 were as follows:

 

Payable during

   Capital
Lease
 

Remainder of 2010

   $ 1,489   

2011

     5,954   

2012

     2,977   
        

Total future minimum lease payments

     10,420   

Less: Amount representing interest (a)

     (928
        

Present value of net minimum lease payments

     9,492   

Less: Current portion of capital lease obligations

     (5,222
        

Long-term obligations under capital lease

   $ 4,270   

 

(a) The lessor’s implicit rate at lease inception was applied.

Samsung Fiber Optics has made a claim against the Company for the infringement of 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 September 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.

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

 

17. Earnings per Unit

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

 

     Three Months Ended  
     Successor            Predecessor  
     September 30,
2010
           September 27,
2009
 

Income from continuing operations

   $ 61,495           $ 53,521   

Income from discontinued operations, net of taxes

     —               8,916   
                     

Net income

     61,495             62,437   
                     

Income from continuing operations attributable to common units

   $ 61,495           $ 53,521   
                     

Net income attributable to common units

   $ 61,495           $ 62,437   
                     

Weighted average common units outstanding-basic

     302,558,556             52,923,483   

Weighted average common units outstanding-diluted

     313,604,679             52,923,483   
                     

Basic and diluted earnings per unit from continuing operations

   $ 0.20           $ 1.01   
                     

Basic and diluted earnings per unit from discontinued operations

   $ —             $ 0.17   
                     

Basic and diluted earnings per unit

   $ 0.20           $ 1.18   
                     

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

 

     Nine Months Ended  
     Successor             Predecessor  
     September 30,
2010
            September 27,
2009
 

Income from continuing operations

   $ 61,849            $ 13,192   

Income from discontinued operations, net of taxes

     —                7,165   
                      

Net income

     61,849              20,357   

Dividends accrued on preferred unitholders

     —                (6,317
                      

Income from continuing operations attributable to common units

   $ 61,849            $ 6,875   
                      

Net income attributable to common units

   $ 61,849            $ 14,040   
                      

Weighted average common units outstanding-basic

     302,520,644              52,923,483   
                      

Weighted average common units outstanding-diluted

     312,905,596              52,923,483   
                      

Basic and diluted earnings per unit from continuing operations

   $ 0.20            $ 0.13   
                      

Basic and diluted earnings per unit from discontinued operations

   $ —              $ 0.14   
                      

Basic and diluted earnings per unit

   $ 0.20            $ 0.27   
                      

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

 

     Three and Nine Months Ended  
     Successor             Predecessor  
     September 30,
2010
            September 27,
2009
 

Redeemable convertible preferred units

     —                93,997   

Options

     914,000              3,826,788   

Warrants

     15,000,000              —     

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

 

 

18. Subsequent Events

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 $215 million aggregate principal amount of 10.5% Senior Notes due 2018, which have been registered under the Securities Act (the “new notes”), for an equal principal amount of 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 are 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. The Form S-4 (as amended) went effective, and the exchange began, on October 15, 2010.

On August 4, 2010, the Company filed a registration statement on Form S-1 under which the Company registered for resale up to $35 million aggregate principal amount of 10.5% Senior Notes due 2018 owned by funds affiliated with Avenue Capital Management II, L.P. The Form S-1 (as amended) went effective on October 15, 2010.

 

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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 September 30, 2010 and December 31, 2009, condensed consolidating statements of operations for the three months and nine months ended September 30, 2010 and September 27, 2009 and condensed consolidating statement of cash flows for the nine months ended September 30, 2010 and September 27, 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.

 

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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 Balance Sheet

September 30, 2010

(Successor Company)

 

     MagnaChip
Semiconductor
LLC

(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Assets

            

Current assets

            

Cash and cash equivalents

   $ 69      $ 46,576      $ 106,152      $ 8,632      $ —        $ 161,429   

Accounts receivable, net

     —          —          177,051        58,955        (99,061     136,945   

Inventories, net

     —          —          65,017        170        (158     65,029   

Other receivables

     710        718        19,648        3,063        (19,663     4,476   

Prepaid expenses

     87        3        13,085        97        (2,897     10,375   

Short-term intercompany loan

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

Other current assets

     6,712        120,151        8,396        111,531        (229,463     17,327   
                                                

Total current assets

     7,578        262,448        389,349        277,448        (541,242     395,581   
                                                

Property, plant and equipment, net

     —          —          175,013        380        —          175,393   

Intangible assets, net

     —          —          30,927        573        —          31,500   

Long-term prepaid expenses

     —          —          19,551        —          (9,866     9,685   

Investment in subsidiaries

     (549,639     (651,906     —          (484,023     1,685,568        —     

Long-term intercompany loan

     697,125        797,160        —          621,000        (2,115,285     —     

Other non-current assets

     —          7,989        6,861        7,285        —          22,135   
                                                

Total Assets

   $ 155,064      $ 415,691      $ 621,701      $ 422,663      $ (980,825   $ 634,294   
                                                

