UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM
10-Q

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

For the quarterly period ended March 31,September 30, 2020

or

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

For the transition period from
to
.

Commission File Number:
001-34791

MagnaChip Semiconductor Corporation

(Exact name of registrant as specified in its charter)

Delaware
 
83-0406195

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

c/o MagnaChip Semiconductor S.A.

1, Allée Scheffer,
L-2520

Luxembourg, Grand Duchy of Luxembourg

(352)
45-62-62

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

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

Title of each class

 

Trading
Symbol(s)

 

Name of each exchange
on which registered

Common Stock, par value $0.01 per share
 
MX
 
New York Stock Exchange

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

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

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

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

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

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

As of AprilOctober 30, 2020, the registrant had 35,065,24835,538,475 shares of common stock outstanding.


Table of Contents

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

     
Page No.
 

   3 

Item 1.

 3
MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019   3 
 

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

3

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three and Nine Months Ended March 31,September 30, 2020 and 2019

   4 
 

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Comprehensive LossIncome (Loss) for the Three and Nine Months Ended March 31,September 30, 2020 and 2019

   5 
 

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended March 31,September 30, 2020 and 2019

   6 
 

MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the ThreeNine Months Ended March 31,September 30, 2020 and 2019

   7 
 

MagnaChip Semiconductor Corporation and Subsidiaries Notes to Consolidated Financial Statements

   8 

Item 2.

    2830 

Item 3.

    4555 

Item 4.

    4656 

   4757 

Item 1.

    4757 

Item 1A.

    4757 

Item 6.

    4859 

   4960 

2

PART I—FINANCIAL INFORMATION

Item 1.

Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

   March 31,
2020
  December 31,
2019
 
   (In thousands of US dollars,
except share data)
 

Assets

   

Current assets

   

Cash and cash equivalents

  $157,293  $151,657 

Accounts receivable, net

   60,688   47,447 

Inventories, net

   37,130   41,404 

Other receivables

   8,297   10,200 

Prepaid expenses

   11,148   9,003 

Hedge collateral (Note 9)

   13,270   9,820 

Other current assets (Notes 10 and 18)

   6,762   10,013 

Current assets held for sale (Note 2)

   201,619   99,821 
  

 

 

  

 

 

 

Total current assets

   496,207   379,365 
  

 

 

  

 

 

 

Property, plant and equipment, net

   67,201   73,068 

Operating leaseright-of-use assets

   1,413   1,876 

Intangible assets, net

   2,583   2,769 

Long-term prepaid expenses

   4,117   5,757 

Othernon-current assets

   8,439   9,059 

Non-current assets held for sale (Note 2)

   —     123,434 
  

 

 

  

 

 

 

Total assets

  $579,960  $595,328 
  

 

 

  

 

 

 

Liabilities and Stockholders’ Equity

   

Current liabilities

   

Accounts payable

  $40,206  $40,376 

Other accounts payable

   6,379   6,410 

Accrued expenses

   41,489   44,799 

Operating lease liabilities

   1,301   1,625 

Current portion of long-term borrowings, net

   82,328   —   

Other current liabilities (Note 10)

   6,982   3,583 

Current liabilities held for sale (Note 2)

   142,013   37,040 
  

 

 

  

 

 

 

Total current liabilities

   320,698   133,833 
  

 

 

  

 

 

 

Long-term borrowings, net

   223,012   304,743 

Accrued severance benefits, net

   48,765   51,181 

Othernon-current liabilities

   8,641   9,671 

Non-current liabilities held for sale (Note 2)

   —     110,881 
  

 

 

  

 

 

 

Total liabilities

   601,116   610,309 
  

 

 

  

 

 

 

Commitments and contingencies (Note 18)

   

Stockholders’ equity

   

Common stock, $0.01 par value, 150,000,000 shares authorized, 44,160,355 shares issued and 35,054,682 outstanding at March 31, 2020 and 43,851,991 shares issued and 34,800,312 outstanding at December 31, 2019

   442   439 

Additionalpaid-in capital

   153,286   152,404 

Accumulated deficit

   (81,880  (58,131

Treasury stock, 9,105,673 shares at March 31, 2020 and 9,051,679 shares at December 31, 2019, respectively

   (107,649  (107,033

Accumulated other comprehensive income (loss)

   14,645   (2,660
  

 

 

  

 

 

 

Total stockholders’ deficit

   (21,156  (14,981
  

 

 

  

 

 

 

Total liabilities and stockholders’ equity

  $579,960  $595,328 
  

 

 

  

 

 

 

   
September 30,

2020
  
December 31,

2019
 
   
(In thousands of 
U.S.
 dollars,
except share data)
 
Assets
   
Current assets
   
Cash and cash equivalents
  $542,111  $151,657 
Accounts receivable, net
   57,772   47,447 
Inventories, net
   33,631   41,404 
Other receivables
   4,551   10,200 
Prepaid expenses
   8,265   9,003 
Hedge collateral (Note 9)
   9,650   9,820 
Other current assets (Notes 10 and 18)
   8,338   10,013 
Current assets held for sale (Note 2)
   —     99,821 
  
 
 
  
 
 
 
Total current assets
   664,318   379,365 
  
 
 
  
 
 
 
Property, plant and equipment, net
   77,489   73,068 
Operating lease
right-of-use
assets
   2,032   1,876 
Intangible assets, net
   2,877   2,769 
Long-term prepaid expenses
   2,138   5,757 
Other
non-current
assets
   8,598   9,059 
Non-current
assets held for sale (Note 2)
   —     123,434 
  
 
 
  
 
 
 
Total assets
  $757,452  $595,328 
  
 
 
  
 
 
 
Liabilities and Stockholders’ Equity
   
Current liabilities
   
Accounts payable
  $40,497  $40,376 
Other accounts payable
   7,639   6,410 
Accrued expenses (Note 8)
   41,630   44,799 
Accrued income taxes
   14,038   1,569 
Operating lease liabilities
   1,390   1,625 
Current portion of long-term borrowings, net
   306,567   —   
Other current liabilities (Note 10)
   7,652   2,014 
Current liabilities held for sale (Note 2)
   —     37,040 
  
 
 
  
 
 
 
Total current liabilities
   419,413   133,833 
  
 
 
  
 
 
 
Long-term borrowings, net
   —     304,743 
Accrued severance benefits, net
   51,953   51,181 
Other
non-current
liabilities
   7,782   9,671 
Non-current
liabilities held for sale (Note 2)
   —     110,881 
  
 
 
  
 
 
 
Total liabilities
   479,148   610,309 
  
 
 
  
 
 
 
Commitments and contingencies (Note 18)
Stockholders’ equity
   
Common stock, $0.01 par value, 150,000,000 shares authorized, 44,595,393 shares issued and 35,489,720 outstanding at September 30, 2020 and 43,851,991 shares issued and 34,800,312 outstanding at December 31, 2019
   447   439 
Additional
paid-in
capital
   159,840   152,404 
Retained earnings (deficit)
   220,253   (58,131
Treasury stock, 9,105,673 shares at September 30, 2020 and 9,051,679 shares at December 31, 2019, respectively
   (107,649  (107,033
Accumulated other comprehensive income (loss)
   5,413   (2,660
  
 
 
  
 
 
 
Total stockholders’ equity (deficit)
   278,304   (14,981
  
 
 
  
 
 
 
Total liabilities and stockholders’ equity
  $757,452  $595,328 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.

3

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

   Three Months Ended 
   March 31,
2020
  March 31,
2019
 
   

(In thousands of US dollars,

except share data)

 

Revenues:

   

Net sales – standard products business

  $110,736  $100,264 

Net sales – transitional Fab 3 foundry services

   9,737   7,003 
  

 

 

  

 

 

 

Total revenues

   120,473   107,267 

Cost of sales:

   

Cost of sales – standard products business

   81,606   81,241 

Cost of sales – transitional Fab 3 foundry services

   9,737   7,003 
  

 

 

  

 

 

 

Total cost of sales

   91,343   88,244 
  

 

 

  

 

 

 

Gross profit

   29,130   19,023 

Operating expenses:

   

Selling, general and administrative expenses

   12,102   12,036 

Research and development expenses

   10,509   12,044 

Other charges

   554   —   
  

 

 

  

 

 

 

Total operating expenses

   23,165   24,080 
  

 

 

  

 

 

 

Operating income (loss)

   5,965   (5,057
  

 

 

  

 

 

 

Interest expense

   (5,607  (5,637

Foreign currency loss, net

   (30,971  (10,610

Loss on early extinguishment of long-term borrowings, net

   —     (42

Other income, net

   838   587 
  

 

 

  

 

 

 

Loss from continuing operations before income tax expense

   (29,775  (20,759

Income tax expense

   1,303   796 
  

 

 

  

 

 

 

Loss from continuing operations

   (31,078  (21,555

Income (loss) from discontinued operations, net of tax

   7,329   (12,570
  

 

 

  

 

 

 

Net loss

  $(23,749 $(34,125
  

 

 

  

 

 

 

Basic and diluted earnings (loss) per common share—

   

Continuing operations

  $(0.89 $(0.63

Discontinued operations

   0.21   (0.37
  

 

 

  

 

 

 

Total

  $(0.68 $(1.00
  

 

 

  

 

 

 

Weighted average number of shares – basic and diluted

   34,893,157   34,194,878 

   
Three Months Ended
  
Nine Months Ended
 
   
September 30,

2020
  
September 30,

2019
  
September 30,

2020
  
September 30,

2019
 
   
(In thousands of 
U.S.
 dollars, except share data)
 
Revenues:
  
Net sales – standard products business
  $116,262  $139,273  $335,953  $371,543 
Net sales – transitional Fab 3 foundry services
   8,551   9,894   28,161   25,776 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total revenues
   124,813   149,167   364,114   397,319 
Cost of sales:
       
Cost of sales – standard products business
   87,494   104,018   245,917   285,643 
Cost of sales – transitional Fab 3 foundry services
   8,731   9,894   28,341   25,776 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total cost of sales
   96,225   113,912   274,258   311,419 
  
 
 
  
 
 
  
 
 
  
 
 
 
Gross profit
   28,588   35,255   89,856   85,900 
Operating expenses:
       
Selling, general and administrative expenses
   12,888   10,686   37,398   33,817 
Research and development expenses
   12,477   10,233   34,094   34,049 
Other charges
   —     —     554   —   
  
 
 
  
 
 
  
 
 
  
 
 
 
Total operating expenses
   25,365   20,919   72,046   67,866 
  
 
 
  
 
 
  
 
 
  
 
 
 
Operating income
   3,223   14,336   17,810   18,034 
  
 
 
  
 
 
  
 
 
  
 
 
 
Interest expense
   (5,485  (5,539  (16,522  (16,615
Foreign currency gain (loss), net
   8,864   (21,985  (13,638  (44,166
Loss on early extinguishment of long-term borrowings, net
   —     —     —     (42
Other income, net
   714   678   2,343   1,816 
  
 
 
  
 
 
  
 
 
  
 
 
 
Income (loss) from continuing operations before income tax expense
   7,316   (12,510  (10,007  (40,973
Income tax expense (benefit)
   (1,145  1,734   836   3,316 
  
 
 
  
 
 
  
 
 
  
 
 
 
Income (loss) from continuing operations
   8,461   (14,244  (10,843  (44,289
Income (loss) from discontinued operations, net of tax
   264,501   12,637   289,227   (963
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income (loss)
  $272,962  $(1,607 $278,384  $(45,252
  
 
 
  
 
 
  
 
 
  
 
 
 
Basic earnings (loss) per common share—
     
Continuing operations
  $0.24  $(0.41 $(0.31 $(1.29
Discontinued operations
   7.50   0.36   8.24   (0.03
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
  $7.74  $(0.05 $7.93  $(1.32
  
 
 
  
 
 
  
 
 
  
 
 
 
Diluted earnings (loss) per common share—
       
Continuing operations
  $0.21  $(0.41 $(0.31 $(1.29
Discontinued operations
   5.68   0.36   8.24   (0.03
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
  $5.89  $(0.05 $7.93  $(1.32
  
 
 
  
 
 
  
 
 
  
 
 
 
Weighted average number of shares—
       
Basic
   35,280,864   34,357,745   35,089,479   34,266,513 
Diluted
   46,581,788   34,357,745   35,089,479   34,266,513 
The accompanying notes are an integral part of these consolidated financial statements.

4

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS) (Unaudited)

   Three Months Ended 
   March 31,
2020
  March 31,
2019
 
   (In thousands of US dollars) 

Net loss

  $(23,749 $(34,125
  

 

 

  

 

 

 

Other comprehensive income (loss)

   

Foreign currency translation adjustments

   22,251   7,304 

Derivative adjustments

   

Fair valuation of derivatives

   (5,004  (499

Reclassification adjustment for loss on derivatives included in net loss

   58   187 
  

 

 

  

 

 

 

Total other comprehensive income

   17,305   6,992 
  

 

 

  

 

 

 

Total comprehensive loss

  $(6,444 $(27,133
  

 

 

  

 

 

 

   
Three Months Ended
  
Nine Months Ended
 
   
September 30,

2020
  
September 30,

2019
  
September 30,

2020
  
September 30,

2019
 
   
(In thousands of 
U.S.
 dollars)
 
Net income (loss)
  $ 272,962  $ (1,607 $278,384  $ (45,252
  
 
 
  
 
 
  
 
 
  
 
 
 
Other comprehensive income (loss)
     
Foreign currency translation adjustments
   (6,517  15,931   9,191   30,915 
Derivative adjustments
     
Fair valuation of derivatives
   1,390   (2,803  (1,410  (5,703
Reclassification adjustment for loss on derivatives included in net income (loss)
   41   1,600   292   3,553 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total other comprehensive income (loss)
   (5,086  14,728   8,073   28,765 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total comprehensive income (loss)
  $267,876  $ 13,121  $286,457  $ (16,487
  
 
 
  
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.

5

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

        Additional
Paid-In
Capital
        Accumulated
Other
Comprehensive
Income (Loss)
    
  Common Stock  Accumulated
Deficit
  Treasury
Stock
  Total 

(In thousands of US dollars, except share data)

 Shares  Amount 

Three Months Ended March 31, 2020:

       

Balance at December 31, 2019, as previously reported

  34,800,312  $439  $152,404  $(58,131 $(107,033 $(2,660 $(14,981

Stock-based compensation

  —     —     885   —     —     —     885 

Settlement of restricted stock units

  308,364   3   (3  —     —     —     —   

Acquisition of treasury stock

  (53,994  —     —     —     (616  —     (616

Other comprehensive income, net

  —     —     —     —     —     17,305   17,305 

Net loss

  —     —     —     (23,749  —     —     (23,749
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at March 31, 2020

  35,054,682  $442  $153,286  $(81,880 $(107,649 $14,645  $(21,156
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Three Months Ended March 31, 2019:

       

Balance at December 31, 2018, as previously reported

  34,441,232  $431  $142,600  $(36,305 $(103,926 $(20,110 $(17,310

Stock-based compensation

  —     —     669   —     —     —     669 

Exercise of stock options

  8,624   0   48   —     —     —     48 

Settlement of restricted stock units

  167,453   2   (2  —     —     —     —   

Acquisition of treasury stock

  (393,807  —     —     —     (2,585  —     (2,585

Other comprehensive income, net

  —     —     —     —     —     6,992   6,992 

Net loss

  —     —     —     (34,125  —     —     (34,125
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at March 31, 2019

  34,223,502  $433  $143,315  $(70,430 $(106,511 $(13,118 $(46,311
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 
  
Common Stock
 
  
Additional
Paid-In
 
 
Retained
Earnings
 
 
Treasury
 
 
Accumulated
Other
Comprehensive
 
 
 
 
(In thousands of U.S. dollars, except share data)
  
Shares
 
  
Amount
 
  
Capital
 
 
(Deficit)
 
 
Stock
 
 
Income (Loss)
 
 
Total
 
Three Months Ended September 30, 2020:
  
   
  
   
  
   
 
   
 
   
 
   
 
   
Balance at June 30, 2020
   35,143,033   $443   $155,591  $(52,709 $(107,649 $10,499  $6,175 
Stock-based compensation
   —      —      2,226   —     —     —     2,226 
Exercise of stock options
   287,292    3    2,024   —     —     —     2,027 
Settlement of restricted stock units
   59,395    1    (1  —     —     —     —   
Other comprehensive loss, net
   —      —      —     —     —     (5,086  (5,086
Net income
   —      —      —     272,962   —     —     272,962 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 2020
   35,489,720   $447   $159,840  $220,253  $(107,649 $5,413  $278,304 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Three Months Ended September 30, 2019:
          
Balance at June 30, 2019
   34,240,181   $433   $144,188  $(79,950 $(106,514 $(6,073 $(47,916
Stock-based compensation
   —      —      479   —     —     —     479 
Exercise of stock options
   129,409    1    888   —     —     —     889 
Settlement of restricted stock units
   1,099    0    (0  —     —     —     —   
Other comprehensive income, net
   —      —      —     —     —     14,728   14,728 
Net loss
   —      —      —     (1,607  —     —     (1,607
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 2019
   34,370,689   $434   $145,555  $(81,557 $(106,514 $8,655  $(33,427
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
  
Common Stock
 
  
Additional
Paid-In
 
 
Retained
Earnings
 
 
Treasury
 
 
Accumulated
Other
Comprehensive
 
 
Total
 
(In thousands of U.S. dollars, except share data)
  
Shares
 
 
Amount
 
  
Capital
 
 
(Deficit)
 
 
Stock
 
 
Income (Loss)
 
Nine Months Ended September 30, 2020:
  
   
 
   
  
   
 
   
 
   
 
   
 
   
Balance at December 31, 2019
   34,800,312  $439   $152,404  $(58,131 $(107,033 $(2,660 $(14,981
Stock-based compensation
   —     —      4,754   —     —     —     4,754 
Exercise of stock options
   375,643   4    2,686   —     —     —     2,690 
Settlement of restricted stock units
   367,759   4    (4  —     —     —     —   
Acquisition of treasury stock
   (53,994  —      —     —     (616  —     (616
Other comprehensive income, net
   —     —      —     —     —     8,073   8,073 
Net income
   —     —      —     278,384   —     —     278,384 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 2020
   35,489,720  $ 447   $159,840  $220,253  $(107,649 $5,413  $278,304 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Nine Months Ended September 30, 2019:
         
Balance at December 31, 2018
   34,441,232  $431   $142,600  $(36,305 $(103,926 $(20,110 $(17,310
Stock-based compensation
   —     —      1,920   —     —     —     1,920 
Exercise of stock options
   153,967   1    1,037   —     —     —     1,038 
Settlement of restricted stock units
   169,592   2    (2  —     —     —     —   
Acquisition of treasury stock
   (394,102  —      —     —     (2,588  —     (2,588
Other comprehensive income, net
   —     —      —     —     —     28,765   28,765 
Net loss
   —     —      —     (45,252  —     —     (45,252
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 2019
   34,370,689  $434   $145,555  $(81,557 $(106,514 $8,655  $(33,427
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.

6

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

   Three Months Ended 
   March 31,
2020
  March 31,
2019
 
   (In thousands of US dollars) 

Cash flows from operating activities

   

Net loss

  $(23,749 $(34,125

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

   

Depreciation and amortization

   7,935   8,303 

Provision for severance benefits

   5,071   3,117 

Amortization of debt issuance costs and original issue discount

   598   571 

Loss on foreign currency, net

   38,480   11,720 

Restructuring and other charges

   2,138   2,822 

Provision for inventory reserves

   570   4,645 

Stock-based compensation

   885   669 

Loss on early extinguishment of long-term borrowings, net

   —     42 

Other

   107   96 

Changes in operating assets and liabilities

   

Accounts receivable, net

   (10,430  (12,844

Unbilled accounts receivable, net

   6,937   9,726 

Inventories

   (4,863  (15,230

Other receivables

   1,982   (4,205

Other current assets

   909   1,836 

Accounts payable

   1,988   20,874 

Other accounts payable

   (1,817  2,797 

Accrued expenses

   (6,611  (5,365

Other current liabilities

   1,062   (6,293

Othernon-current liabilities

   1,808   1,085 

Payment of severance benefits

   (2,080  (2,263

Other

   148   347 
  

 

 

  

 

 

 

Net cash provided by (used in) operating activities

   21,068   (11,675
  

 

 

  

 

 

 

Cash flows from investing activities

   

Proceeds from settlement of hedge collateral

   4,239   2,242 

Payment of hedge collateral

   (7,841  —   

Purchase of property, plant and equipment

   (3,351  (11,207

Payment for intellectual property registration

   (229  (232

Collection of guarantee deposits

   47   298 

Payment of guarantee deposits

   —     (892

Other

   8   (10
  

 

 

  

 

 

 

Net cash used in investing activities

   (7,127  (9,801
  

 

 

  

 

 

 

Cash flows from financing activities

   

Repurchase of long-term borrowings

   —     (1,175

Proceeds from exercise of stock options

   —     48 

Acquisition of treasury stock

   (1,021  (2,353

Repayment of financing related to water treatment facility arrangement

   (135  (143

Repayment of principal portion of finance lease liabilities

   (60  (59
  

 

 

  

 

 

 

Net cash used in financing activities

   (1,216  (3,682
  

 

 

  

 

 

 

Effect of exchange rates on cash and cash equivalents

   (7,089  (1,468
  

 

 

  

 

 

 

Net increase (decrease) in cash and cash equivalents

   5,636   (26,626
  

 

 

  

 

 

 

Cash and cash equivalents

   

Beginning of the period

   151,657   132,438 
  

 

 

  

 

 

 

End of the period

  $157,293  $105,812 
  

 

 

  

 

 

 

Supplemental cash flow information

   

Cash paid for interest

  $9,522  $9,549 
  

 

 

  

 

 

 

Cash paid for income taxes

  $1,534  $1,556 
  

 

 

  

 

 

 

Non-cash investing activities

   

Property, plant and equipment additions in other accounts payable

  $687  $2,643 
  

 

 

  

 

 

 

Non-cash financing activities

   

Acquisition of treasury stock to satisfy the tax withholding obligations in connection with equity-based compensation

  $—    $(232
  

 

 

  

 

 

 

   
Nine Months Ended
 
   
September 30,

2020
  
September 30,

2019
 
   
(In thousands of 
U.S.
 dollars)
 
Cash flows from operating activities
   
Net income (loss)
  $278,384  $ (45,252
Adjustments to reconcile net income (loss) to net cash provided by operating activities
   
Depreciation and amortization
   13,333   24,661 
Provision for severance benefits
   14,150   10,491 
Amortization of debt issuance costs and original issue discount
   1,824   1,712 
Loss on foreign currency, net
   6,609   50,512 
Restructuring and other charges
   490   470 
Provision for inventory reserves
   4,079   9,255 
Stock-based compensation
   4,754   1,920 
Loss on early extinguishment of long-term borrowings, net
   —     42 
Gain on sale of discontinued operations
   (287,117  —   
Others, net
   85   61 
Changes in operating assets and liabilities
   
Accounts receivable, net
   (16,583  (32,812
Unbilled accounts receivable, net
   14,260   14,208 
Inventories
   1,390   (15,576
Other receivables
   6,111   (4,814
Other current assets
   9,143   6,356 
Accounts payable
   (5,156  27,585 
Other accounts payable
   (8,034  (10,074
Accrued expenses
   1,991   3,831 
Accrued income taxes
   12,546   (583
Other current liabilities
   2,243   (5,766
Other
non-current
liabilities
   2,868   808 
Payment of severance benefits
   (5,888  (6,195
Others, net
   59   (821
  
 
 
  
 
 
 
Net cash provided by operating activities
   51,541   30,019 
  
 
 
  
 
 
 
Cash flows from investing activities
   
Proceeds from settlement of hedge collateral
   8,029   12,625 
Payment of hedge collateral
   (7,841  (17,024
Purchase of property, plant and equipment
   (16,353  (16,693
Payment for intellectual property registration
   (664  (907
Collection of guarantee deposits
   891   539 
Payment of guarantee deposits
   (611  (1,330
Proceeds from sale of discontinued operations
   350,553   —   
Others, net
   26   225 
  
 
 
  
 
 
 
Net cash provided by (used in) investing activities
   334,030   (22,565
  
 
 
  
 
 
 
Cash flows from financing activities
   
Repurchase of long-term borrowings
   —     (1,175
Proceeds from exercise of stock options
   2,690   1,038 
Acquisition of treasury stock
   (1,021  (2,588
Repayment of financing related to water treatment facility arrangement
   (402  (415
Repayment of principal portion of finance lease liabilities
   (165  (174
  
 
 
  
 
 
 
Net cash provided by (used in) financing activities
   1,102   (3,314
  
 
 
  
 
 
 
Effect of exchange rates on cash and cash equivalents
   3,781   (5,237
  
 
 
  
 
 
 
Net increase (decrease) in cash and cash equivalents
   390,454   (1,097
  
 
 
  
 
 
 
Cash and cash equivalents
   
Beginning of the period
   151,657   132,438 
  
 
 
  
 
 
 
End of the period
  $542,111  $ 131,341 
  
 
 
  
 
 
 
Supplemental cash flow information
   
Cash paid for interest
  $19,044  $19,071 
  
 
 
  
 
 
 
Cash paid for income taxes
  $2,573  $1,904 
  
 
 
  
 
 
 
Non-cash
investing activities
   
Property, plant and equipment additions in other accounts payable
  $3,865  $496 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.

7

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1. Business, Basis of Presentation and Significant Accounting Policies

Business

MagnaChip Semiconductor Corporation (together with its subsidiaries, the “Company”) is a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, Internet of Things (“IoT”) applications, consumer, industrial and automotive applications. The Company provides technology platforms for analog, mixed signal, power, high voltage,
non-volatile
memory and Radio Frequency (“RF”) applications.

On March 30,September 1, 2020 (the “Closing Date”), the Company entered into a definitive Business Transfer Agreement (the “BTA”) forcompleted the previously announced sale of itsthe Company’s Foundry Services Group business and
its
fabrication facility located in Cheongju (“Fabknown as “Fab 4” to Key Foundry Co., Ltd. (the “Buyer”), the largera Korean limited liability company and wholly owned subsidiary of the Company’s two8-inch manufacturing facilities, to Magnus Semiconductor, LLC, a Korean limited liability company or one of its wholly owned subsidiaries (the “Buyer”(“Magnus”), in exchange for a purchase price equal to the KRW equivalent of $344.7approximately $350.6 million, in cash, subject towhich included a positive working capital adjustments set forth
a
djustment of approximately $5.9 million, pursuant to the terms of a business transfer agreement dated March 31, 2020 by and among the Company and Magnus (the “Business Transfer Agreement”). The purchase price was paid in a combination of U.S. Dollars in the BTA.amount of $46.5 million and Korean Won in the amount of approximately KRW 360.6 billion. In addition to the purchase price, the Buyer assumed all severance liabilities relating to the transferred employees, which had a value of approximately $100 million. The Buyer is a special purpose company formedwholly owned subsidiary of Magnus, which was established by Alchemist Capital Partners Korea Co., Ltd. and Credian Partners, Inc. On April 20, 2020, Magnus assigned, and the Buyer assumed, all rights and obligations of Magnus under the Business Transfer Agreement. This planned divestiture of the Foundry Services Group business and Fab 4 will allowallows the Company to strategically shift its operational focus to its standard products business. The Foundry Services Group was historically a reportable segment. As a result of the entry into the BTA, the results of theThe Foundry Services Group werebusiness was classified as discontinued operations in the Company’s consolidated statements of operations and excluded from both continuing operations and segment results for all periods presented. Accordingly, commencing with the first quarter of 2020, the Company has one reportable segment: its standard products business, together with transitional foundry services associated with its fabrication facility located in Gumi, Korea, known as “Fab 3,” that it expects to perform for the Buyer for a period of up to three years (the “Transitional Fab 3 Foundry Services”). The Company’s standard products business includes its Display Solutions and Power Solutions business lines. The Company’s Display Solutions products provide panel display solutions to major suppliers of large and small rigid and flexible panel displays, and mobile, automotive applications and home appliances. The Company’s Power Solutions products include discrete and integrated circuit solutions for power management in communications, consumer and industrial applications.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“US
U.S.
GAAP”). These interim consolidated financial statements include normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair statement of the Company’s financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with Accounting Standards Codification
(“ASC”) 270, “Interim
“Interim Reporting” and, accordingly, do not include all of the information and note disclosures required by US
U.S.
 GAAP for complete financial statements, except for the changes below. The results of operations for the three and nine months ended March 31,September 30, 2020 are not necessarily indicative of the results to be expected for a full year or for any other periods.

The Company has reclassified certain prior year amounts to conform to the current year’s presentation for discontinued operations to reflect the anticipated divestiture of its Foundry Services Group business and Fab 4. The assets to be acquired and liabilities to be transferred to the Buyer, as specified in the BTA,Business Transfer Agreement, have been classified as assets and liabilities held for sale in the Company’s consolidated balance sheets, subject to adjustments set forth in the BTA.Business Transfer Agreement. See Note 2 “Discontinued Operations and Assets Held for Sale” for additional information. The consolidated statements of cash flows have not been adjusted to separately disclose cash flows related to discontinued operations, but the material items in the operating and investing activities of cash flows relating to discontinued operations are disclosed in Note 2. Unless otherwise stated, information in these notes to consolidated financial statements relates to the Company’s continuing operations and excludes the discontinued operations.

There have been no material changes to the Company’s significant accounting policies as of and for the three and nine months ended March 31,September 30, 2020, except for those related to discontinued operations and assets held for sale as described below, as compared to the significant accounting policies described in the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2019.

8

Discontinued Operations and Assets Held for Sale

The Company reports the results of operations of a business as discontinued operations if a disposal represents a strategic shift that has or will have a major effect on the Company’s operations and financial results when the business is sold and classified as held for sale, in accordance with the criteria of Accounting Standard Codification (“ASC”)
ASC
205, “Presentation of Financial Statements” (“ASC 205”) and ASC 360, “Property, Plant and Equipment” (“ASC 360”). Assets and liabilities of a business classified as held for sale are recorded at the lower of its carrying amount or estimated fair value less costs to sell.sell, and depreciation and amortization ceases on the date that the held for sale criteria are met. If the carrying amount of the business exceeds its estimated fair value less costs to sell, a loss is recognized. Assets and liabilities related to discontinued operations classified as held for sale are segregated in the current and prior balance sheets in the period in which the business is classified as held for sale. The results of discontinued operations are reported in “Income (loss) from discontinued operations, net of tax” in the accompanying consolidated statements of operations for the current and prior periods commencing in the period in which the business meets the criteria.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”)
No. 2019-12, “Income
“Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU
2019-12”).
ASU
2019-12
removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU
2019-12
is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company does not expect the adoption of ASU
2019-12
to have a material effect on the Company’s consolidated financial statements.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards UpdateASU
No. 2016-13, “Financial
“Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU
2016-13”).
ASU
2016-13
amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. In April 2019, the FASB issued Accounting Standards Update
No. 2019-04, “Codification
“Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU
2019-04”),
and in November 2019, the FASB issued Accounting Standards Update
No. 2019-11, “Codification
“Codification Improvements to Topic 326, Financial Instruments—Credit Losses” (“ASU
2019-11”)
to clarify and address certain items related to the amendments in ASU
2016-13.
In February 2020, the FASB issued Accounting Standards Update
No. 2020-02, “Financial
“Financial Instruments—Credit Losses (Topic 326)” (“ASU
2020-02”),
which incorporates SEC SAB 119 (updated from SAB 102) into the ASC by aligning SEC recommended policies and procedures with ASC 326.The326. The Company adopted ASU
2016-13,
ASU
2019-04,
ASU
2019-11
and ASU
2020-02
as of January 1, 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued Accounting Standards Update
No. 2018-13 “Fair
“Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU
2018-13”).
ASU
2018-13
amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. The Company adopted ASU
2018-13
as of January 1, 2020, and the adoption of ASU
2018-13
did not impact the Company’s consolidated financial statements.

9

2. Discontinued Operations and Assets Held for Sale

On March 30,September 1, 2020, the Company entered into the BTA forcompleted the sale of itsthe Company’s Foundry Services Group business and Fab 4. As a result of the sale of the Foundry Services Group business and Fab 4, the Company recorded a gain of $287,117 thousand and all operations from the Foundry Services Group business and Fab 4 were classified as discontinued operations for all periods presented. Following the consummation of the sale, and for up to three years, the Company is expected to provide 
the Transitional Fab 3 Foundry Services. For the periods priorServices at an agreed upon cost plus mark-up. Accounts receivable related to the closing of the sale, revenue from providing the Transitional Fab 3 Foundry Services to the Foundry Services Group is recorded at cost on bothBuyer was
$2,484 
thousand as of September 30, 2020 and there was no related cash inflow for the continuingthree and discontinued businesses. The sale is expected to close within approximately four to sixnine months from the date of the BTA, subject to customary closing conditions.

ended September 30, 2020.

The following table summarizes the results from discontinued operations, net of tax, for the three and nine months ended March 31,September 30, 2020 and 2019.

   Three Months Ended 
   March 31,
2020
   March 31,
2019
 
   (In thousands of US dollars) 

Revenues:

    

Net sales – Foundry Services Group

  $86,279   $57,116 

Net sales – transitional Fab 3 foundry services

   (9,737   (7,003
  

 

 

   

 

 

 

Total revenues

   76,542    50,113 

Cost of sales:

    

Cost of sales – Foundry Services Group

   65,583    53,438 

Cost of sales – transitional Fab 3 foundry services

   (9,737   (7,003
  

 

 

   

 

 

 

Total cost of sales

   55,846    46,435 
  

 

 

   

 

 

 

Gross profit

   20,696    3,678 

Operating expenses:

    

Selling, general and administrative expenses

   5,644    6,034 

Research and development expenses

   7,403    7,974 

Restructuring and other charges

   2,115    2,894 
  

 

 

   

 

 

 

Total operating expenses

   15,162    16,902 
  

 

 

   

 

 

 

Operating income (loss) from discontinued operations

   5,534    (13,224

Foreign currency gain, net

   2,097    613 

Other income

   107    86 
  

 

 

   

 

 

 

Income (loss) from discontinued operations before income tax expense

   7,738    (12,525

Income tax expense

   409    45 
  

 

 

   

 

 

 

Income (loss) from discontinued operations, net of tax

  $7,329   $(12,570
  

 

 

   

 

 

 

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,

2020
   
September 30,

2019
   
September 30,

2020
   
September 30,

2019
 
   
(In thousands of 
U.S.
 dollars, except share data)
 
Revenues:
        
Net sales – Foundry Services Group
  $72,674   $ 90,404   $ 254,732   $ 220,659 
Net sales – transitional Fab 3 foundry services
   (6,277   (9,894   (25,887   (25,776
  
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues
   66,397    80,510    228,845    194,883 
Cost of sales:
        
Cost of sales – Foundry Services Group
   52,420    64,793    182,872    179,152 
Cost of sales – transitional Fab 3 foundry services
   (6,277   (9,894   (25,887   (25,776
  
 
 
   
 
 
   
 
 
   
 
 
 
Total cost of sales
   46,143    54,899    156,985    153,376 
  
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
   20,254    25,611    71,860    41,507 
Operating expenses:
        
Selling, general and administrative expenses
   4,068    6,126    14,704    18,040 
Research and development expenses
   5,166    7,135    19,484    22,326 
Restructuring and other charges
   7,870    763    10,574    4,787 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   17,104    14,024    44,762    45,153 
  
 
 
   
 
 
   
 
 
   
 
 
 
Operating income (loss) from discontinued operations
   3,150    11,587    27,098    (3,646
  
 
 
   
 
 
   
 
 
   
 
 
 
Foreign currency gain (loss), net
   (797   780    1,277    2,533 
Others, net
   18    (10   66    (59
  
 
 
   
 
 
   
 
 
   
 
 
 
Income (loss) from discontinued operations before income tax expense
   2,371    12,357    28,441    (1,172
Income tax expense (benefit)
   14,173    (280   15,517    (209
Gain on sale of discontinued operations
   287,117    —      287,117    —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Transaction costs
  
(10,814
)
  
 
 
   
(10,814
)
  
— 
 
 
Income (loss) from discontinued operations, net of tax
   264,501    12,637    289,227    (963
  
 
 
   
 
 
   
 
 
   
 
 
 
For the three months ended March 31,September 30, 2020 and 2019, the Company recorded $2,115$7,870 thousand and $743$763 thousand, respectively, and for the nine months ended September 30, 2020 and 2019, the Company recorded $10,574 thousand and $2,636 thousand, respectively, in professional fees and transaction related expenses incurred in connection with the sale of the Foundry Services Group business and Fab 4, and recorded such costs as restructuring and other charges in the above. For the threenine months ended March 31,September 30, 2019, the Company also recorded in the same line a $2,151 thousand restructuring-related charge to its fab employees.

10

The following table provides a reconciliation of the aggregate carrying amounts of major classes of assets and liabilities relating to the Foundry Services Group business and Fab 4, whichw
h
ich are included in assets and liabilities held for sale as of December 31, 2019 in the accompanying consolidated balance sheets for each of the periods presented:

   March 31,
2020
   December 31,
2019
 
   (In thousands of US dollars) 

Assets

    

Current assets

    

Accounts receivable, net

  $40,735   $48,194 

Unbilled accounts receivable, net

   9,374    16,463 

Inventories, net

   34,968    31,863 

Other current assets

   2,891    3,301 

Other assets of the disposal group classified as held for sale

   1,461    —   
  

 

 

   

 

 

 

Total current assets held for sale

  $89,429   $99,821 
  

 

 

   

 

 

 

Property, plant and equipment, net

   99,604    109,506 

Intangible assets, net

   1,202    1,245 

Othernon-current assets

   11,384    12,683 
  

 

 

   

 

 

 

Total assets held for sale

  $201,619   $223,255 
  

 

 

   

 

 

 

Liabilities

    

Current liabilities

    

Accounts payable

  $20,462   $20,503 

Other current liabilities

   14,773    16,537 
  

 

 

   

 

 

 

Total current liabilities held for sale

  $ 35,235   $ 37,040 
  

 

 

   

 

 

 

Accrued severance benefits, net

   93,121    95,547 

Othernon-current liabilities

   13,657    15,334 
  

 

 

   

 

 

 

Total liabilities held for sale

  $ 142,013   $ 147,921 
  

 

 

   

 

 

 

As of March 31, 2020, all assets and liabilities held for sale are classified as current on the consolidated balance sheets based on the anticipated date of disposal of the Foundry Services Group business and Fab 4.

sheet:

   
December 31,

2019
 
   
(In thousands of 
U.S.
 dollars)
 
Assets
  
Current assets
  
Accounts receivable, net
  $48,194 
Unbilled accounts receivable
   16,463 
Inventories, net
   31,863 
Other current assets
   3,301 
  
 
 
 
Total current assets held for sal
e
  $99,821 
  
 
 
 
Property, plant and equipment, net
   109,506 
Intangible assets, net
   1,245 
Other
non-current
assets
   12,683 
  
 
 
 
Total assets held for sale
  $223,255 
  
 
 
 
Liabilities
  
Current liabilities
  
Accounts payable
  $20,503 
Other current liabilities
   16,537 
  
 
 
 
Total current liabilities held for sale
  $37,040 
  
 
 
 
Accrued severance benefits, net
   95,547 
Other
non-current
liabilities
   15,334 
  
 
 
 
Total liabilities held for sale
  $147,921 
  
 
 
 
The following table provides supplemental cash flows information related to discontinued operations:

   Three Months Ended 
   March 31,
2020
   March 31,
2019
 
   (In thousands of US dollars) 

Significant non-cash operating activities:

    

Depreciation and amortization

  $5,365   $5,752 

Provision for severance benefits

   3,052    1,803 

Stock-based compensation

   123    106 

Investing activities:

    

Capital expenditures

  $(1,479  $(4,469

   
Nine Months Ended
 
   
September 30,

2020
   
September 30,

2019
 
   
(In thousands of 
U.S.
 dollars)
 
Significant
non-cash
operating activities:
    
Depreciation and amortization
  $5,365   $16,958 
Provision for severance benefits
   8,209    5,997 
Stock-based compensation
   388    259 
Investing activities:
    
Capital expenditures
  $(5,838  $(9,174
11

3. Sales of Accounts Receivable and Receivable Discount Program

The Company has entered into
is party to
an agreement to sell selected trade accounts receivable to a financial institution from time to time since March 2012. After the sale, the Company does not retain any interest in the receivables and the applicable financial institution collects these accounts
receivable
directly from the customer. There was no0 sale of these accounts
receivable
for the threenine months ended March 31,September 30, 2020. For the threenine months ended March 31,September 30, 2019, the proceeds from the sales of these accounts
receivable
totaled $7,989$14,474 thousand and these sales resulted in
pre-tax
losses of $25$45 thousand, which are included in selling, general and administrative expenses in the consolidated statements of operations. Net proceeds of this accounts receivable sale program are recognized in the consolidated statements of cash flows as part of operating cash flows.