Liabilities and Unitholders’ Equity

            

Current liabilities

            

Accounts payable

   $ —        $ —        $ 130,401      $ 40,564      $ (99,007   $ 71,958   

Other accounts payable

     7,848        8,066        14,392        2,344        (19,663     12,987   

Accrued expenses

     111        12,711        142,509        122,198        (229,517     48,012   

Short-term intercompany borrowings

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

Current portion of capital lease obligations

     —          —          5,222        —          —          5,222   

Other current liabilities

     —          —          3,962        4,170        (2,897     5,235   
                                                

Total current liabilities

     7,959        20,777        391,486        264,276        (541,084     143,414   
                                                

Long-term borrowings

     —          943,939        621,000        797,160        (2,115,285     246,814   

Long-term obligations under capital lease

     —          —          4,270        —          —          4,270   

Accrued severance benefits, net

     —          —          83,727        1,216        —          84,943   

Other non-current liabilities

     —          (1 )     5,181        12,434        (9,866     7,748   
                                                

Total liabilities

     7,959        964,715        1,105,664        1,075,086        (2,666,235     487,189   
                                                

Commitments and contingencies

            

Unitholders’ equity

            

Common units

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

Additional paid-in capital

     39,887        (734,543     (537,976     (732,808     2,005,327        39,887   

Retained earnings

     59,886        57,410        25,488        36,553        (119,451     59,886   

Accumulated other comprehensive income

     (8,121     (8,120     (10,480     (8,144     26,744        (8,121
                                                

Total unitholders’ equity

     147,105        (549,024     (483,963     (652,423     1,685,410        147,105   
                                                

Total liabilities and unitholders’ equity

   $ 155,064      $ 415,691      $ 621,701      $ 422,663      $ (980,825   $ 634,294   
                                                

 

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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 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   
                                                

 

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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 September 30, 2010

(Successor Company)

 

     MagnaChip
Semiconductor
LLC

(Parent)
    Co-Issuers     Non-Guarantors      Guarantors     Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 209,580       $ 7,416      $ (7,548   $ 209,448   

Cost of sales

     —          —          140,126         1,116        (1,109     140,133   
                                                 

Gross profit

     —          —          69,454         6,300        (6,439     69,315   
                                                 

Selling, general and administrative expenses

     140        373        16,293         2,795        (3,399     16,202   

Research and development expenses

     —          —          24,023         2,138        (3,042     23,119   

Restructuring and impairment charges

     —          —          442         —          —          442   
                                                 

Operating income (loss)

     (140     (373     28,696         1,367        2        29,552   
                                                 

Other income (expense)

     —          29,393        26,565         (21,558     —          34,400   
                                                 

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

     (140     29,020        55,261         (20,191     2        63,952   
                                                 

Income tax expenses

     —          —          —           2,457        —          2,457   
                                                 

Income (loss) before equity in earnings of related investment

     (140     29,020        55,261         (22,648     2        61,495   
                                                 

Earnings of related investment

     61,635        32,494        —           55,263        (149,392     —     
                                                 

Net Income

   $ 61,495      $ 61,514      $ 55,261       $ 32,615      $ (149,390   $ 61,495   
                                                 

Net Income attributable to common units

   $ 61,495      $ 61,514      $ 55,261       $ 32,615      $ (149,390   $ 61,495   
                                                 

 

29


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 nine months ended September 30, 2010

(Successor Company)

 

     MagnaChip
Semiconductor
LLC

(Parent)
    Co-Issuers     Non-Guarantors     Guarantors      Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 579,239      $ 26,021       $ (21,627   $ 583,633   

Cost of sales

     —          —          396,808        8,033         (4,415     400,426   
                                                 

Gross profit

     —          —          182,431        17,988         (17,212     183,207   
                                                 

Selling, general and administrative expenses

     1,318        898        49,148        7,549         (8,839     50,074   

Research and development expenses

     —          —          66,880        6,420         (9,107     64,193   

Restructuring and impairment charges

     —          —          1,045        —           —          1,045   
                                                 

Operating income (loss)