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

4. Inventories

Inventories as of March 31,September 30, 2020 and December 31, 2019 consist of the following (in thousands):

   March 31,
2020
   December 31,
2019
 

Finished goods

  $8,448   $10,087 

Semi-finished goods andwork-in-process

   25,342    28,815 

Raw materials

   7,916    8,449 

Materialsin-transit

   231    —  ��

Less: inventory reserve

   (4,807   (5,947
  

 

 

   

 

 

 

Inventories, net

  $37,130   $41,404 
  

 

 

   

 

 

 

   
September 30,

2020
   
December 31,

2019
 
Finished goods
  $5,030   $10,087 
Semi-finished goods and
work-in-process
   28,919    28,815 
Raw materials
   5,743    8,449 
Materials
in-transit
   444    —   
Less: inventory reserve
   (6,505   (5,947
  
 
 
   
 
 
 
Inventories, net
  $33,631   $41,404 
  
 
 
   
 
 
 
Changes in inventory reserve for the three and nine months ended March 31,September 30, 2020 and 2019 are as follows (in thousands):

   Three Months Ended 
   March 31,
2020
   March 31,
2019
 

Beginning balance

  $(5,947  $(4,845

Change in reserve

    

Inventory reserve charged to costs of sales

   (1,275   (5,073

Sale of previously reserved inventory

   906    476 
  

 

 

   

 

 

 
   (369   (4,597

Write off

   499    592 

Translation adjustments

   316    160 

Reclassified to assets held for sale

   694    —   
  

 

 

   

 

 

 

Ending balance

  $(4,807  $(8,690
  

 

 

   

 

 

 

   
Three Months

Ended
   
Nine Months

Ended
   
Three Months

Ended
   
Nine Months

Ended
 
   
September 30, 2020
   
September 30, 2019
 
Beginning balance
  $(5,307  $(5,947  $(11,782  $(4,845
Change in reserve
        
Inventory reserve charged to costs of sales
   (3,472   (6,541   (1,298   (10,745
Sale of previously reserved inventory
   1,578    3,231    914    1,880 
  
 
 
   
 
 
   
 
 
   
 
 
 
   (1,894   (3,310   (384   (8,865
Write off
   835    1,976    377    1,593 
Translation adjustments
   (139   82    461    789 
Reclassified to assets held for sale
   0      694    —      —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
  $(6,505  $(6,505  $(11,328  $(11,328
  
 
 
   
 
 
   
 
 
   
 
 
 
Inventory reserve represents the Company’s best estimate in value lost due to excessive inventory level, physical deterioration, obsolescence, changes in price levels, or other causes based on individual facts and circumstances. Inventory reserve relates to inventory items including finished goods, semi-finished goods,
work-in-process
and raw materials. Write off of this reserve is recognized only when the related inventory has been disposed or scrapped.

12

5. Property, Plant and Equipment

Property, plant and equipment as of March 31,September 30, 2020 and December 31, 2019 are comprised of the following (in thousands):

   March 31,
2020
   December 31,
2019
 

Buildings and related structures

  $21,309   $22,502 

Machinery and equipment

   85,213    89,453 

Finance leaseright-of-use assets

   306    323 

Others

   20,863    22,242 
  

 

 

   

 

 

 
   127,691    134,520 

Less: accumulated depreciation

   (73,987   (75,704

Land

   13,497    14,252 
  

 

 

   

 

 

 

Property, plant and equipment, net

  $67,201   $73,068 
  

 

 

   

 

 

 

   
September 30,

2020
   
December 31,

2019
 
Buildings and related structures
  $22,580   $22,502 
Machinery and equipment
   90,136    89,453 
Finance lease
right-of-use
assets
   319    323 
Others
   31,802    22,242 
  
 
 
   
 
 
 
   144,837    134,520 
Less: accumulated depreciation
   (81,409   (75,704
Land
   14,061    14,252 
  
 
 
   
 
 
 
Property, plant and equipment, net
  $77,489   $73,068 
  
 
 
   
 
 
 
Aggregate depreciation expenses totaled $2,409$7,473 thousand and $2,412$7,267 thousand for the threenine months ended March 31,September 30, 2020 and 2019, respectively.

Concurrent with the execution of the BTA, the Company executed a factory (kun) mortgage agreement under which the real property owned by the Company in respect of the Fab 3 fabrication facility located in Gumi, Korea and other material assets located in, attached to or forming part of such facility were pledged as collateral for purposes of securing the payment of its termination fee of $34,470 thousand under the BTA. The Company has a right to replace the factory (kun) mortgage at any time with a deposit of $34,470 thousand cash into escrow.

6. Intangible Assets

Intangible assets as of March 31,September 30, 2020 and December 31, 2019 are comprised of the following (in thousands):

   March 31, 2020 
   Gross
amount
   Accumulated
amortization
   Net
amount
 

Technology

  $6,226   $(6,226  $—  

Customer relationships

   9,641    (9,641   —   

Intellectual property assets

   8,314    (5,731   2,583 
  

 

 

   

 

 

   

 

 

 

Intangible assets, net

  $24,181   $(21,598  $2,583 
  

 

 

   

 

 

   

 

 

 

   
September 30, 2020
 
   
Gross

amount
   
Accumulated

amortization
   
Net

amount
 
Technology
  $6,487   $(6,487  $—  
Customer relationships
   10,044    (10,044   —   
Intellectual property assets
   8,760    (5,883   2,877 
  
 
 
   
 
 
   
 
 
 
Intangible assets, net
  $25,291   $(22,414  $2,877 
  
 
 
   
 
 
   
 
 
 
   
December 31, 2019
 
   
Gross

amount
   
Accumulated

amortization
   
Net

amount
 
Technology
  $6,575   $(6,575  $—  
Customer relationships
   10,180    (10,180   —   
Intellectual property assets
   8,637    (5,868   2,769 
  
 
 
   
 
 
   
 
 
 
Intangible assets, net
  $25,392   $(22,623  $2,769 
  
 
 
   
 
 
   
 
 
 

Aggregate amortization expenses for intangible assets totaled $161$495 thousand and $139$436 thousand for the threenine months ended March 31,September 30, 2020 and 2019, respectively.

13

7. Leases

The Company has operating and finance leases for buildings and other assets such as vehicles and office equipment. The Company’s leases have remaining lease terms ranging from 1 year to 43 years.

The tables below present financial information related to the Company’s leases.

The Company adopted the new lease accounting standard as of January 1, 2019, using the modified retrospective transition method. The tables below present financial information related to
t
o the Company’s leases

Supplemental balance sheets information related to leases as of March 31,September 30, 2020 and December 31, 2019 are as follows (in thousands):

Leases

 

Classification

  March 31,
2020
   December 31,
2019
 

Assets

     

Operating lease

 Operating lease right-of-use assets  $1,413   $1,876 

Finance lease

 Property, plant and equipment, net   229    258 
   

 

 

   

 

 

 

Total lease assets

   $1,642   $2,134 
   

 

 

   

 

 

 

Liabilities

     

Current

     

Operating

 Operating lease liabilities  $1,301   $1,625 

Finance

 Other current liabilities   58    60 

Non-current

     

Operating

 Othernon-current liabilities   112    251 

Finance

 Othernon-current liabilities   182    208 
   

 

 

   

 

 

 

Total lease liabilities

   $1,653   $2,144 
   

 

 

   

 

 

 

Leases
  
Classification
   
September 30,
2020
   
December 31,

2019
 
Assets
      
Operating lease
   
Operating lease right-of-use assets
   $2,032   $1,876 
Finance lease
   Property, plant and equipment, net    207    258 
    
 
 
   
 
 
 
Total lease assets
    $2,239   $2,134 
    
 
 
   
 
 
 
Liabilities
      
Current
      
Operating
   Operating lease liabilities   $1,390   $1,625 
Finance
   Other current liabilities    62    60 
Non-current
      
Operating
   Other
non-current
liabilities
    642    251 
Finance
   Other
non-current
liabilities
    158    208 
    
 
 
   
 
 
 
Total lease liabilities
    $2,252   $2,144 
    
 
 
   
 
 
 
The following table presents the weighted average remaining lease term and discount rate:

   March 31,
2020
  December 31,
2019
 

Weighted average remaining lease term

   

Operating leases

   1.0 years   1.1 years 

Finance leases

   3.8 years   4.0 years 

Weighted average discount rate

   

Operating leases

   7.35  7.19

Finance leases

   7.75  7.75

   
September 30,

2020
  
December 31,

2019
 
Weighted average remaining lease term
   
Operating leases
   1.4 years   1.1 years 
Finance leases
   3.3 years   4.0 years 
Weighted average discount rate
   
Operating leases
   6.82  7.19
Finance leases
   7.75  7.75
The components of lease cost included in the Company’s consolidated statements of operations, are as follows (in thousands):

   Three Months
Ended
 
   March 31,
2020
   March 31,
2019
 

Operating lease cost

  $468   $525 

Finance lease cost

    

Amortization ofright-of-use assets

   16    17 

Interest on lease liabilities

   5    6 
  

 

 

   

 

 

 

Total lease cost

  $489   $548 
  

 

 

   

 

 

 

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,

2020
   
September 30,

2019
   
September 30,

2020
   
September 30,

2019
 
Operating lease cost
 $480   $483   $1,409   $1,509 
Finance lease cost
        
Amortization of
right-of-use
assets
   16    15    47    48 
Interest on lease liabilities
   4    5    13    17 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total lease cost
  $500   $503   $1,469   $1,574 
  
 
 
   
 
 
   
 
 
   
 
 
 
The above table does not include an immaterial cost of short-term leases for the three and nine months ended March 31,September 30, 2020 and 2019.

14

Other lease information is as follows (in thousands):

   Three Months
Ended
 
   March 31,
2020
   March 31,
2019
 

Cash paid for amounts included in the measurement of lease liabilities

    

Operating cash flows from operating leases

  $468   $525 

Operating cash flows from finance leases

   5    6 

Financing cash flows from finance leases

   14    14 

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,

2020
   
September 30,

2019
   
September 30,

2020
   
September 30,

2019
 
Cash paid for amounts included in the measurement of lease liabilities
        
Operating cash flows from operating leases
  $480   $483   $1,409   $1,509 
Operating cash flows from finance leases
   4    5    13    17 
Financing cash flows from finance leases
   15    13    43    41 
The aggregate future lease payments for operating and finance leases as of March 31,September 30, 2020 are as follows (in thousands):

   Operating
Leases
   Finance
Leases
 

2020

  $1,192   $55 

2021

   254    74 

2022

   21    74 

2023

   1    74 

Thereafter

   —      —   
  

 

 

   

 

 

 

Total future lease payments

   1,468    277 

Less: Imputed interest

   (55   (37
  

 

 

   

 

 

 

Present value of future payments

  $1,413   $240 
  

 

 

   

 

 

 

   
Operating

Leases
   
Finance

Leases
 
2020
  $358   $19 
2021
   1,459    77 
2022
   308    77 
2023
   16    77 
Thereafter
   —      —   
  
 
 
   
 
 
 
Total future lease payments
   2,141    250 
Less: Imputed interest
   (109   (30
  
 
 
   
 
 
 
Present value of future payments
  $2,032   $220 
  
 
 
   
 
 
 
8. Accrued Expenses

Accrued expenses as of March 31,September 30, 2020 and December 31, 2019 are comprised of the following (in thousands):

   March 31,
2020
   December 31,
2019
 

Payroll, benefits and related taxes, excluding severance benefits

  $8,992   $8,493 

Withholding tax attributable to intercompany interest income

   23,771    23,371 

Interest on senior notes

   3,444    8,205 

Outside service fees

   1,224    1,996 

Others

   4,058    2,734 
  

 

 

   

 

 

 

Accrued expenses

  $41,489   $44,799 
  

 

 

   

 

 

 

   
September 30,

2020
   
December 31,

2019
 
Payroll, benefits and related taxes, excluding severance benefits
  $9,743   $8,493 
Withholding tax attributable to intercompany interest income
   25,206    23,371 
Interest on senior notes
   3,444    8,205 
Outside service fees
   685    1,996 
Others
   2,552    2,734 
  
 
 
   
 
 
 
Accrued expenses
  $41,630   $44,799 
  
 
 
   
 
 
 
15

9. Derivative Financial Instruments

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

Details of derivative contracts as of March 31,September 30, 2020 are as follows (in thousands):

Date of transaction

  Type of derivative   Total notional amount   Month of settlement

August 13, 2019

   Zero cost collar   $30,000   April 2020 to June 2020

September 27, 2019

   Zero cost collar   $21,000   April 2020 to June 2020

December 4, 2019

   Zero cost collar   $30,000   July 2020 to December 2020

January 31, 2020

   Zero cost collar   $30,000   July 2020 to December 2020

February 3, 2020

   Zero cost collar   $18,000   July 2020 to December 2020

February 21, 2020

   Zero cost collar   $30,000   July 2020 to December 2020

Date of transaction
  
Type of derivative
   
Total notional amount
   
Month of settlement
December 4, 2019
  Zero cost collar   $15,000   October 2020 to
 
December 2020
January 31, 2020
   Zero cost collar   $15,000   October 2020 to December 2020
February 3, 2020
   Zero cost collar   $9,000   October 2020 to December 2020
February 21, 2020
   Zero cost collar   $15,000   October 2020 to December 2020
July 13, 2020
   Zero cost collar   $30,000   January 2021 to June 2021
Details of derivative contracts as of December 31, 2019 are as follows (in thousands):

Date of transaction

  Type of derivative   Total notional amount   Month of settlement

August 13, 2019

   Zero cost collar   $60,000   January 2020 to June 2020

September 27, 2019

   Zero cost collar   $42,000   January 2020 to June 2020

December 4, 2019

   Zero cost collar   $30,000   July 2020 to December 2020

Date of transaction
  
Type of derivative
   
Total notional amount
   
Month of settlement
August 13, 2019
   Zero cost collar   $60,000    January 2020 to
 
June 2020
 
September 27, 2019
   Zero cost collar   $42,000    January 2020 to June 2020 
December 4, 2019
   Zero cost collar   $30,000    July 2020 to
 
December 2020
 
 
 
 
 
The zero cost collar contracts qualify as cash flow hedges under ASC 815, “Derivatives and Hedging,” since at both the inception of the contracts and on an ongoing basis, the hedging relationship was and is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the contracts.

The fair values of the Company’s outstanding zero cost collar contracts recorded as assets and liabilities as of March 31,September 30, 2020 and December 31, 2019 are as follows (in thousands):

Derivatives designated as hedging instruments:

      March 31,
2020
   December 31,
2019
 

Asset Derivatives:

      

Zero cost collars

   Other current assets   $—    $1,456 

Liability Derivatives:

      

Zero cost collars

   Other current liabilities   $3,500   $—  

Derivatives designated as hedging instruments:
      
September 30,

2020
   
December 31,

2019
 
Asset Derivatives:
      
Zero cost collars
   Other current assets   $262   $1,456 
Liability Derivatives:
      
Zero cost collars
   Other current liabilities   $33   $—  
Offsetting of derivative assets and liabilities as of March 31,September 30, 2020 is as follows (in thousands):

As of March 31, 2020

  Gross amounts of
recognized
liabilities
   Gross amounts
offset in the
balance sheets
   Net amounts of
liabilities
presented in the
balance sheets
   Gross amounts not offset
in the balance sheets
  Net amount 
  Financial
instruments
   Cash collateral
pledged
 

Liability Derivatives:

           

Zero cost collars

  $3,500   $—    $3,500   $—    $(2,720 $780 

As of September 30, 2020
  
Gross amounts of

recognized

assets/liabilities
   
Gross amounts

offset in the

balance sheets
   
Net amounts of

assets/liabilities

presented in the

balance sheets
   
Gross amounts not offset

in the balance sheets
   
Net amount
 
  
Financial

instruments
   
Cash collateral

pledged
 
Asset Derivatives:
            
Zero cost collars
  $262   $0   $262   $0   $0   $262 
Liability Derivatives:
                              
Zero cost collars
  $33   $0   $33   $0   $0   $33 
Offsetting of derivative assets as of December 31, 2019 is as follows (in thousands):

As of December 31, 2019
  
Gross amounts of

recognized

assets
   
Gross amounts

offset in the

balance sheets
   
Net amounts of

assets

presented in the

balance sheets
   
Gross amounts not offset

in the balance sheets
   
Net amount
 
  
Financial

instruments
   
Cash collateral

pledged
 
Asset Derivatives:
            
Zero cost collars
  $1,456   $
 —
 
  
$1,456   $
 —
 
  
$1,070   $2,526 

16

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

The following table summarizes the impact of derivative instruments on the consolidated statements of operations for the three and nine months ended March 31,September 30, 2020 and 2019 and net sales of discontinued operation are included in the below table (in thousands):

Derivatives in ASC

815 Cash Flow Hedging

Relationships                   

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

Into Statement of Operations
(Effective Portion)
  Location/Amount of Gain (Loss)
Recognized in
Statement of Operations on Derivatives
(Ineffective Portion)
 
   Three Months Ended
March 31,
      Three Months Ended
March 31,
      Three Months Ended
March 31,
 
   2020  2019      2020  2019      2020   2019 

Zero cost collars

  $(5,004 $34   Net sales   $(58 $—    Other income, net   $117   $—  

Forwards

  $—   $(533  Net sales   $—   $(89  Other income, net   $—    $(56

Forwards—excluded time value

     Net sales   $—   $(98     
  

 

 

  

 

 

    

 

 

  

 

 

    

 

 

   

 

 

 
  $(5,004 $(499   $(58 $(187   $117   $(56
  

 

 

  

 

 

    

 

 

  

 

 

    

 

 

   

 

 

 

Derivatives in ASC
815 Cash Flow Hedging
Relationships
  
Amount of Gain (Loss)

Recognized in

AOCI on

Derivatives
  
Location/Amount of Loss

Reclassified from AOCI

Into Statement of Operations
  
Location/Amount of Gain (Loss)

Recognized in

Statement of Operations on Derivatives
 
   
Three Months Ended

September 30,
      
Three Months Ended

September 30,
      
Three Months Ended

September 30,
 
   
2020
   
2019
      
2020
  
2019
      
2020
   
2019
 
Zero cost collars
  $1,390   $(2,803)��  Net sales   $(41 $(1,600  Other income, net   $50   $(33
Derivatives in ASC
815 Cash Flow Hedging
Relationships
  
Amount of Loss

Recognized in

AOCI on

Derivatives
  
Location/Amount of Loss

Reclassified from AOCI

Into Statement of Operations
  
Location/Amount of Gain (Loss)

Recognized in

Statement of Operations on Derivatives
 
   
Nine Months Ended

September 30,
      
Nine Months Ended

September 30,
      
Nine Months Ended

September 30,
 
   
2020
  
2019
      
2020
  
2019
      
2020
   
2019
 
Zero cost collars
  $(1,410 $(3,905  Net sales   $(292 $(1,803  Other income, net   $222   $(44
Forwards
  $—   $(1,798  Net sales   $—   $(1,750  Other income, net   $—    $(125
  
 
 
  
 
 
    
 
 
  
 
 
    
 
 
   
 
 
 
  $(1,410 $(5,703   $(292 $(3,553   $222   $(169
  
 
 
  
 
 
    
 
 
  
 
 
    
 
 
   
 
 
 
As of March 31,September 30, 2020, the amount expected to be reclassified from accumulated other comprehensive income into lossincome within the next twelve months is $3,401$427 thousand.

The Company set aside $10,550$9,650 thousand and $8,750 thousand of cash deposits to the counterparties, Nomura Financial Investment (Korea) Co., Ltd. (“NFIK”) and Deutsche Bank AG, Seoul Branch (“DB”), as required for the zero cost collar contracts outstanding as of March 31,September 30, 2020 and December 31, 2019, respectively. These cash deposits are recorded as hedge collateral on the consolidated balance sheets.

The Company is required to deposit additional cash collateral with NFIK and DB for any exposure in excess of $500 thousand, and $2,720 thousand and0 such cash collateral was required as of September 30, 2020. As of December 31, 2019, $1,070 thousand of additional cash collateral were required and recorded as hedge collateral on the consolidated balance sheets as of March 31, 2020sheet.
These forward and December 31, 2019, respectively.

Thesezero cost collar contracts may be terminated by the counterparty in a number of circumstances, including if the Company’s borrowing rating falls below

B-/B3
or if the Company’s total cash and cash equivalents is less than $30,000 thousand at the end of a fiscal quarter, unless a waiver is obtained from the counterparty.

17

10. Fair Value Measurements

Fair Value of Financial Instruments

As of March 31,September 30, 2020, the following table represents the Company’s assets and liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):

   Carrying Value
March 31, 2020
   Fair Value
Measurement
March 31, 2020
   Quoted Prices in
Active Markets
for Identical
liability (Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 

Liabilities:

          

Derivative liabilities (other current liabilities)

  $3,500   $3,500    —     $3,500    —   

   
Carrying Value

September 30, 2020
   
Fair Value

Measurement

September 30, 2020
   
Quoted Prices in

Active Markets

for Identical

Asset
 /

Liability (Level 1)
   
Significant

Other

Observable

Inputs

(Level 2)
   
Significant

Unobservable

Inputs

(Level 3)
 
Assets:
          
Derivative assets (other current assets)
  $ 262   $262    —     $262    —   
Liabilities:
          
Derivative liabilities (other current liabilities)
  $33   $33    —     $33    —   
As of December 31, 2019, the following table represents the Company’s assets measured at fair value on a recurring basis and the basis for that measurement (in thousands):

   
Carrying Value

December 31, 2019
   
Fair Value

Measurement

December 31, 2019
   
Quoted Prices in

Active Markets

for Identical

Asset (Level 1)
   
Significant

Other

Observable

Inputs

(Level 2)
   
Significant

Unobservable

Inputs

(Level 3)
 
Assets:
          
Derivative assets (other current assets)
  $1,456   $1,456    —     $1,456    —   

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

Fair Value of Borrowings

   March 31, 2020   December 31, 2019 
   Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value
 
   (In thousands of US dollars) 

Borrowings:

        

5.0% Exchangeable Senior Notes due March 2021 (Level 2)

  $82,328   $94,479   $81,959   $116,078 

6.625% Senior Notes due July 2021 (Level 2)

  $223,012   $210,795   $222,784   $224,250 

   
September 30, 2020
   
December 31, 2019
 
   
Carrying

Value
   
Fair

Value
   
Carrying

Value
   
Fair

Value
 
   
(In thousands of
U.S.
dollars)
 
Borrowings:
        
5.0% Exchangeable Senior Notes due March 2021 (Level 2)
  $83,088   $126,643   $81,959   $116,078 
6.625% Senior Notes due July 2021 (Level 2)
  $223,479   $224,250   $222,784   $224,250 
On January 17, 2017, the Company’s wholly-owned subsidiary, MagnaChip Semiconductor S.A., closed an offering (the “Exchangeable Notes Offering”) of 5.0% Exchangeable Senior Notes due March 1, 2021 (the “Exchangeable Notes”), of $86,250 thousand, which represents the principal amount, excluding $5,902 thousand of debt issuance costs. In December 2018 and February 2019, MagnaChip Semiconductor S.A. repurchased a principal amount equal to $1,590 thousand and $920 thousand, respectively, of the Exchangeable Notes in the open market. The Company estimates the fair value of the Exchangeable Notes using the market approach, which utilizes quoted market prices that fall under Level 2. For further description of the Exchangeable Notes, see Note 11, “Borrowings.”

On July 18, 2013, the Company issued 6.625% Senior Notes due July 15, 2021 (the “2021 Notes”) of $225,000 thousand, which represents the principal amount, excluding $1,125 thousand of original issue discount and $5,039 thousand of debt issuance costs. In December 2018 and January 2019, the Company repurchased a principal amount equal to $500 thousand and $250 thousand, respectively, of the 2021 Notes in the open market. The Company estimates the fair value of the 2021 Notes using the market approach, which utilizes quoted market prices that fall under Level 2. For further description of the 2021 Notes, see
Note 11, “Borrowings.“Borrowings” and Note 19, “Subsequent Events.

18

Fair Values Measured on a
Non-recurring
Basis

The Company’s
non-financial
assets, such as property, plant and equipment, and intangible assets are recorded at fair value upon acquisition and are remeasured at fair value only if an impairment charge is recognized. As of March 31,September 30, 2020 and 2019, the Company did not0t have any assets or liabilities measured at fair value on a
non-recurring
basis.

11. Borrowings

Borrowings as of March 31,September 30, 2020 and December 31, 2019 are as follows (in thousands):

   March 31,
2020
   December 31,
2019
 

5.0% Exchangeable Senior Notes due March 2021

  $83,740   $83,740 

6.625% Senior Notes due July 2021

   224,250    224,250 

Less: unamortized discount and debt issuance costs

   (2,650   (3,247
  

 

 

   

 

 

 

Total borrowings, net

   305,340    304,743 

Less: current portion of long-term borrowings, net

   (82,328   —   
  

 

 

   

 

 

 

Long-term borrowings, net

  $223,012   $304,743 
  

 

 

   

 

 

 

   
September 30,

2020
   
December 31,

2019
 
5.0% Exchangeable Senior Notes due March 2021
  $83,740   $83,740 
6.625% Senior Notes due July 2021
   224,250    224,250 
Less: unamortized discount and debt issuance costs
   (1,423   (3,247
  
 
 
   
 
 
 
Total borrowings, net
   306,567    304,743 
Less: current portion of long-term borrowings, net
   306,567    —   
  
 
 
   
 
 
 
Long-term borrowings, net
  $0    $304,743 
  
 
 
   
 
 
 
5.0% Exchangeable Senior Notes

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

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

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

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

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

19

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

The Company incurred debt issuance costs of $5,902 thousand related to the issuance of the Exchangeable Notes. The debt issuance costs are recorded as a direct deduction from the long-term borrowings in the consolidated balance sheets and amortized to interest expense using the effective interest method over the term of the Exchangeable Notes. Interest expense related to the Exchangeable Notes for the three and nine months ended March 31,September 30, 2020 were $1,429 thousand and $4,720 thousand, respectively. Interest expense related to the Exchangeable Notes for the three and nine months ended September 30, 2019 were $1,416$1,404 thousand and $1,408$4,206 thousand, respectively.

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

6.625% Senior Notes

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

On or after July 15, 2019, the Company can optionally redeem all or a part of the 2021 Notes at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest and special interest, if any, on the notes redeemed, to the applicable date of redemption.

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

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

The Company incurred original issue discount of $1,125 thousand and debt issuance costs of $5,039 thousand related to the issuance of the 2021 Notes. The original issue discount and the debt issuance costs are recorded as a direct deduction from the long-term borrowings in the consolidated balance sheets and amortized to interest expense using the effective interest method over the term of the 2021 Notes. Interest expense related to the 2021 Notes for the three and nine months ended March 31,September 30, 2020 were $3,951 thousand and $11,838 thousand, respectively. Interest expenses related to the 2021 Notes for the three and nine months ended September 30, 2019 were $3,943$3,935 thousand and $3,930$11,794 thousand, respectively.

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

On October 2, 2020, the Company redeemed all of the outstanding 2021 Notes. For a further discussion of such redemption, see Note 19, “Subsequent Events.”

20

12. Accrued Severance Benefits

The majority of accrued severance benefits are for employees in the Company’s Korean subsidiary. Pursuant to the Employee Retirement Benefit Security Act of Korea, eligible employees and executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of March 31,September 30, 2020, 98% of all employees of the Company were eligible for severance benefits.

benefit

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

   Three Months Ended 
   March 31,
2020
   March 31,
2019
 

Beginning balance

  $53,344   $55,691 

Provisions

   2,019    1,314 

Severance payments

   (1,952   (1,496

Translation adjustments

   (2,801   (956
  

 

 

   

 

 

 
   50,610    54,553 

Less: Cumulative contributions to severance insurance deposit accounts

   (1,557   (869

The National Pension Fund

   (75   (87

Group severance insurance plan

   (213   (243
  

 

 

   

 

 

 

Accrued severance benefits, net

  $48,765   $53,354 
  

 

 

   

 

 

 

   
Three Months Ended
   
Nine Months Ended
   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2020
   
September 30, 2019
 
Beginning balance
  $51,785   $53,344   $53,202   $55,691 
Provisions
   2,167    5,941    1,851    4,494 
Severance payments
   (1,295   (4,749   (1,017   (4,312
Translation adjustments
   1,204    (675   (2,180   (4,017
  
 
 
   
 
 
   
 
 
   
 
 
 
   53,861    53,861    51,856    51,856 
Less: Cumulative contributions to severance insurance deposit accounts
   (1,616   (1,616   (1,357   (1,357
The National Pension Fund
   (73   (73   (80   (80
Group severance insurance plan
   (219   (219   (227   (227
  
 
 
   
 
 
   
 
 
   
 
 
 
Accrued severance benefits, net
  $ 51,953   $ 51,953   $ 50,192   $ 50,192 
  
 
 
   
 
 
   
 
 
   
 
 
 
The severance benefits funded through the Company’s National Pension Fund and group severance insurance plan will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.

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

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

   Severance benefit 

Remainder of 2020

  $369 

2021

   626 

2022

   823 

2023

   580 

2024

   788 

2025

   2,201 

2026 – 2030

   19,439 

   
Severance benefit
 
Remainder of 2020  $387 
2021   386 
2022   743 
2023   605 
2024   1,074 
2025   2,157 
2026 – 2030   19,644 
The above amounts were determined based on the
non-executive
employees’ current salary rates and the number of service years that will be accumulated upon their retirement dates. These amounts do not include amounts that might be paid to
non-executive
employees that will cease working with the Company before their normal retirement ages.

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

21

13. Foreign Currency Loss,Gain (Loss), Net

Net foreign currency gain or loss includes
non-cash
translation gain or loss associated with intercompany balances. A substantial portion of the Company’s net foreign currency gain or loss is
non-cash
translation gain or loss associated with intercompany long-term loans to the Company’s Korean subsidiary. The loans are denominated in US
U.S.
dollars and are affected by changes in the exchange rate between the Korean won and the US
U.S.
dollar. As of March 31,September 30, 2020 and December 31, 2019, the outstanding intercompany loan balances including accrued interest between the Korean subsidiary and the Dutch subsidiary were $684,021$445,991 thousand and $686,485 thousand, respectively. The Korean won to US
U.S.
 dollar exchange rates were 1,222.6:1,173.5:1 and 1,157.8:1 using the first base rate as of March 31,September 30, 2020 and December 31, 2019, respectively, as quoted by the KEB Hana Bank.

14
.
Income Taxes

The Company and its subsidiaries file income tax returns in Korea, Japan, Taiwan, the US
U.S.
and in various other jurisdictions. The Company is subject to income- or
non-income
tax examinations by tax authorities of these jurisdictions for all open tax years.

A

Income from continuing operations before income tax expense for the three months ended September 30, 2020 was $7,316 thousand and loss from continuing operations before income tax expense for the three months ended March 31, 2020 andSeptember 30, 2019 was $29,775 thousand and $20,759 thousand, respectively.$12,510 thousand. For the three months ended March 31, September 30,
2020, andthe Company recorded an income tax benefit on continuing operations of $1,145 thousand, primarily attributable to the foreign translation loss realized by the Company’s Korean subsidiary upon the repayment of a part of its intercompany loans by the Dutch subsidiary to fund the redemption of the 2021 Notes.
For the three months ended September 30, 2019,
the Company recorded an income tax expense on continuing operations of $1,303$1,734 
thousand, 
primarily attributable to interest on intercompany loan balances. Income tax expense was recorded for the Company’s Korean subsidiary based on the estimated taxable income for the respective periods, combined with its ability to utilize net operating loss carryforwards up to 60% in 2019.
Loss from continuing operations before income tax expense for the nine months ended September 30, 2020 and 2019 were $10,007 thousand and $796$40,973 thousand, respectively. For the nine months ended September 30, 2020 and 2019, the Company recorded income tax expense on continuing of $836 thousand and $3,316 thousand, respectively, primarily attributable to interest on intercompany loan balances. Income tax expense was recorded for the Company’s Korean subsidiary based on the estimated taxable income for the respective periods, combined with its ability to utilize net operating loss carryforwards up to 60% in 2019 and 2020.

In July 2020, the U.S. Treasury Department issued final tax regulations related to the foreign-derived intangible income and global intangible

low-taxed
income (GILTI) provisions, which permits a taxpayer to elect to exclude income subject to a high effective rate of foreign tax from its GILTI inclusion. The Company is currently assessing the potential impact of the final regulations to the Company’s consolidated financial statements.
22

15. Geographic and Other Information

Historically, the Company operated in two reportable segments: Foundry Services Group and Standard Products Group. The Company’s Foundry Services Group provides specialty analog and mixed-signal foundry services mainly for fabless and Integrated Device Manufacturer (“IDM”) semiconductor companies that primarily serve communications, IoT, consumer, industrial and automotive applications. The Company’s Standard Products Group is comprised of two business lines: Display Solutions and Power Solutions. The Company’s Display Solutions products provide panel display solutions to major suppliers of large and small rigid and flexible panel displays, and mobile, automotive applications and home appliances. The Company’s Power Solutions products include discrete and integrated circuit solutions for power management in communications, consumer and industrial applications.

On March 30,September 1, 2020, the Company entered intocompleted the BTA to sell itssale of the Company’s Foundry Services Group business and Fab 4. The plannedThis divestiture of its Foundry business and Fab 4 allows the Company to strategically shift its operational focus to its standard products business. As a result, the results of the Foundry Services Group business were classified as discontinued operations in the Company’s consolidated statements of operations and thus excluded from both continuing operations and segment results for all periods presented. Please see “Item 1. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 2. Discontinued Operations and Assets Held for Sale” for additional information on the results of discontinued operations. Accordingly, the Company now has one reportable segment. The Company’s chief operating decision maker is its Chief Executive Officer, who allocates resources and assesses performance of the business and other activities based on gross profit.

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

   Three Months Ended 
   March 31,
2020
   March 31,
2019
 

Revenues

    

Standard products business

    

Display Solutions

  $77,593   $58,230 

Power Solutions

   33,143    42,034 
  

 

 

   

 

 

 

Total standard products business

  $110,736   $100,264 

Transitional Fab 3 foundry services

   9,737    7,003 
  

 

 

   

 

 

 

Total revenues

  $120,473   $107,267 
  

 

 

   

 

 

 

   Three Months Ended 
   March 31,
2020
   March 31,
2019
 

Gross Profit

    

Standard products business

  $29,130   $19,023 

Transitional Fab 3 foundry services

   —      —   
  

 

 

   

 

 

 

Total gross profit

  $29,130   $19,023 
  

 

 

   

 

 

 

 
  
Three Months Ended
 
  
Nine Months Ended
 
 
  
September 30,
2020
 
  
September 30,
2019
 
  
September 30,
2020
 
  
September 30,
2019
 
Revenues
  
   
  
   
  
   
  
   
Standard products business
        
Display Solutions
  $69,583   $90,550   $216,352   $233,041 
Power Solutions
   46,679    48,723    119,601    138,502 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total standard products business
   116,262    139,273    335,953    371,543 
Transitional Fab 3 foundry services
   8,551    9,894    28,161    25,776 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues
  $ 124,813   $ 149,167   $ 364,114   $ 397,319 
  
 
 
   
 
 
   
 
 
   
 
 
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,

2020
   
September 30,

2019
   
September 30,

2020
   
September 30,

2019
 
Gross Profit
        
Standard products business
  $ 28,768   $ 35,255   $ 90,036   $ 85,900 
Transitional Fab 3 foundry services
   (180   —      (180   —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Total gross profit
  $28,588   $35,255   $89,856   $85,900 
  
 
 
   
 
 
   
 
 
   
 
 
 
The following is a summary of net sales – standard products business (which does not include the Transitional Fab 3 Foundry Services) by geographic region, based on the location to which the products are billed (in thousands):

   Three Months Ended 
   March 31,
2020
   March 31,
2019
 

Korea

  $30,817   $34,646 

Asia Pacific (other than Korea)

   77,542    63,747 

United States

   709    462 

Europe

   971    1,133 

Others

   697    276 
  

 

 

   

 

 

 

Total

  $110,736   $100,264 
  

 

 

   

 

 

 

                                                                                
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,

2020
   
September 30,

2019
   
September 30,

2020
   
September 30,

2019
 
Korea
  $28,370   $36,114   $81,144   $107,319 
Asia Pacific (other than Korea)
   84,188    100,872    245,940    258,276 
United States
   1,789    482    3,959    1,600 
Europe
   1,451    1,501    3,278    3,515 
Others
   464    304    1,632    833 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $116,262   $139,273   $335,953   $371,543 
  
 
 
   
 
 
   
 
 
   
 
 
 
23
For the three months ended March 31,September 30, 2020 and 2019, of the Company’s net sales – standard products business in Asia Pacific (other than Korea) and, net sales – standard products business in Greater China (China, Hong Kong and Macau) represented 95.3%87.7% and 94.1%95.8%, respectively.
For the nine months ended September 30, 2020 and 2019, of totalthe Company’s net sales – standard products business in Asia Pacific (other than Korea), net sales – standard products business in Greater China (China, Hong Kong and Macau) represented 88.4% and 95.8%, respectively.

Net sales from the Company’s top ten largest customers in the standard products business (which does not include the Transitional Fab 3 Foundry Services) accounted for 90%87% and 88%90% for the three months ended March 31,September 30, 2020 and 2019, respectively, and 88% and 90% for the nine months ended September 30, 2020 and 2019, respectively.

For the three months ended March 31,September 30, 2020, the Company had two customersone customer that represented 52.8% and 15.8%52.9% of its net sales – standard products business. Forbusiness, and for the threenine months ended March 31, 2019,September 30, 2020, the Company had two customersone customer that represented 45.0% and 11.6%54.0% of its net sales – standard products business.

95%

For the three months ended September 30, 2019, the Company had one customer that represented 56.1% of its net sales – standard products business, and for the Company’s property, plantnine months ended September 30, 2019, the Company had one customer that represented 52.6% of its net sales – standard products business.
As of September 30, 2020 and equipment from continuing operations are located in Korea asDecember 31, 2019, one customer accounted for 39.4% and 43.1% of March 31, 2020.

16. Accumulated Other Comprehensive Income (Loss)

accounts receivable, net, respectively.