     (1,318     (898     65,358        4,019         734        67,895   
                                                 

Other income (expense)

     3,734        21,276        (30,181     3,306         —          (1,865
                                                 

Income before income taxes, equity in earnings of related equity investment

     2,416        20,378        35,177        7,325         734        66,030   
                                                 

Income tax expenses (benefits)

     —          —          (1,947     6,128         —          4,181   
                                                 

Income before equity in earnings of related investment

     2,416        20,378        37,124        1,197         734        61,849   
                                                 

Earnings of related investment

     59,433        38,903        —          37,412         (135,748     —     
                                                 

Net income

   $ 61,849      $ 59,281      $ 37,124      $ 38,609       $ (135,014   $ 61,849   
                                                 

Net income attributable to common units

   $ 61,849      $ 59,281      $ 37,124      $ 38,609       $ (135,014   $ 61,849   
                                                 

 

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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 September 27, 2009

(Predecessor Company)

 

     MagnaChip
Semiconductor
LLC

(Parent)
    Co-Issuers     Non-Guarantors      Guarantors     Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 151,181       $ 50,308      $ (44,862   $ 156,627   

Cost of sales

     —          —          103,726         41,733        (40,994     104,465   
                                                 

Gross profit

     —          —          47,455         8,575        (3,868     52,162   
                                                 

Selling, general and administrative expenses

     81        23        15,783         2,521        (1,233     17,175   

Research and development expenses

     —          —          18,284         2,878        (3,458     17,704   
                                                 

Operating income (loss)

     (81     (23     13,388         3,176        823        17,283   
                                                 

Other income (expense)

     (1,012 )     22,147        29,383         (11,846     —          38,672   
                                                 

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

     (1,093     22,124        42,771         (8,670     823        55,955   
                                                 

Income tax expenses

     —          —          36         2,398        —          2,434   
                                                 

Income (loss) before equity in earnings of related investment

     (1,093     22,124        42,735         (11,068     823        53,521   
                                                 

Earnings of related investment

     63,530        43,434        —           53,421        (160,385     —     
                                                 

Income from continuing operations

     62,437        65,558        42,735         42,353        (159,562     53,521   
                                                 

Income (loss) from discontinued operation, net of tax

     —          —          10,709         (1,611     (182     8,916   
                                                 

Net income

   $ 62,437      $ 65,558      $ 53,444       $ 40,742      $ (159,744   $ 62,437   
                                                 

Income from continuing operations attributable to common units

   $ 62,437      $ 65,558      $ 42,735       $ 42,353      $ (159,562   $ 53,521   
                                                 

Net income attributable to common units

   $ 62,437      $ 65,558      $ 53,444       $ 40,742      $ (159,744   $ 62,437   
                                                 

 

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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 nine months ended September 27, 2009

(Predecessor Company)

 

     MagnaChip
Semiconductor
LLC

(Parent)
    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —        $ —        $ 384,826      $ 142,016      $ (129,063   $ 397,779   

Cost of sales

     —          —          274,785        117,879        (116,277     276,387   
                                                

Gross profit

     —          —          110,041        24,137        (12,786     121,392   
                                                

Selling, general and administrative expenses

     2,742        64        42,485        9,131        (3,611     50,811   

Research and development expenses

     —          —          51,622        8,787        (9,477     50,932   

Restructuring and impairment charges

     —          —          —          439        —          439   
                                                

Operating income (loss)

     (2,742     (64     15,934        5,780        302        19,210   
                                                

Other income (expense)

     (1,012 )     24,632        (13,646     (8,553     —          1,421   
                                                

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

     (3,754     24,568        2,288        (2,773     302        20,631   
                                                

Income tax expenses

     —          —          88        7,351        —          7,439   
                                                

Income (loss) before equity in earnings of related investment

     (3,754     24,568        2,200        (10,124     302        13,192   
                                                

Earnings of related investment

     24,111        1,343        —          11,163        (36,617     —     
                                                

Income from continuing operation

     20,357        25,911        2,200        1,039        (36,315     13,192   
                                                

Income (loss) from discontinued operation, net of taxes

     —          —          9,093        (1,566     (362     7,165   
                                                

Net income (loss)

   $ 20,357      $ 25,911      $ 11,293      $ (527   $ (36,677   $ 20,357   
                                                

Dividends accrued on preferred units

     6,317        —          —          —