24
16.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consistsconsist
s
 of the following as of March 31,September 30, 2020 and December 31, 2019, respectively (in thousands):

   March 31,
2020
   December 31,
2019
 

Foreign currency translation adjustments

  $18,046   $(4,205

Derivative adjustments

   (3,401   1,545 
  

 

 

   

 

 

 

Total

  $14,645   $(2,660
  

 

 

   

 

 

 

   
September 30,

2020
   
December 31,

2019
 
Foreign currency translation adjustments
  $ 4,986   $(4,205
Derivative adjustments
   427    1,545 
  
 
 
   
 
 
 
Total
  $5,413   $(2,660
  
 
 
   
 
 
 
Changes in accumulated other comprehensive income (loss) for the three months ended March 31,September 30, 2020 and 2019 are as follows (in thousands):

Three Months Ended March 31, 2020

  Foreign
currency
translation
adjustments
   Derivative
adjustments
   Total 

Beginning balance

  $(4,205  $1,545   $(2,660
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications

   22,251    (5,004   17,247 

Amounts reclassified from accumulated other comprehensive loss

   —      58    58 
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

   22,251    (4,946   17,305 
  

 

 

   

 

 

   

 

 

 

Ending balance

  $18,046   $(3,401  $14,645 
  

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2019

 Foreign
currency
translation
adjustments
  Derivative
adjustments
   Total 

Beginning balance

 $(20,061 $(49  $(20,110
 

 

 

  

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications

  7,304   (499   6,805 

Amounts reclassified from accumulated other comprehensive loss

  —     187    187 
 

 

 

  

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

  7,304   (312   6,992 
 

 

 

  

 

 

   

 

 

 

Ending balance

 $(12,757 $(361  $(13,118
 

 

 

  

 

 

   

 

 

 

Three Months Ended September 30, 2020
  
Foreign

currency

translation

adjustments
   
Derivative

adjustments
   
Total
 
Beginning balance
  $ 11,503   $(1,004  $ 10,499 
  
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss) before reclassifications
   (6,517   1,390    (5,127
Amounts reclassified from accumulated other comprehensive loss
   —      41    41 
  
 
 
   
 
 
   
 
 
 
Net current-period other comprehensive income (loss)
   (6,517   1,431    (5,086
  
 
 
   
 
 
   
 
 
 
Ending balance
  $4,986   $427   $5,413 
  
 
 
   
 
 
   
 
 
 
Three Months Ended September 30, 2019
  
Foreign

currency

translation

adjustments
   
Derivative

adjustments
   
Total
 
Beginning balance
  $(5,077  $(996  $(6,073
  
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss) before reclassifications
   15,931    (2,803   13,128 
Amounts reclassified from accumulated other comprehensive loss
   —      1,600    1,600 
  
 
 
   
 
 
   
 
 
 
Net current-period other comprehensive income (loss)
   15,931    (1,203   14,728 
  
 
 
   
 
 
   
 
 
 
Ending balance
  $ 10,854   $(2,199  $8,655 
  
 
 
   
 
 
   
 
 
 
Changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2020 and 2019 are as follows (in thousands):
Nine Months Ended September 30, 2020
  
Foreign

currency

translation

adjustments
   
Derivative

adjustments
   
Total
 
Beginning balance
  $(4,205  $1,545   $(2,660
  
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss) before reclassifications
   9,191    (1,410   7,781 
Amounts reclassified from accumulated other comprehensive loss
   —      292    292 
  
 
 
   
 
 
   
 
 
 
Net current-period other comprehensive income (loss)
   9,191    (1,118   8,073 
  
 
 
   
 
 
   
 
 
 
Ending balance
  $4,986   $427   $5,413 
  
 
 
   
 
 
   
 
 
 
Nine Months Ended September 30, 2019
  
Foreign

currency

translation

adjustments
   
Derivative

adjustments
   
Total
 
Beginning balance
  $(20,061  $(49  $(20,110
  
 
 
   
 
 
   
 
 
 
Other comprehensive income (loss) before reclassifications
   30,915    (5,703   25,212 
Amounts reclassified from accumulated other comprehensive loss
   —      3,553    3,553 
  
 
 
   
 
 
   
 
 
 
Net current-period other comprehensive income (loss)
   30,915    (2,150   28,765 
  
 
 
   
 
 
   
 
 
 
Ending balance
  $10,854   $(2,199  $8,655 
  
 
 
   
 
 
   
 
 
 
25

There was no0 income tax impact related to changes in accumulated other comprehensive income (loss) for the three and nine months ended March 31,September 30, 2020 and 2019 due to net operating loss carry-forwards available to offset taxable income and full allowance for deferred tax assets.

26

17. LossEarnings (Loss) Per Share

The following table illustrates the computation of basic and diluted lossearnings (loss) per common share for the three and nine months ended March 31,September 30, 2020 and 2019:

  Three Months Ended 
  March 31,
2020
  March 31,
2019
 
  

(In thousands of US dollars,

except share data)

 

Basic and diluted loss per share

  

Loss from continuing operations

 $(31,078 $(21,555

Income (loss) from discontinued operations, net of tax

  7,329   (12,570
 

 

 

  

 

 

 

Net loss

 $(23,749 $(34,125
 

 

 

  

 

 

 

Weighted average number of shares – basic and diluted

  34,893,157   34,194,878 

Basic and diluted earnings (loss) per common share

  

Continuing operations

 $(0.89 $(0.63

Discontinued operations

  0.21   (0.37
 

 

 

  

 

 

 

Total

 $(0.68 $(1.00
 

 

 

  

 

 

 

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,

2020
   
September 30,

2019
   
September 30,

2020
   
September 30,

2019
 
   
(In thousands of 
U.S.
 dollars, except share data)
 
Basic earnings (loss) per share
        
Income (loss) from continuing operations
  $8,461   $(14,244  $(10,843  $(44,289
Income (loss) from discontinued operations, net of tax
   264,501    12,637    289,227    (963
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income (loss)
  $272,962    (1,607  $278,384   $(45,252
  
 
 
   
 
 
   
 
 
   
 
 
 
Basic weighted average common stock outstanding
   35,280,864    34,357,745    35,089,479    34,266,513 
Basic earnings (loss) per common share
        
Continuing operations
  $0.24   $(0.41  $(0.31  $(1.29
Discontinued operations
   7.50    0.36    8.24    (0.03
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $7.74   $(0.05  $7.93   $(1.32
  
 
 
   
 
 
   
 
 
   
 
 
 
Diluted earnings (loss) per share
        
Income (loss) from continuing operations
  $8,461   $(14,244  $(10,843  $(44,289
Add back: Interest expense on Exchangeable Notes
   1,429    —      —      —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Income (loss) from continuing operations allocated to common stockholders
  $9,890   $(14,244  $(10,843  $(44,289
Income (loss) from discontinued operations, net of tax
   264,501    12,637    289,227    (963
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income (loss) allocated to common stockholders
  $274,391   $(1,607  $278,384   $(45,252
  
 
 
   
 
 
   
 
 
   
 
 
 
Basic weighted average common stock outstanding
   35,280,864    34,357,745    35,089,479    34,266,513 
Net effect of dilutive equity awards
   1,156,769    —      —      —   
Net effect of assumed conversion of 5.0% Exchangeable Notes to common stock
   10,144,155    —      —      —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Diluted weighted average common stock outstanding
   46,581,788    34,357,745    35,089,479    34,266,513 
Diluted earnings (loss) per common share
        
Continuing operations
  $0.21   $(0.41  $(0.31  $(1.29
Discontinued operations
   5.68    0.36    8.24    (0.03
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $5.89   $(0.05  $7.93   $(1.32
  
 
 
   
 
 
   
 
 
   
 
 
 
The following outstanding instruments were excluded from the computation of diluted loss per share, as they have an anti-dilutive effect on the calculation:

   Three Months Ended 
   March 31,
2020
   March 31,
2019
 

Options

         2,163,845          2,632,300 

Restricted Stock Units

   729,939    508,943 

For the three months ended March 31, 2020 and 2019, 10,144,155

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,

2020
   
September 30,

2019
   
September 30,

2020
   
September 30,

2019
 
Options
   697,667    2,479,423    1,788,202    2,479,423 
Restricted Stock Units
   —      592,967    1,248,113    592,967 
The numbers of shares and 10,182,542 shares, respectively, of potential common stock from the assumed conversion of Exchangeable Notes that were excluded from the computation of diluted loss per share as the anti-dilutive effects were anti-dilutive10,144,155 for each of the nine months ended September 30, 2020 and three months ended September 30, 2019, and 10,156,810 for the periods.

nine months ended September 30, 2019.

18. Commitments and Contingencies

Long-term Purchase Agreements and Advances to Suppliers

The Company purchases raw materials from a variety of vendors. During the normal course of business, in order to manage manufacturing lead times and help assure adequacy supply, the Company from time to time may enter into multi-year purchase agreements, which specify future quantities and pricing of materials to be supplied by the vendors. The Company reviews the terms of the long-term supply agreements and assesses the need for any accrual for estimated losses, such as lower of cost or net realizable value that will not be recovered by future sales prices. No such accrual was required as of March 31,September 30, 2020 and December 31, 2019, respectively.

27

The Company, from time to time, may make advances in form of prepayments or deposits to suppliers to procure materials to meet its planned production. The Company recorded advances of $5,118$5,545 thousand and $6,593 thousand as other current assets as of March 31,September 30, 2020 and December 31, 2019, respectively.

COVID-19
Pandemic

In December 2019, a strain of coronavirus causing a disease known as
COVID-19
surfaced in Wuhan, China, resulting in significant disruptions among Chinese manufacturing and other facilities and travel throughout China. In March 2020, the World Health Organization declared the
COVID-19
outbreak a pandemic, which continues to spread rapidly in the U.S. and other countries throughout the world. Governmental authorities throughout the world have implemented numerous containment measures, including travel bans and restrictions, quarantines,
shelter-in-place
orders, and business restrictions and shutdowns, resulting in rapidly changing market and economic conditions.

While the Company experienced some minor disruption in its Power Solutions business from assembly and test subcontractors located in China in the first quarter of 2020 as a result of

COVID-19,
to date its external Display Solutions business contractors and
sub-contractors
have not been materially impacted by the outbreak. Nevertheless, while the future impact on the Company’s business from the
COVID-19
pandemic is currently difficult to assess, the significant global macro-economic disruption will adversely affect customer demand for some of its products in the near term. The Company is, however, unable to accurately predict the full impact
COVID-19
will have on its future results of operations due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, a potential future recurrence of the outbreak, further containment actions that may be taken by governmental authorities, the impact to the businesses of its customers and suppliers, and other factors.

The Company continues to closely monitor and evaluate the nature and scope of the impact on
COVID-19
to its business, consolidated results of operations, and financial condition, and may take further actions altering its business operations and managing its costs and liquidity that the Company deems necessary or appropriate to respond to this fast moving and uncertain global health crisis and the resulting global economic consequences.

19. Subsequent Events
Redemption of 6.625% Senior Notes due 2021
The Company completed the redemption
of all of the outstanding
2021 Notes on October 2, 2020 (the “Redemption Date”). The Company paid approximately $227.4 million to fully redeem all of the outstanding $224.25 million aggregate principal amount of the 2021 Notes at a redemption price equal to the sum of 100% of the principal
amount of the 2021 Notes,
plus accrued and unpaid interest thereon to, but excluding, the Redemption Date. The redemption of the 2021 Notes was funded by the Company’s Korean subsidiary’s repayment of intercompany loans using the cash proceeds that it received from the sale of the Foundry Services Group business and Fab 4.
On
October 12, 2020, the Company paid a withholding tax of approximately $20,562 thousand, attributable to the repaid accrued interests on the related intercompany loans.
28

FORWARD LOOKING STATEMENTS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All statements other than statements of historical facts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements.

These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in this section, in “Part II: Item 1A. Risk Factors” herein and in “Part I: Item 1A. Risk Factors” in our Annual Report on Form
10-K
filed on February 21, 2020 (“2019 Form
10-K”) (including
(including that the impact of the
COVID-19
pandemic may also exacerbate the risks discussed therein).

All forward-looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information or future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Statements made in this Quarterly Report on Form
10-Q (this
(this “Report”), unless the context otherwise requires, that include the use of the terms “we,” “us,” “our” and “MagnaChip” refer to MagnaChip Semiconductor Corporation and its consolidated subsidiaries. The term “Korea” refers to the Republic of Korea or South Korea.

29

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the related notes included elsewhere in this Report. We have reclassified certain prior year amounts to conform to the current year’s presentation for discontinued operations to reflect the divestiture of our Foundry Services Group business and Fab 4. Unless otherwise stated, information in this section relates to our continuing operations. The consolidated statements of cash flows have not been adjusted to separately disclose cash flows related to discontinued operations.

Overview

We are a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, IoT applications, consumer, industrial and automotive applications. We provide technology platforms for analog, mixed-signal, power, high voltage,
non-volatile
memory, and radio frequency applications. We have a proven record with more than 40 years of operating history, a portfolio of approximately 2,9501,200 registered patents and pending applications and extensive engineering and manufacturing process expertise.

On March 30, 2020, we entered into the BTABusiness Transfer Agreement for the sale of our Foundry Services Group business and Fab 4. The planned divestiturepreviously announced sale of the Foundry Services Group business and Fab 4 will allow usis expected to strategically shift our operational focus to our standard products business. As a result, the results of the Foundry Services Group business were classified as discontinued operations in our consolidated statements of operations from the first quarter of 2020 and excluded from both continuing operations and segment results for all periods presented. Accordingly, fromcommencing in the first quarter of 2020, we have one reportable segment: our standard products business, together with transitional foundry services associated with our fabrication facility located in Gumi, Korea, known as Fab 3, that it expectswe expect to perform for the Buyer for a period of up to three years (the “Transitional Fab 3 Foundry Services”). The Transitional Fab 3 Foundry Services revenue is accounted for at cost prior to the closing ofOn September 1, 2020, we completed the sale of theour Foundry Services Group business and Fab 4.

4 to Key Foundry Co., Ltd. (the “Buyer”), for a purchase price equal to approximately $350.6 million in cash.

Our standard products business includes our Display Solutions and Power Solutions business lines.

Our Display Solutions products provide panel display solutions to major panel display suppliers of large and smallmobile rigid and flexible panel displays for home appliances, mobile communications, monitors, notebooks and mobile, automotive applications and home appliances.applications. Our Display Solutions products include source, gate drivers, timing controllers, and
one-chip
integrated solutions for LCD (Liquid Crystal Display) and OLED panel displays used in televisions, public displays, monitors, notebooks, mobile communications and automotive applications. Our Display Solutions products support the industry’s most advanced display technologies, such as OLEDs, and low temperature polysiliconspolysilicon (LTPS), as well as high-volume display technologies such as thin film transistors (TFT). Since 2007, we have designed and manufactured OLED display driver IC products. Our current portfolio of OLED solutions address a wide range of resolutions ranging from HD to Wide Quad High Definition (WQHD) for applications including smartphones, TVs, and other mobile devices. We believe we have a unique intellectual property portfolio and mixed-signal design and manufacturing expertise in the OLED industry.

Our Power Solutions business line produces power management semiconductor products including discrete and integrated circuit solutions for power management in consumer, communications, consumercomputing, industrial and industrialautomotive applications. These products include metal oxide semiconductor field effect transistors (MOSFETs), insulated-gate bipolar transistors (IGBTs),
AC-DC
converters,
DC-DC
converters, LED drivers, switching regulators, and linear regulators, interface ICs and power management ICs (PMICs) for a range of devices, including televisions, smartphones, mobile phones, desktop PCs, notebooks, tablet PCs, other consumer electronics, andtablets, servers, telecommunication power, home appliances, industrial applications such as uninterruptible power suppliers,supplies (UPSs), LED lighting, personal mobility, motor controldrives, battery management systems (BMS) and home appliances.

automotive electronics.

Our wide variety of analog and mixed-signal semiconductor products combined with our mature technology platform allow us to address multiple high-growth end markets and to rapidly develop and introduce new products and services in response to market demands. Our design center and substantial manufacturing operations in Korea place us at the core of the global electronics device supply chain. We believe this enables us to quickly and efficiently respond to our customers’ needs, and allows us to better serve and capture additional demand from existing and new customers.

To maintain and increase our profitability, we must accurately forecast trends in demand for electronics devices that incorporate semiconductor products we produce. We must understand our customers’ needs as well as the likely end market trends and demand in the markets they serve. We must also invest in relevant research and development activities and purchase necessary materials on a timely basis to meet our customers’ demand while maintaining our target margins and cash flow.

30

The semiconductor markets in which we participate are highly competitive. The prices of our products tend to decrease regularly over their useful lives, and such price decreases can be significant as new generations of products are introduced by us or our competitors. We strive to offset the impact of declining selling prices for existing products through cost reductions and the introduction of new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to mitigate the risk of losses from product obsolescence.

Demand for our products and services is driven by overall demand for communications, IoT, consumer, industrial and automotive products and can be adversely affected by periods of weak consumer and enterprise spending or by market share losses by our customers. In order to mitigate the impact of market volatility on our business, we are diversifying our portfolio of products, customers, and target applications. We also expect that new competitors will emerge in these markets that may place increased pressure on the pricing for our products and services. While we believe we are well positioned competitively to compete in these markets and against these new competitors as a result of our long operating history, existing manufacturing capacity and our worldwide customer base, if we are not effective in competing in these markets, our operating results may be adversely affected.

Net sales of thefor our standard products business are driven by design wins in which we are selected by an electronics original equipment manufacturer (OEM) or other potential customer to supply its demand for a particular product. A customer will often have more than one supplier designed in to multi-source components for a particular product line. Once we have design wins and the products enter into mass production, we often specify the pricing of a particular product for a set period of time, with periodic discussions and renegotiations of pricing with our customers. In any given period, our net sales depend heavily upon the
end-market
demand for the goods in which our products are used, the inventory levels maintained by our customers and, in some cases, allocation of demand for components for a particular product among selected qualified suppliers.

In contrast to completely fabless semiconductor companies, our internal manufacturing capacity provides us with greater control over manufacturing costs and the ability to implement process and production improvements for our internally manufactured products, which can favorably impact gross profit margins. Our internal manufacturing capacity also allows for better control over delivery schedules, improved consistency over product quality and reliability and improved ability to protect intellectual property from misappropriation on these products. However, having internal manufacturing capacity exposes us to the risk of under-utilization of manufacturing capacity that results in lower gross profit margins, particularly during downturns in the semiconductor industry.

Our standard products business requires investments in capital equipment. Analog and mixed-signal manufacturing facilities and processes are typically distinguished by the design and process implementation expertise rather than the use of the most advanced equipment. Many of these processes also tend to migrate more slowly to smaller geometries due to technological barriers and increased costs. For example, some of our products use high-voltage technology that requires larger geometries and that may not migrate to smaller geometries for several years, if at all. As a result, our manufacturing base and strategy do not require substantial investment in leading edge process equipment for those products, allowing us to utilize our facilities and equipment over an extended period of time with moderate required capital investments. In addition, we are less likely to experience significant industry overcapacity, which can cause product prices to decline significantly. In general, we seek to invest in manufacturing capacity that can be used for multiple high-value applications over an extended period of time. In addition, we outsource manufacturing of those products which do require advanced technology and
12-inch
wafer capacity, such as organic light emitting diodes (OLED). We believe this balanced capital investment strategy enables us to optimize our capital investments and facilitates more diversified product and service offerings.

Since 2007, we have designed and manufactured OLED display driver ICs in our internal manufacturing facilities. As we expanded our design capabilities to products that require lower geometries unavailable at our existing manufacturing facilities, we began outsourcing manufacturing of certain OLED display driver ICs to an external
12-inch
foundry fromstarting in the second half of 2015. This additional source of manufacturing is an increasingly important part of our supply chain management. By outsourcing manufacturing of advanced OLED products to external
12-inch
foundries, we are able to dynamically adapt to the changing customer requirements and address growing markets without substantial capital investments by us. Both at the internal
8-inch
manufacturing facilities and external
12-inch
foundries, we apply our unique OLED process patents as well as other intellectual property, proprietary process design kits and custom design-flow methodologies.

Our success going forward will depend upon our ability to adapt to future challenges such as the emergence of new competitors for our products and services or the consolidation of current competitors. Additionally, we must innovate to remain ahead of, or at least rapidly adapt to, technological breakthroughs that may lead to a significant change in the technology necessary to deliver our products and services. We believe that our established relationships and close collaboration with leading customers enhance our awareness of new product opportunities, market and technology trends and improve our ability to adapt and grow successfully.

31

Recent Developments

Business Transfer Agreement

Redemption of 6.625% Senior Notes due 2021
We completed the redemption of the outstanding 2021 Notes on October 2, 2020. We paid approximately $227.4 million to fully redeem all of the outstanding $224.25 million aggregate principal amount of the 2021 Notes at a redemption price equal to the sum of 100% of the principal amount thereof, plus accrued and unpaid interest on the 2021 Notes, but excluding, the Redemption Date. The redemption of the 2021 Notes was funded by our Korean subsidiary’s repayment of intercompany loans using the cash proceeds that it received from the sale of the Foundry Services Group business and Fab 4. On March 30,October 12, 2020, we entered intopaid a withholding tax of approximately $20.6 million, attributable to the BTA forrepaid accrued interests on the related intercompany loans.
Completion of Sale of the Foundry Services Group business and Fab 4
On September 1, 2020, we completed the previously announced sale of our Foundry Services Group business and Fab 4 to the Buyer. On the terms and subject to the conditions set forthBuyer in the BTA, the Buyer agreed to acquire certain assets and assume certain liabilities related to the Foundry Services Group business and Fab 4exchange for a purchase price equal to the KRW equivalent of $344.7approximately $350.6 million, in cash, subject to awhich included an estimated positive working capital adjustment as described in the BTA. Subjectof approximately $5.9 million, pursuant to the terms of the BTA, all employeesBusiness Transfer Agreement, which was entered into on March 30, 2020. The purchase price was paid in a combination of U.S. Dollars in the Foundry Services Group businessamount of $46.5 million and Fab 4 will be transferredKorean Won in the amount of approximately KRW 360.6 billion. In addition to the purchase price, the Buyer as of the closing date, unless any of such employees formally objects to the transfer. The Buyer will assumeassumed all severance liabilities relating to the transferred employees.employees, which had a value of approximately $100 million. For a summary of the key terms and conditions of the BTA,Business Transfer Agreement, please see our Current Report on Form
8-K
filed on March 31, 2020 and the BTABusiness Transfer Agreement filed as Exhibit 10.1 thereto.

Power Outage
On July 20, 2020, our Fab 3 facility in Gumi, South Korea experienced a temporary power outage for approximately 9 hours and 15 minutes. The accident caused certain damage to our work in process wafers and we incurred charges for facility recovery, resulting in an incremental cost of approximately $1.2 million. Management is currently evaluating potential insurance and other claims that we may have to recover our costs incurred as a result of the loss and damages. The recovery of our Fab 3 from this power outage took longer than expected, which limited our ability to produce products in Fab 3 at full capacity, resulting in a lower factory utilization during the third quarter of 2020.
COVID-19
Pandemic

In December 2019, a strain of coronavirus causing a disease known as
COVID-19
surfaced in Wuhan, China, resulting in significant disruptions among Chinese manufacturing and other facilities and travel throughout China. In March 2020, the World Health Organization declared the
COVID-19
outbreak a pandemic, which continues to spread rapidly in the U.S. and other countries throughout the world. Governmental authorities throughout the world have implemented numerous containment measures, including travel bans and restrictions, quarantines,
shelter-in-place
orders, and business restrictions and shutdowns, resulting in rapidly changing market and economic conditions.

While we experienced some minor disruption in our Power Solutions business from assembly and test subcontractors located in China in the first quarter of 2020 as a result of
COVID-19,
to date our external Display Solutions business contractors and
sub-contractors
have not been materially impacted by the outbreak. Nevertheless, while the future impact on our business from the
COVID-19
pandemic is currently difficult to assess, the significant global macro-economic disruption will adversely affect customer demand for some of our products in the near term. We are, however, unable to accurately predict the full impact
COVID-19
will have on our future results of operations due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, a potential future recurrence of the outbreak, further containment actions that may be taken by governmental authorities, the impact to the businesses of our customers and suppliers, and other factors.

We continue to closely monitor and evaluate the nature and scope of the impact on
COVID-19
to our business, consolidated results of operations, and financial condition, and may take further actions altering our business operations and managing our costs and liquidity that we deem necessary or appropriate to respond to this fast moving and uncertain global health crisis and the resulting global economic consequences.

Repurchase

32

Explanation and Reconciliation ofNon-US
Non-U.S. GAAP
Measures

Adjusted EBITDA, Adjusted Operating Income and Adjusted Net Income (Loss)

We use the terms Adjusted EBITDA, Adjusted Operating Income and Adjusted Net Income (Loss) (including on a per share basis) in our report. Adjusted EBITDA, as we define it, is anon-US
non-U.S. GAAP
measure. We define Adjusted EBITDA for the periods indicated as EBITDA (as defined below), adjusted to exclude (i) restructuring and other charges, (ii) equity-based compensation expense, (iii)(ii) foreign currency loss (gain), net, (iv)(iii) derivative valuation loss (gain), net, (v)(iv) loss on early extinguishment of long-term borrowings, net, (v) inventory reserve related to Huawei impact of downstream trade restrictions, (vi) expenses related to Fab 3 power outage and (vi)(vii) others. EBITDA for the periods indicated is defined as net income (loss) before interest expense, net, income tax expense, and depreciation and amortization.

See the footnotes to the table below for further information regarding these items. We present Adjusted EBITDA as a supplemental measure of our performance because:

we believe that Adjusted EBITDA, by eliminating the impact of a number of items that we do not consider to be indicative of our core ongoing operating performance, provides a more comparable measure of our operating performance from
period-to-period
and may be a better indicator of future performance;

we believe that Adjusted EBITDA is commonly requested and used by securities analysts, investors and other interested parties in the evaluation of the Company as an enterprise level performance measure that eliminates the effects of financing, income taxes and the accounting effects of capital spending, as well as other one time or recurring items described above; and

we believe that Adjusted EBITDA is useful for investors, among other reasons, to assess the Company’s
period-to-period
core operating performance and to understand and assess the manner in which management analyzes operating performance.

We use Adjusted EBITDA in a number of ways, including:

for planning purposes, including the preparation of our annual operating budget;

to evaluate the effectiveness of our enterprise level business strategies;

in communications with our Board of Directors concerning our consolidated financial performance; and

in certain of our compensation plans as a performance measure for determining incentive compensation payments.

We encourage you to evaluate each adjustment and the reasons we consider them appropriate. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Adjusted EBITDA is not a measure defined in accordance with USU.S. GAAP and should not be construed as an alternative to income from continuing operations, cash flows from operating activities or net income, as determined in accordance with USU.S. GAAP. A reconciliation of net income (loss) to Adjusted EBITDA from continuing operations discontinued operations and total operations is as follows:

   Three Months Ended
March 31, 2020
  Three Months Ended
March 31, 2019
 
   Continuing
Operations
  Discontinued
Operations
  Total  Continuing
Operations
  Discontinued
Operations
  Total 
   (In millions) 

Net Income (Loss)

  $(31.1 $7.3  $(23.7 $(21.6 $(12.6 $(34.1

Interest expense, net

   4.9   —     4.9   5.1   —     5.1 

Income tax expense

   1.3   0.4   1.7   0.8   0.0   0.8 

Depreciation and amortization

   2.6   5.4   7.9   2.6   5.8   8.3 

EBITDA

   (22.3  13.1   (9.2  (13.1  (6.8  (19.9

Adjustments

       

Restructuring and other charges(a)

   —     2.1   2.1   —     2.9   2.9 

Equity-based compensation expense(b)

   0.8   0.1   0.9   0.6   0.1   0.7 

Foreign currency loss (gain), net(c)

   31.0   (2.1  28.9   10.6   (0.6  10.0 

Derivative valuation loss (gain), net(d)

   (0.1  —     (0.1  0.1   —     0.1 

Loss on early extinguishment of long-term borrowings, net(e)

   —     —     —     0.0   —     0.0 

Others(f)

   0.6   —     0.6   0.6   —     0.6 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted EBITDA

  $9.9  $13.2  $23.1  $(1.3 $(4.4 $(5.7
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

   
Three Months
Ended
September 30,
2020
   
Nine Months
Ended
September 30,
2020
   
Three Months
Ended
September 30,
2019
   
Nine Months
Ended
September 30,
2019
 
   
(In millions)
 
Income (loss) from continuing operations
  $8.5   $ (10.8  $ (14.2  $ (44.3
Interest expense, net
   4.9    14.5    4.9    14.8 
Income tax expenses
   (1.1   0.8    1.7    3.3 
Depreciation and amortization
   2.9    8.0    2.6    7.7 
EBITDA
  $15.0   $12.5   $(5.0  $ (18.5
Adjustments:
        
Equity-based compensation expense(a)
   2.1    4.4    0.4    1.7 
Foreign currency loss (gain), net(b)
   (8.9   13.6    22.0    44.2 
Derivative valuation loss (gain), net(c)
   (0.1   (0.2   0.0    0.2 
Loss on early extinguishment of long-term borrowings, net(d)
   —      —      —      0.0 
Inventory reserve related to Huawei impact of downstream trade restrictions (e)
   2.3    2.3    —      —   
Expenses related to Fab 3 power outage(f)
   1.2    1.2    —      —   
Others(g)
   —      0.6    —      0.6 
  
 
 
   
 
 
   
 
 
   
 
 
 
Adjusted EBITDA
  $11.7   $34.3   $17.4   $28.1 
  
 
 
   
 
 
   
 
 
   
 
 
 
33

(a)

For the three months ended March 31, 2020, this adjustment eliminates a $2.1 million in professional fees incurred in connection with the Foundry Services Group business and Fab 4. For the three months ended March 31, 2019, this adjustment eliminates the impact of a $2.2 million restructuring related charge with respect to the fab employees. This adjustment also eliminates a $0.7 million legal costs incurred in connection with the Foundry Services Group and Fab 4.

(b)

This adjustment eliminates the impact of

non-cash
equity-based compensation expenses. Although we expect to incur
non-cash
equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these
non-cash
expenses as supplemental information.

(c)(b)

This adjustment mainly eliminates the impact of
non-cash
foreign currency translation associated with intercompany debt obligations with respect to the continuing operations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily
non-cash
gains or losses, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results.

(d)(c)

This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in USU.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance.

(e)(d)

This adjustment eliminates $0.04 million in expenses related to the repurchase of a portion of the 2021 Notes and the Exchangeable Notes in the first quarter of 2019.

(e)
This adjustment eliminates a $2.3 million excess and obsolete inventory charge that we recorded in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers. As this charge meaningfully impacted our operational results and is not expected to represent an ongoing operating expense subject to our ability to foresee and control, we believe our operating performance results are more meaningfully compared if this charge is excluded.
(f)

This adjustment eliminates $1.2 million in expenses related to the
write-off
of the damaged work in process wafers and charges for facility recovery. These charges are inconsistent in amount and frequency, and we do not believe that these charges are indicative of our core operation performance and have been excluded for comparative purposes.
(g)
For the threenine months ended March 31,September 30, 2020, this adjustment primarily eliminates
non-recurring
professional service fees and expenses incurred in connection with certain treasury and finance initiatives. Forinitiatives incurred during the three months ended March 31, 2020. For the nine months ended September 30, 2019, this adjustment primarily eliminates a $0.5 million legal settlement charge related to dispute with a prior customer and a legal expense related to the indemnification of a former employee, which is borne by us under a negotiated separation agreement.agreement during the three months ended March 31, 2019. We do not believe that these charges are indicative of our core operating performance and have been excluded for comparative purposes.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under USU.S. GAAP. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

although depreciation and amortization are
non-cash
charges, the assets being depreciated and amortized will often need to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees;

Adjusted EBITDA does not reflect the costs of holding certain assets and liabilities in foreign currencies; and

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our USU.S. GAAP results and using Adjusted EBITDA only supplementally.

34

We present Adjusted NetOperating Income (Loss) (including on a per share basis) as a further supplemental measuremeasures of our performance. We prepare Adjusted NetOperating Income (Loss) (including on a per share basis) by adjusting netoperating income (loss) to eliminate the impact of a number ofnon-cashequity-based compensation expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted NetOperating Income (Loss) (including on a per share basis); is particularly useful because it reflects the impact of our asset base and capital structure on our operating performance. We present Adjusted Net Income (Loss) (including on a per share basis) for a number of reasons, including:

we use Adjusted Net Income (Loss) (including on a per share basis) in communications with our Board of Directors concerning our consolidated financial performance without the impact ofnon-cash expenses and the other items as we discussed below since we believe that it is a more consistent measure of our core operating results from period to period; and

we believe that reporting Adjusted Net Income (Loss) (including on a per share basis) is useful to readersinvestors to provide a supplemental way to understand our underlying operating performance and allows investors to monitor and understand changes in evaluating our core operating results because it eliminates the effects ofnon-cash expenses as well as the other items we discuss below, such as foreign currency gains and losses, which are out of our control and can vary significantlyability to generate income from period to period.

ongoing business operations.

Adjusted NetOperating Income (Loss) (including on a per share basis) is not a measure defined in accordance with USU.S. GAAP and should not be construed as an alternative to operating income, income from continuing operations, cash flows from operating activities or net income, as determined in accordance with USU.S. GAAP. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted NetOperating Income (Loss) (including on a per share basis) differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted NetOperating Income, (Loss) (including on a per share basis), you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted NetOperating Income (Loss) (including on a per share basis); for the periods indicated as netoperating income (loss), adjusted to exclude (i) restructuring and other charges, (ii) equity-basedEquity-based compensation expense, (ii) inventory reserve related to Huawei impact of downstream trade restrictions, (iii) foreign currency loss (gain), net,expenses related to Fab 3 power outage and (iv) derivative valuation loss (gain), net, (v) loss on early extinguishment of long-term borrowings, net and (vi) others.

The following table summarizes the adjustments to netoperating income (loss) from continuing operations, discontinued operations and total operations that we make in order to calculate Adjusted NetOperating Income (Loss) (including on a per share basis) from continuing operations, discontinued operations and total operations for the periods indicated:

   Three Months Ended
March 31, 2020
  Three Months Ended
March 31, 2019
 
   Continuing
Operations
  Discontinued
Operations
  Total  Continuing
Operations
  Discontinued
Operations
  Total 
   (In millions, except per share data) 

Net Income (Loss)

  $(31.1 $7.3  $(23.7 $(21.6 $(12.6 $(34.1

Adjustments

       

Restructuring and other charges(a)

   —     2.1   2.1   —     2.9   2.9 

Equity-based compensation expense(b)

   0.8   0.1   0.9   0.6   0.1   0.7 

Foreign currency loss (gain), net(c)

   31.0   (2.1  28.9   10.6   (0.6  10.0 

Derivative valuation loss (gain), net(d)

   (0.1  —     (0.1  0.1   —     0.1 

Loss on early extinguishment of long-term borrowings, net(e)

   —     —     —     0.0   —     0.0 

Others(f)

   0.6   —     0.6   0.6   —     0.6 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted Net Income (Loss)

  $1.1  $7.5  $8.6  $(9.7 $(10.2 $(19.9
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Reported earnings (loss) per share – basic

  $(0.89 $0.21  $(0.68 $(0.63 $(0.37 $(1.00

Reported earnings (loss) per share – diluted

  $(0.89 $0.21  $(0.68 $(0.63 $(0.37 $(1.00

Weighted average number of shares – basic

   34,893,157   34,893,157   34,893,157   34,194,878   34,194,878   34,194,878 

Weighted average number of shares – diluted

   34,893,157   34,893,157   34,893,157   34,194,878   34,194,878   34,194,878 

Adjusted Net Income (Loss) per share – basic

  $0.03  $0.21  $0.25  $(0.28 $(0.30 $(0.58

Adjusted Net Income (Loss) per share – diluted

  $0.03  $0.21  $0.24  $(0.28 $(0.30 $(0.58

Weighted average number of shares – basic

   34,893,157   34,893,157   34,893,157   34,194,878   34,194,878   34,194,878 

Weighted average number of shares – diluted

   35,883,200   35,883,200   35,883,200   34,194,878   34,194,878   34,194,878 

   
Three Months
Ended
September 30,
2020
   
Nine Months
Ended
September 30,
2020
   
Three Months
Ended
September 30,
2019
   
Nine Months
Ended
September 30,
2019
 
   
(In millions)
 
Operating income
  $3.2   $17.8   $14.3   $18.0 
Adjustments:
        
Equity-based compensation expense(a)
   2.1    4.4    0.4    1.7 
Inventory reserve related to Huawei impact of downstream trade restrictions (b)
   2.3    2.3   ��—      —   
Expenses related to Fab 3 power outage(c)
   1.2    1.2    —      —   
Others(d)
   —      0.6    —      0.6 
  
 
 
   
 
 
   
 
 
   
 
 
 
Adjusted Operating Income
  $8.8   $26.2   $14.8   $20.3 
  
 
 
   
 
 
   
 
 
   
 
 
 
(a)

For the three months ended March 31, 2020, this adjustment eliminates a $2.1 million in professional fees incurred in connection with the Foundry Services Group business and Fab 4. For the three months ended March 31, 2019, this adjustment eliminates the impact of a $2.2 million restructuring related charge with respect to the fab employees. This adjustment also eliminates a $0.7 million legal costs incurred in connection with the Foundry Services Group and Fab 4.

(b)

This adjustment eliminates the impact of

non-cash
equity-based compensation expenses. Although we expect to incur
non-cash
equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these
non-cash
expenses as supplemental information.

(b)
This adjustment eliminates a $2.3 million excess and obsolete inventory charge that we recorded in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers. As this charge meaningfully impacted our operational results and is not expected to represent an ongoing operating expense subject to our ability to foresee and control, we believe our operating performance results are more meaningfully compared if this charge is excluded.
(c)

This adjustment eliminates $1.2 million in expenses related to the
write-off
of the damaged work in process wafers and charges for facility recovery. These charges are inconsistent in amount and frequency, and we do not believe that these charges are indicative of our core operation performance and have been excluded for comparative purposes.
(d)
For the nine months ended September 30, 2020, this adjustment primarily eliminates
non-recurring
professional service fees and expenses incurred in connection with certain treasury and finance initiatives incurred during the three months ended March 31, 2020. For the nine months ended September 30, 2019, this adjustment primarily eliminates a $0.5 million legal settlement charge related to dispute with a prior customer and a legal expense related to the indemnification of a former employee, which is borne by us under a negotiated separation agreement during the three months ended March 31, 2019. We do not believe that these charges are indicative of our core operating performance and have been excluded for comparative purposes.
35

We present Adjusted Net Income (including on a per share basis) as a further supplemental measure of our performance. We prepare Adjusted Net Income (including on a per share basis) by adjusting net income (loss) to eliminate the impact of a number of
non-cash
expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted Net Income (including on a per share basis); is particularly useful because it reflects the impact of our asset base and capital structure on our operating performance. We present Adjusted Net Income (including on a per share basis) for a number of reasons, including:
we use Adjusted Net Income (including on a per share basis) in communications with our Board of Directors concerning our consolidated financial performance without the impact of
non-cash
expenses and the other items as we discussed below since we believe that it is a more consistent measure of our core operating results from period to period; and
we believe that reporting Adjusted Net Income (including on a per share basis) is useful to readers in evaluating our core operating results because it eliminates the effects of
non-cash
expenses as well as the other items we discuss below, such as foreign currency gains and losses, which are out of our control and can vary significantly from period to period.
Adjusted Net Income (including on a per share basis) is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to income from continuing operations, cash flows from operating activities or net income, as determined in accordance with U.S. GAAP. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Net Income (including on a per share basis) differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Net Income (including on a per share basis), you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Net Income (including on a per share basis); for the periods indicated as net income (loss), adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss (gain), net, (iii) derivative valuation loss (gain), net, (iv) loss on early extinguishment of long-term borrowings, net, (v) inventory reserve related to Huawei impact of downstream trade restrictions, (vi) expenses related to Fab 3 power outage and (vii) others.
The following table summarizes the adjustments to income (loss) from continuing operations that we make in order to calculate Adjusted Net Income (including on a per share basis) from continuing operations for the periods indicated:
   
Three Months
Ended
September 30,
2020
   
Nine Months
Ended
September 30,
2020
   
Three Months
Ended
September 30,
2019
   
Nine Months
Ended
September 30,
2019
 
   
(In millions)
 
Income (loss) from continuing operations
  $8.5   $(10.8  $(14.2  $(44.3
Adjustments:
        
Equity-based compensation expense(a)
   2.1    4.4    0.4    1.7 
Foreign currency loss (gain), net(b)
   (8.9   13.6    22.0    44.2 
Derivative valuation loss (gain), net(c)
   (0.1   (0.2   0.0    0.2 
Loss on early extinguishment of long-term borrowings, net(d)
   —      —      —      0.0 
Inventory reserve related to Huawei impact of downstream trade restrictions (e)
   2.3    2.3    —      —   
Expenses related to Fab 3 power outage(f)
   1.2    1.2    —      —   
Others(g)
   —      0.6    —      0.6 
  
 
 
   
 
 
   
 
 
   
 
 
 
Adjusted Net Income
  $5.1   $11.0   $8.2   $2.3 
  
 
 
   
 
 
   
 
 
   
 
 
 
Reported earnings (loss) per share – basic
  $0.24   $(0.31  $(0.41  $(1.29
Reported earnings (loss) per share – diluted
  $0.21   $(0.31  $(0.41  $(1.29
Weighted average number of shares – basic
   35,280,864    35,089,479    34,357,745    34,266,513 
Weighted average number of shares – diluted
   46,581,788    35,089,479    34,357,745    34,266,513 
Adjusted earnings per share – basic
  $0.15   $0.31   $0.24   $0.07 
Adjusted earnings per share – diluted
  $0.14   $0.30   $0.21   $0.07 
Weighted average number of shares – basic
   35,280,864    35,089,479    34,357,745    34,266,513 
Weighted average number of shares – diluted
   46,581,788    36,151,622    45,516,245    34,955,722 
36

(a)
This adjustment eliminates the impact of
non-cash
equity-based compensation expenses. Although we expect to incur
non-cash
equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these
non-cash
expenses as supplemental information.
(b)
This adjustment mainly eliminates the impact of
non-cash
foreign currency translation associated with intercompany debt obligations with respect to the continuing operations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily
non-cash
gains or losses, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results.

(d)(c)

This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in USU.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance.

(e)(d)

This adjustment eliminates $0.04 million in expenses related to the repurchase of a portion of the 2021 Notes and the Exchangeable Notes in the first quarter of 2019.

(e)
This adjustment eliminates a $2.3 million excess and obsolete inventory charge that we recorded in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers. As this charge meaningfully impacted our operational results and is not expected to represent an ongoing operating expense subject to our ability to foresee and control, we believe our operating performance results are more meaningfully compared if this charge is excluded.
(f)

This adjustment eliminates $1.2 million in expenses related to the
write-off
of the damaged work in process wafers and charges for facility recovery. These charges are inconsistent in amount and frequency, and we do not believe that these charges are indicative of our core operation performance and have been excluded for comparative purposes.
(g)
For the threenine months ended March 31,September 30, 2020, this adjustment primarily eliminates
non-recurring
professional service fees and expenses incurred in connection with certain treasury and finance initiatives. Forinitiatives incurred during the three months ended March 31, 2020. For the nine months ended September 30, 2019, this adjustment primarily eliminates a $0.5 million legal settlement charge related to dispute with a prior customer and a legal expense related to the indemnification of a former employee, which is borne by us under a negotiated separation agreement.agreement during the three months ended March 31, 2019. We do not believe that these charges are indicative of our core operating performance and have been excluded for comparative purposes.

There was no tax impact from the adjustments to net income (loss) to calculate our Adjusted Net Income (Loss)from continuing operations for the threenine months ended March 31,September 30, 2020 and 2019 due to net operating loss carry-forwards available to offset taxable income and full allowance for deferred tax assets. We believe that all adjustments to net income (loss) from continuing operations used to calculate Adjusted Net Income (Loss)from continuing operations were applied consistently to the periods presented.

Adjusted Net Income (Loss) has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under USU.S. GAAP. Some of these limitations are:

Adjusted Net Income (Loss) does not reflect changes in, or cash requirements for, our working capital needs;

Adjusted Net Income (Loss) does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees;

Adjusted Net Income (Loss) does not reflect the costs of holding certain assets and liabilities in foreign currencies; and

other companies in our industry may calculate Adjusted Net Income (Loss) differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted Net Income (Loss) should not be considered as a measure of profitability of our business. We compensate for these limitations by relying primarily on our USU.S. GAAP results and using Adjusted Net Income (Loss) only supplementally.

37

Factors Affecting Our Results of Operations

Net
Sales.
We derive substantially all of our sales (net of sales returns and allowances) from our standard products business. We outsource manufacturing of advanced OLED products to external
12-inch
foundries. Our product inventory is primarily located in Korea and is available for drop shipment globally. Outside of Korea, we maintain limited product inventory, and our sales representatives generally relay orders to our factories in Korea for fulfillment. We have strategically located our sales and technical support offices near concentrations of major customers. Our sales offices are located in Korea, the United States, Japan and Greater China. Our network of authorized agents and distributors is in the United States, Europe and the Asia Pacific region.

We recognize revenue when risk and reward of ownership pass to the customer either upon shipment, upon product delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement. For the threenine months ended March 31,September 30, 2020 and 2019, we sold products to 135 and 132170 customers, respectively,in each period, and our net sales to our ten largest customers represented 90%88% and 88%90% of our net sales — standard products business, respectively. Our Fab 3 production capacity is approximately 31,000 semiconductor wafers per month. We believe our large-scale, cost-effective fabrication facilities enable us to rapidly adjust our production levels to meet shifts in demand by our end customers.

We will provide the Transitional Fab 3 Foundry Services for a period up to three years after the sale of the Foundry Services Group business and Fab 4. For the periods prior to the closing of the sale of the Foundry Services Group business and Fab 4 (which is accounted for as a discontinued operation beginning in the first quarter of 2020), revenue derived from the Transitional Fab 3 Foundry Services is recorded at cost in both of our continuing and discontinued operations.

Following the consummation of the sale, and for up to three years, we are expected to provide the Transitional Fab 3 Foundry Services at an agreed upon cost plus mark-up.

Gross Profit.
Our overall gross profit generally fluctuates as a result of changes in overall sales volumes and in the average selling prices of our products and services. Other factors that influence our gross profit include changes in product mix, the introduction of new products and services and subsequent generations of existing products and services, shifts in the utilization of our manufacturing facility and the yields achieved by our manufacturing operations, changes in material, labor and other manufacturing costs including outsourced manufacturing expenses, and variation in depreciation expense.

Average
Selling
Prices.
Average selling prices for our products tend to be highest at the time of introduction of new products which utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products. We strive to offset the impact of declining selling prices for existing products through our product development activities and by introducing new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to preclude losses from product and productive capacity obsolescence.

Material Costs.
Our cost of material consistscosts consist of costs of raw materials, such as silicon wafers, chemicals, gases and tape and packaging supplies. We use processes that require specialized raw materials, such as silicon wafers, that are generally available from a limited number of suppliers. If demand increases or supplies decrease, the costs of our raw materials could increase significantly.

Labor
Costs.
A significant portion of our employees are located in Korea. Under Korean labor laws, most employees and certain executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of March 31,September 30, 2020, approximately 98% of our employees were eligible for severance benefits.

Depreciation Expense.
We periodically evaluate the carrying values of long-lived assets, including property, plant and equipment and intangible assets, as well as the related depreciation periods. We depreciated our property, plant and equipment using the straight-line method over the estimated useful lives of our assets. Depreciation rates vary from
30-40
years on buildings to 5 to 12 years for certain equipment and assets. Our evaluation of carrying values is based on various analyses including cash flow and profitability projections. If our projections indicate that future undiscounted cash flows are not sufficient to recover the carrying values of the related long-lived assets, the carrying value of the assets is impaired and will be reduced, with the reduction charged to expense so that the carrying value is equal to fair value.

Selling
Expenses.
We sell our products worldwide through a direct sales force as well as a network of sales agents and representatives to OEMs, including major branded customers and contract manufacturers, and indirectly through distributors. Selling expenses consist primarily of the personnel costs for the members of our direct sales force, a network of sales representatives and other costs of distribution. Personnel costs include base salary, benefits and incentive compensation.

General
and
Administrative
Expenses.
General and administrative expenses consist of the costs of various corporate operations, including finance, legal, human resources and other administrative functions. These expenses primarily consist of payroll-related expenses, consulting and other professional fees and office facility-related expenses.

38

Research
and
Development.
The rapid technological change and product obsolescence that characterize our industry require us to make continuous investments in research and development. Product development time frames vary but, in general, we incur research and development costs one to two years before generating sales from the associated new products. These expenses include personnel costs for members of our engineering workforce, cost of photomasks, silicon wafers and other
non-recurring
engineering charges related to product design. Additionally, we develop base line process technology through experimentation and through the design and use of characterization wafers that help achieve commercially feasible yields for new products. The majority of research and development expenses of our display business are material and design-related costs for OLED display driver IC product development involving
40-nanometer
or finer processes. The majority of research and development expenses of our power business are certain equipment, material and design-related costs for power discrete products and material and design-related costs for power IC products. Power IC uses standard BCD process technologies which can be sourced from multiple foundries, including Fab 4.

Interest Expense.
Our interest expense was incurred primarily under our 2021 Notes and our Exchangeable Notes.

On October 2, 2020, we redeemed all outstanding 2021 Notes. We will not incur interest expense associated with the 2021 Notes from and after October 2, 2020.

Impact of Foreign Currency Exchange Rates on Reported Results of Operations.
Historically, a portion of our revenues and greater than the majority of our operating expenses and costs of sales have been denominated innon-US
non-U.S.
currencies, principally the Korean won, and we expect that this will remain true in the future. Because we report our results of operations in USU.S. dollars converted from ournon-US
non-U.S.
revenues and expenses based on monthly average exchange rates, changes in the exchange rate between the Korean won and the USU.S. dollar could materially impact our reported results of operations and distort period to period comparisons. In particular, because of the difference in the amount of our consolidated revenues and expenses that are in USU.S. dollars relative to Korean won, depreciation in the USU.S. dollar relative to the Korean won could result in a material increase in reported costs relative to revenues, and therefore could cause our profit margins and operating income (loss) to appear to decline materially, particularly relative to prior periods. The converse is true if the USU.S. dollar were to appreciate relative to the Korean won. Moreover, our foreign currency gain or loss would be affected by changes in the exchange rate between the Korean won and the USU.S. dollar, as a substantial portion of
non-cash
translation gain or loss is associated with the intercompany long-term loans to our Korean subsidiary, which is denominated in USU.S. dollars. As of March 31,September 30, 2020, the outstanding intercompany loan balance including accrued interest between our Korean subsidiary and our Dutch subsidiary was $684.0$446.0 million. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our stock could be adversely affected.

From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. Our Korean subsidiary enters into foreign currency forward and zero cost collar contracts in order to mitigate a portion of the impact of USU.S. dollar-Korean won exchange rate fluctuations on our operating results. Obligations under these foreign currency forward and zero cost collar contracts must be cash collateralized if our exposure exceeds certain specified thresholds. These forward and zero cost collar contracts may be terminated by a counterparty in a number of circumstances, including if our long-term debt rating falls below
B-/B3
or if our total cash and cash equivalents is less than $30.0 million at the end of a fiscal quarter unless a waiver is obtained from the counterparty. We cannot assure that any hedging technique we implement will be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on our results of operations.

Foreign Currency Gain or Loss.
Foreign currency translation gains or losses on transactions by us or our subsidiaries in a currency other than our or our subsidiaries’ functional currency are included in foreign currency gain (loss), net in our statements of operations. A substantial portion of this net foreign currency gain or loss relates to
non-cash
translation gain or loss related to the principal balance of intercompany balances at our Korean subsidiary that are denominated in USU.S. dollars. This gain or loss results from fluctuations in the exchange rate between the Korean won and USU.S. dollar.

Income Taxes.
We record our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. We exercise significant management judgment in determining our provision for income taxes, deferred tax assets and liabilities. We assess whether it is more likely than not that the deferred tax assets existing at the
period-end
will be realized in future periods. In such assessment, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent results of operations. In the event we were to determine that we would be able to realize the deferred income tax assets in the future in excess of their net recorded amount, we would adjust the valuation allowance, which would reduce the provision for income taxes.

We are subject to income- or
non-income-based
tax examinations by tax authorities of the US,U.S., Korea and multiple other foreign jurisdictions, where applicable, for all open tax years. Significant estimates and judgments are required in determining our worldwide provision for income- or
non-income
based taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.

39

Discontinued Operations.
On March 30, 2020, we entered into the BTABusiness Transfer Agreement for the sale of itsour Foundry Services Group business and our Fab 4 to the Buyer. As a result, the results of the Foundry Services Group business were classified as discontinued operations in our consolidated statements of operations and excluded from both continuing operations and segment results for all periods presented.

On September 1, 2020, we completed the sale for a purchase price equal to approximately $350.6 million in cash.

Capital
Expenditures.
We primarily invest in manufacturing equipment, software design tools and other tangible assets mainly for fabrication facility maintenance, capacity expansion and technology improvement. Capacity expansions and technology improvements typically occur in anticipation of increases in demand. We typically pay for capital expenditures in partial installments with portions due on order, delivery and final acceptance. Our capital expenditures mainly include our payments for the purchase of property, plant and equipment.

Inventories.
We monitor our inventory levels in light of product development changes and market expectations. We may be required to take additional charges for quantities in excess of demand, cost in excess of market value and product age. Our analysis may take into consideration historical usage, expected demand, anticipated sales price, new product development schedules, the effect new products might have on the sales of existing products, product age, customer design activity, customer concentration and other factors. These forecasts require us to estimate our ability to predict demand for current and future products and compare those estimates with our current inventory levels and inventory purchase commitments. Our forecasts for our inventory may differ from actual inventory use.

40

Results of Operations – Comparison of Three Months Ended March 31,September 30, 2020 and 2019

The following table sets forth consolidated results of operations for the three months ended March 31,September 30, 2020 and 2019:

   Three Months Ended
March 31, 2020
  Three Months Ended
March 31, 2019
    
   Amount  % of
Total revenues
  Amount  % of
Total revenues
  Change
Amount
 
   (In millions) 

Revenues

      

Net sales – standard products business

  $110.7   91.9 $100.3   93.5 $10.5 

Net sales – transitional Fab 3 foundry services

   9.7   8.1   7.0   6.5   2.7 
  

 

 

   

 

 

   

 

 

 

Total revenues

   120.5   100.0   107.3   100.0   13.2 

Cost of sales

      

Cost of sales – standard products business

   81.6   67.7   81.2   75.7   0.4 

Cost of sales – transitional Fab 3 foundry services

   9.7   8.1   7.0   6.5   2.7 

Total cost of sales

   91.3   75.8   88.2   82.3   3.1 
  

 

 

   

 

 

   

 

 

 

Gross profit

   29.1   24.2   19.0   17.7   10.1 

Selling, general and administrative expenses

   12.1   10.0   12.0   11.2   0.1 

Research and development expenses

   10.5   8.7   12.0   11.2   (1.5

Other charges

   0.6   0.5   —     —     0.6 
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

   6.0   5.0   (5.1  (4.7  11.0 
  

 

 

   

 

 

   

 

 

 

Interest expense

   (5.6  (4.7  (5.6  (5.3  0.0 

Foreign currency loss, net

   (31.0  (25.7  (10.6  (9.9  (20.4

Loss on early extinguishment of long-term borrowings, net

   —     —     (0.0  (0.0  0.0 

Others, net

   0.8   0.7   0.6   0.5   0.3 
  

 

 

   

 

 

   

 

 

 
   (35.7  (29.7  (15.7  (14.6  (20.0
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income tax expense

   (29.8  (24.7  (20.8  (19.4  (9.0

Income tax expense

   1.3   1.1   0.8   0.7   0.5 
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations

   (31.1  (25.8  (21.6  (20.1  (9.5

Income (loss) from discontinued operations, net of tax

   7.3   6.1   (12.6  (11.7  19.9 

Net loss

  $(23.7  (19.7 $(34.1  (31.8 $10.4 
  

 

 

   

 

 

   

 

 

 

   
Three Months Ended
September 30, 2020
  
Three Months Ended
September 30, 2019
    
   
Amount
  
% of
Total revenues
  
Amount
  
% of
Total revenues
  
Change
Amount
 
   
(In millions)
 
Revenues
      
Net sales – standard products business
  $116.3   93.1 $139.3   93.4 $ (23.0
Net sales – transitional Fab 3 foundry services
   8.6   6.9   9.9   6.6   (1.3
  
 
 
   
 
 
   
 
 
 
Total revenues
   124.8   100.0   149.2   100.0   (24.4
Cost of sales
      
Cost of sales – standard products business
   87.5   70.1   104.0   69.7   (16.5
Cost of sales – transitional Fab 3 foundry services
   8.7   7.0   9.9   6.6   (1.2
  
 
 
   
 
 
   
 
 
��
Total cost of sales
   96.2   77.1   113.9   76.4   (17.7
  
 
 
   
 
 
   
 
 
 
Gross profit
   28.6   22.9   35.3   23.6   (6.7
Selling, general and administrative expenses
   12.9   10.3   10.7   7.2   2.2 
Research and development expenses
   12.5   10.0   10.2   6.9   2.2 
  
 
 
   
 
 
   
 
 
 
Operating income
   3.2   2.6   14.3   9.6   (11.1
  
 
 
   
 
 
   
 
 
 
Interest expense
   (5.5  (4.4  (5.5  (3.7  0.1 
Foreign currency gain (loss), net
   8.9   7.1   (22.0  (14.7  30.8 
Others, net
   0.7   0.6   0.7   0.5   0.0 
  
 
 
   
 
 
   
 
 
 
   4.1   3.3   (26.8  (18.0  30.9 
  
 
 
   
 
 
   
 
 
 
Income (loss) from continuing operations before income tax expense
   7.3   5.9   (12.5  (8.4  19.8 
Income tax expense (benefit)
   (1.1  (0.9  1.7   1.2   (2.9
  
 
 
   
 
 
   
 
 
 
Income (loss) from continuing operations
   8.5   6.8   (14.2  (9.5  22.7 
Income from discontinued operations, net of tax
   264.5   211.9   12.6   8.5   251.9 
  
 
 
   
 
 
   
 
 
 
Net income (loss)
  $273.0   218.7  $(1.6  (1.1 $274.6 
  
 
 
   
 
 
   
 
 
 
41

The following sets forth information relating to our continuing operations:

   Three Months Ended
March 31, 2020
  Three Months Ended
March 31, 2019
    
   Amount   % of
Total Revenues
  Amount   % of
Total Revenues
  Change
Amount
 
   (In millions) 

Revenues

        

Net sales – standard products business

        

Display Solutions

  $77.6    64.4 $58.2    54.3 $19.4 

Power Solutions

   33.1    27.5   42.0    39.2   (8.9
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total standard products business

   110.7    91.9   100.3    93.5   10.5 

Net sales – transitional Fab 3 foundry services

   9.7    8.1   7.0    6.5   2.7 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total revenues

  $120.5    100.0 $107.3    100.0 $13.2 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 
   Three Months Ended
March 31, 2020
  Three Months Ended
March 31, 2019
    
   Amount   % of
Net sales
  Amount   % of
Net sales
  Change
Amount
 
   (In millions) 

Gross Profit

        

Gross profit – standard products business

  $29.1    26.3 $19.0    19.0 $10.1 

Gross profit – transitional Fab 3 foundry services

   —      —     —      —     —   
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total gross profit

  $29.1    24.2 $19.0    17.7 $10.1 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

                                                            
  
Three Months Ended
September 30, 2020
  
Three Months Ended
September 30, 2019
    
  
Amount
  
% of
Total Revenues
  
Amount
  
% of
Total Revenues
  
Change
Amount
 
  
(In millions)
 
Revenues
     
Net sales – standard products business
     
Display Solutions
 $69.6   55.7 $90.6   60.7 $ (21.0
Power Solutions
  46.7   37.4   48.7   32.7   (2.0
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total standard products business
  116.3   93.1   139.3   93.4   (23.0
Net sales – transitional Fab 3 foundry services
  8.6   6.9   9.9   6.6   (1.3
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total revenues
 $124.8   100.0 $149.2   100.0 $ (24.4
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
              
              
              
              
              
     
Three Months Ended
September 30, 2020
   
Three Months Ended
September 30, 2019
     
     
Amount
   
% of
Net sales
   
Amount
     
% of
Net sales
   
Change
Amount
 
     
(In millions)
 
Gross Profit
              
Gross profit – standard products business
    $28.8    24.7  $35.3      25.3  $ (6.5
Gross profit – transitional Fab 3 foundry services
     (0.2   (2.1   —        —      (0.2
    
 
 
   
 
 
   
 
 
     
 
 
   
 
 
 
Total gross profit
    $28.6    22.9  $35.3      23.6  $ (6.7
    
 
 
   
 
 
   
 
 
     
 
 
   
 
 
 
Revenues

Total revenues were $120.5$124.8 million for the three months ended March 31,September 30, 2020, a $13.2$24.4 million, or 12.3%16.3%, increaseddecrease compared to $107.3$149.2 million for the three months ended March 31,September 30, 2019. This increasedecrease was primarily due to an increasea decrease in revenue related to our standard products business as described below.

The standard products business.
 Net sales from our standard products business were $110.7$116.3 million for the three months ended March 31,September 30, 2020, a 10.5$23.0 million, or 10.4%16.5%, increaseddecrease compared to $100.3$139.3 million for the three months ended March 31,September 30, 2019. This increaseThe decrease in net sales from our Display Solutions business line was primarily attributable to an increase in revenue related tothe U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, that impacted the shipment of certain mobile OLED display driver ICs due to an increase in new OLED smartphones by Chinese and Korean manufacturers, which were offset in part by lower demand for power products as a result ofCOVID-19-related supply chain issues and market softness in China,our customers, and a strategic reduction of our lower margin
non-auto
LCD DDIC business.

The decrease in net sales from our Power Solutions business line was primarily attributable to the Fab 3 power outage that affected our ability to meet customer demand for some of our Power Solution products during the three months ended September 30, 2020.

The transitional Fab 3 foundry services.
Net sales formfrom the transitional Fab 3 foundry services were $9.7$8.6 million and $7.0$9.9 million for the three months ended March 31,September 30, 2020 and 2019, respectively.

Gross Profit

Total gross profit was $29.1$28.6 million for the three months ended March 31,September 30, 2020 compared to $19.0$35.3 million for the three months ended March 31,September 30, 2019, a $10.1$6.7 million, or 53.1%18.9%, increase.decrease. Gross profit as a percentage of net sales for the three months ended March 31,September 30, 2020 increaseddecreased to 24.2%22.9% compared to 17.7%23.6% for the three months ended March 31,September 30, 2019. The increasedecrease in gross profit and gross profit as a percentage of net sales was primarily due to a decrease in gross profit and gross profit as a percentage of net sales from our standard products business as further described below.

The standard products business.
 Gross profit from theour standard products business was $29.1$28.8 million for the three months ended March 31,September 30, 2020, which represented a $10.1$6.5 million, or 53.1%18.4%, increasedecrease from gross profit of $19.0$35.3 million for the three months ended March 31,September 30, 2019. Gross profit as a percentage of net sales for the three months ended March 31,September 30, 2020 increaseddecreased to 26.3%24.7% compared to 19.0%25.3% for the three months ended March 31,September 30, 2019. The increasedecrease was primarily attributable to a $2.3 million of unexpected excess and obsolete inventory charge that we recorded in the third quarter of 2020 in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers. The delayed recovery of Fab 3 from the power outage, which resulted in a lower than anticipated utilization rate, also negatively affected both gross profit and gross profit margin was primarily attributable to an improved product mix andas a decrease in inventory reserve related to a legacy display product.

percentage of net sales.

42

Net Sales – Standard Products Business by Geographic Region

We report net sales – standard products business by geographic region based on the location to which the products are billed. The following table sets forth our net sales - sales—standard products business by geographic region and the percentage of total net sales - sales—standard products business represented by each geographic region for the three months ended March 31,September 30, 2020 and 2019:

   Three Months Ended
March 31, 2020
  Three Months Ended
March 31, 2019
    
   Amount   % of
Net Sales –
standard
products
business
  Amount   % of
Net Sales –
standard
products
business
  Change
Amount
 
   (In millions) 

Korea

  $30.8    27.8 $34.6    34.6 $(3.8

Asia Pacific (other than Korea)

   77.5    70.0   63.7    63.6   13.8 

United States

   0.7    0.6   0.5    0.5   0.2 

Europe

   1.0    0.9   1.1    1.1   (0.2

Others

   0.7    0.6   0.3    0.3   0.4 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 
  $110.7    100.0 $100.3    100.0 $10.5 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

   
Three Months Ended
September 30, 2020
  
Three Months Ended
September 30, 2019
    
   
Amount
   
% of
Net Sales –
standard
products
business
  
Amount
   
% of
Net Sales –
standard
products
business
  
Change
Amount
 
   
(In millions)
 
Korea
  $28.4    24.4 $36.1    25.9 $(7.7
Asia Pacific (other than Korea)
   84.2    72.4   100.9    72.4   (16.7
United States
   1.8    1.5   0.5    0.3   1.3 
Europe
   1.5    1.2   1.5    1.1   (0.1
Others
   0.5    0.4   0.3    0.2   0.2 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
  $116.3    100.0 $139.3    100.0 $ (23.0
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
Net sales – standard products business in Korea for the three months ended March 31,September 30, 2020 decreased from $34.6$36.1 million to $30.8$28.4 million compared to the three months ended March 31,September 30, 2019, which represented a decrease of $3.8$7.7 million, or 11.1%21.4%, primarily due to a strategic reduction of our lower margin
non-auto
LCD DDIC business and lower demand for power products such ashigh-end MOSFETs primarily for TV and smartphone applications, and a strategic reduction of our lower margin LCD business, which was offset in part by an increase in revenue related to our mobile OLED display driver ICs due to an increase in demand for production of new OLED smartphones by Chinese and Korean manufacturers.

manufacturers due in part to the geographic diversification of our OLED product portfolio amid a

COVID-19-related
disruption. This increase continued until the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, impacted the shipment of certain mobile OLED display driver ICs to certain of our customers.
Net sales – standard products business in Asia Pacific (other than Korea) for the three months ended March 31,September 30, 2020 increaseddecreased to $77.5$84.2 million from $63.7$100.9 million in the three months ended March 31,September 30, 2019, which represented an increasea decrease of $13.8$16.7 million, or 21.6%16.5%, primarily due to an increase in revenue related tothe U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, that impacted the shipment of certain mobile OLED display driver ICs due to an increase in demand for production of new OLED smartphones by Chinese and Korean manufacturers, which is offset in part by lower demand for power products as a result ofCOVID-19-related supply chain issues and market softness in China.

our customers.

Operating Expenses

Selling,
General
and
Administrative
Expenses.
 Selling, general and administrative expenses were $12.1$12.9 million, or 10.0%10.3%, of total revenues, for the three months ended March 31,September 30, 2020, compared to $12.0$10.7 million, or 11.2%7.2%, of total revenues, for the three months ended March 31,September 30, 2019. The increase of $0.1$2.2 million, or 0.5%20.6%, was primarily attributable to an increase in legal and consulting service fees andemployee compensation, including equity-based compensation. This increase was offset in part by a $0.5 million legal settlement charge related to dispute with a prior customer recorded in the first quarter of 2019.

Research
and
Development
Expenses.
 Research and development expenses were $10.5$12.5 million, or 8.7%10.0%, of total revenues, for the three months ended March 31,September 30, 2020, compared to $12.0$10.2 million, or 11.2%6.9%, of total revenues, for the three months ended March 31,September 30, 2019. The decreaseincrease of $1.5$2.2 million, or 12.7%21.9%, was primarily attributable to the timing ofan increase in development activities for our
28-nanometer
OLED display driver ICs and a decreasean increase in outside service fees and various overhead expenses.

Other Charges. Other charges were $0.6 million for the three months ended March 31, 2020, which were consisted of professional service fees and expenses incurred in connection with certain treasury and finance initiatives.

employee compensation, including equity-based compensation.

Operating Income (Loss)

As a result of the foregoing, operating income of $6.0$3.2 million was recorded for the three months ended March 31,September 30, 2020, compared to operating lossincome of $5.1$14.3 million the three months ended March 31,September 30, 2019. As discussed above, the increasedecrease in operating income of $11.0$11.1 million resulted primarily from a $10.1$6.7 million decrease in gross profit, a $2.2 million increase in gross profitselling, general and administrative expenses and a $1.5$2.2 million decreaseincrease in research and development expenses.

43

Other Income

Interest
Expense.
 Interest expenses were $5.6$5.5 million for each of the three months ended September 30, 2020 and $5.6 millionSeptember 30, 2019.
Foreign
Currency Gain (Loss),
Net.
 Net foreign currency gain for the three months ended March 31, 2020 and March 31, 2019, respectively.

ForeignCurrencyLoss,Net. Net foreign currency loss for the three months ended March 31,September 30, 2020 was $31.0$8.9 million compared to net foreign currency loss of $10.6$22.0 million for the three months ended March 31,September 30, 2019. The net foreign currency gain for the three months ended September 30, 2020 was due to the appreciation in value of the Korean won relative to the U.S. dollar during the period. The net foreign currency loss for the three months ended March 31, 2020 and March 31,September 30, 2019 was due to the depreciation in value of the Korean won relative to the USU.S. dollar during the period.

A substantial portion of our net foreign currency gain or loss is
non-cash
translation gain or loss associated with intercompany long-term loans to our Korean subsidiary, which are denominated in USU.S. dollars, and are affected by changes in the exchange rate between the Korean won and the USU.S. dollar. As of March 31,September 30, 2020 and March 31,September 30, 2019, the outstanding intercompany loan balances including accrued interest between our Korean subsidiary and our Dutch subsidiary were $684$446.0 million and $666$679.6 million, respectively. The decrease in the outstanding intercompany loan balances including accrued interest was primarily attributable to our Korean subsidiary’s repayment of certain loans by our Dutch subsidiary to fund the redemption of the outstanding 2021 Notes on October 2, 2020. Foreign currency translation gain or loss from intercompany balances were included in determining our consolidated net income since the intercompany balances were not considered long-term investments in nature because management intended to settle these intercompany balances at their respective maturity dates.

Loss on Early Extinguishment of Long-Term Borrowings,

Others,
Net.For the three months ended March 31, 2019, we repurchased a principal amount of $0.3 million and $0.9 million of the 2021 Notes and the Exchangeable Notes, respectively. In connection with these repurchases, we recognized a $0.04 million of net loss.

Others,Net.

Others were comprised of rental income, interest income, and gains and losses from valuation of derivatives which were designated as hedging instruments. Others for the three months ended March 31,September 30, 2020 and March 31,September 30, 2019 was $0.8$0.7 million and $0.6 million, respectively.

in each period.

Income Tax Expense

(Benefit)

Income tax benefit for the three months ended September 30, 2020 was $1.1 million, which was primarily attributable to the foreign translation loss realized by our Korean subsidiary upon the repayment of a part of its intercompany loans by the Dutch subsidiary to fund the redemption of the 2021 Notes. Income tax expense were $1.3 million and $0.8of $1.7 million for the three monthsmonth ended March 31, 2020 andSeptember 30, 2019 respectively, and werewas primarily attributable to interest on intercompany loan balances. Income tax expense was recorded for our Korean subsidiary based on the estimated taxable income for the respective periods, combined with its ability to utilize net operating loss carryforwards up to 60% in 2020 and 2019.

Loss

Income (Loss) from continuing operations

Continuing Operations

As a result of the foregoing, a net lossincome from continuing operations decreasedincreased by $9.5$22.7 million for the three months ended March 31,September 30, 2020 compared to the three months ended March 31,September 30, 2019. As discussed above, the increase in net lossincome from continuing operations primarily resulted from a $20.4$30.8 million increaseimprovement in net foreign currency loss and a $2.9 million decrease in income tax expense, which was offset in part by an $11.0$11.1 million increasedecrease in operating income.

Income (loss) from discontinued operations, netDiscontinued Operations, Net of tax

Tax

On March 30, 2020, we entered into the BTABusiness Transfer Agreement for the sale of our Foundry Services Group business and Fab 4. As a result, the results of the Foundry Services Group business were classified as discontinued operations in our consolidated statements of operations and excluded from our continuing operations for all periods presented.

Net income

Income from discontinued operations, net of tax for the three months ended March 31,September 30, 2020 was $7.3$264.5 million, compared to net lossincome from discontinued operations, net of tax of $12.6 million for the three months ended March 31,September 30, 2019. The $19.9$251.9 million increase in income from discontinued operations, net of tax primarily resulted from a $287.1 million increase in gain on sale of discontinued operations, which was offset in part by a $14.5 million increase in income tax expense, a $10.8 million increase in transaction costs, a $7.1 million increase in restructuring and other charges and a $5.4 million decrease in gross profit.
Net Income (Loss)
As a result of the foregoing, net income of $273.0 million was recorded for the three months ended September 30, 2020 compared to net loss of $1.6 million for the three months ended September 30, 2019. As discussed above, the increase in net income of $274.6 million primarily resulted from a $251.9 million increase in income from discontinued operations, net of tax, mainly attributable to the completion of the sale of the Foundry Service Group business and Fab 4, and a $22.7 million improvement in loss from continuing operations.
44

Results of Operations – Comparison of Nine Months Ended September 30, 2020 and 2019
The following table sets forth consolidated results of operations for the nine months ended September 30, 2020 and 2019:
   
Nine Months Ended
September 30, 2020
  
Nine Months Ended
September 30, 2019
    
   
Amount
  
% of
Total revenues
  
Amount
  
% of
Total revenues
  
Change
Amount
 
   
(In millions)
 
Revenues
      
Net sales – standard products business
  $336.0   92.3 $371.5   93.5 $(35.6
Net sales – transitional Fab 3 foundry services
   28.2   7.7   25.8   6.5   2.4 
  
 
 
   
 
 
   
 
 
 
Total revenues
   364.1   100.0   397.3   100.0   (33.2
Cost of sales
      
Cost of sales – standard products business
   245.9   67.5   285.6   71.9   (39.7
Cost of sales – transitional Fab 3 foundry services
   28.3   7.8   25.8   6.5   2.6 
  
 
 
   
 
 
   
 
 
 
Total cost of sales
   274.3   75.3   311.4   78.4   (37.2
  
 
 
   
 
 
   
 
 
 
Gross profit
   89.9   24.7   85.9   21.6   4.0 
Selling, general and administrative expenses
   37.4   10.3   33.8   8.5   3.6 
Research and development expenses
   34.1   9.4   34.0   8.6   0.0 
Other charges
   0.6   0.2   —     —     0.6 
  
 
 
   
 
 
   
 
 
 
Operating income
   17.8   4.9   18.0   4.5   (0.2
  
 
 
   
 
 
   
 
 
 
Interest expense
   (16.5  (4.5  (16.6  (4.2  0.1 
Foreign currency loss, net
   (13.6  (3.7  (44.2  (11.1  30.5 
Loss on early extinguishment of long-term borrowings, net
   —     —     (0.0  (0.0  0.0 
Others, net
   2.3   0.6   1.8   0.5   0.5 
  
 
 
   
 
 
   
 
 
 
   (27.8  (7.6  (59.0  (14.9  31.2 
  
 
 
   
 
 
   
 
 
 
Loss from continuing operations before income tax expense
   (10.0  (2.7  (41.0  (10.3  31.0 
Income tax expense
   0.8   0.2   3.3   0.8   (2.5
  
 
 
   
 
 
   
 
 
 
Loss from continuing operations
   (10.8  (3.0  (44.3  (11.1  33.4 
Income (loss) from discontinued operations, net of tax
   289.2   79.4   (1.0  (0.2  290.2 
  
 
 
   
 
 
   
 
 
 
Net income (loss)
  $278.4   76.5  $(45.3  (11.4 $323.6 
  
 
 
   
 
 
   
 
 
 
45

The following sets forth information relating to our continuing operations:
  
Nine Months Ended
September 30, 2020
  
Nine Months Ended
September 30, 2019
    
  
Amount
  
% of
Total Revenues
  
Amount
  
% of
Total Revenues
  
Change
Amount
 
  
(In millions)
 
Revenues
     
Net sales – standard products business
     
Display Solutions
 $216.4   59.4 $233.0   58.7 $(16.7
Power Solutions
  119.6   32.8   138.5   34.9   (18.9
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total standard products business
  336.0   92.3   371.5   93.5   (35.6
Net sales – transitional Fab 3 foundry services
  28.2   7.7   25.8   6.5   2.4 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total revenues
 $364.1   100.0 $397.3   100.0 $(33.2
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
                 
                 
                 
                 
                 
   
Nine Months Ended
September 30, 2020
  
Nine Months Ended
September 30, 2019
    
   
Amount
  
% of
Net sales
  
Amount
   
% of
Net sales
  
Change
Amount
 
   
(In millions)
 
Gross Profit
       
Gross profit – standard products business
  $90.0   26.8 $85.9    23.1 $4.1 
Gross profit – transitional Fab 3 foundry services
   (0.2  (0.6  —      —     (0.2
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total gross profit
  $89.9   24.7 $85.9    21.6 $4.0 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Revenues
Total revenues were $364.1 million for the nine months ended September 30, 2020, a $33.2 million, or 8.4%, decrease compared to $397.3 million for the nine months ended September 30, 2019. This decrease was primarily due to a decrease in revenue related to our standard products business as described below.
The standard products business.
 Net sales from our standard products business were $336.0 million for the nine months ended September 30, 2020, a $35.6 million, or 9.6%, decrease compared to $371.5 million for the nine months ended September 30, 2019. The decrease in net sales from our Display Solutions business line was primarily attributable to a strategic reduction of our lower margin
non-auto
LCD DDIC business and a decrease in revenue related to our mobile OLED display driver ICs as a result of
COVID-19,
which negatively affected the global smartphone market in 2020. The U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, also impacted the shipment of certain mobile OLED display driver ICs to certain of our customers. The decrease in net sales from our Power Solutions business line was primarily attributable to the significant global macro-economic market disruption due to
COVID-19,
which affected customer demand for some of our Power Solution products.
The transitional Fab 3 foundry services.
Net sales from the transitional Fab 3 foundry services were $28.2 million and $25.8 million for the nine months ended September 30, 2020 and 2019, respectively.
Gross Profit
Total gross profit was $89.9 million for the nine months ended September 30, 2020 compared to $85.9 million for the nine months ended September 30, 2019, a $4.0 million, or 4.6%, increase. Gross profit as a percentage of net sales for the nine months ended September 30, 2020 increased to 24.7% compared to 21.6% for the nine months ended September 30, 2019. The increase in gross profit and gross profit as a percentage of net sales was due to the increase in gross profit and gross profit as a percentage of net sales from our standard products business as further described below.
The standard products business.
 Gross profit from our standard products business was $90.0 million for the nine months ended September 30, 2020, which represented a $4.1 million, or 4.8%, increase from gross profit of $85.9 million for the nine months ended September 30, 2019. Gross profit as a percentage of net sales for the nine months ended September 30, 2020 increased to 26.8% compared to 23.1% for the nine months ended September 30, 2019. The increase in both gross profit and gross profit as a percentage of net sales was primarily attributable to inventory reserves related to certain legacy display products that were recorded in the first
46

half of 2019 and an improved product mix, which was offset in part by a $2.3 million of unexpected excess and obsolete inventory charge that we recorded in the third quarter of 2020 in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers. The delayed recovery of Fab 3 from the power outage, resulting in a lower than anticipated utilization rate, also negatively affected both gross profit and gross profit as a percentage of net sales.
47

Net Sales – Standard Products Business by Geographic Region
We report net sales – standard products business by geographic region based on the location to which the products are billed. The following table sets forth our net sales—standard products business by geographic region and the percentage of total net sales—standard products business represented by each geographic region for the nine months ended September 30, 2020 and 2019:
   
Nine Months Ended
September 30, 2020
  
Nine Months Ended
September 30, 2019
    
   
Amount
   
% of
Net Sales –
standard
products
business
  
Amount
   
% of
Net Sales –
standard
products
business
  
Change
Amount
 
   
(In millions)
 
Korea
  $81.1    24.2 $107.3    28.9 $(26.2
Asia Pacific (other than Korea)
   245.9    73.2   258.3    69.5   (12.3
United States
   4.0    1.2   1.6    0.4   2.4 
Europe
   3.3    1.0   3.5    .0.9   (0.2
Others
   1.6    0.5   0.8    0.2   0.8 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
  $336.0    100.0 $371.5    100.0 $(35.6
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
Net sales – standard products business in Korea for the nine months ended September 30, 2020 decreased from $107.3 million to $81.1 million compared to the nine months ended September 30, 2019, which represented a decrease of $26.2 million, or 24.4%, primarily due to a strategic reduction of our lower margin
non-auto
LCD DDIC business and lower demand for power products such as MOSFETs primarily for TV and smartphone applications, which was offset in part by an increase in revenue related to our mobile OLED display driver ICs due to an increase in demand for production of new OLED smartphones by Chinese manufacturers due in part to the geographic diversification of our OLED product portfolio amid a
COVID-19-related
disruption. This increase continued until the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, impacted the shipment of certain mobile OLED display driver ICs to certain of our customers.
Net sales – standard products business in Asia Pacific (other than Korea) for the nine months ended September 30, 2020 decreased to $245.9 million from $258.3 million in the nine months ended September 30, 2019, which represented a decrease of $12.3 million, or 4.8%, primarily due to a decrease in revenue related to our mobile OLED display driver ICs as a result of
COVID-19,
which negatively has affected the global smartphone market in 2020. The U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, also impacted the shipment of certain mobile OLED display driver ICs to certain of our customers.
Operating Expenses
Selling,
General
and
Administrative
Expenses.
 Selling, general and administrative expenses were $37.4 million, or 10.3%, of total revenues, for the nine months ended September 30, 2020, compared to $33.8 million, or 8.5%, of total revenues, for the nine months ended September 30, 2019. The increase of $3.6 million, or 10.6%, was primarily attributable to an increase in employee compensation, including equity-based compensation, and legal and consulting service fees, which was offset in part by a $0.5 million legal settlement charge related to dispute with a prior customer recorded in the first quarter of 2019.
Research
and
Development
Expenses.
 Research and development expenses were $34.1 million, or 9.4%, of total revenues, for the nine months ended September 30, 2020, which remained flat, compared to $34.0 million, or 8.6%, of total revenues, for the nine months ended September 30, 2019.
Other Charges.
Other charges were $0.6 million for the nine months ended September 30, 2020, which consisted of professional service fees and expenses incurred in connection with certain treasury and finance initiatives incurred during the three months ended March 31, 2020.
Operating Income
As a result of the foregoing, operating income of $17.8 million was recorded for the nine months ended September 30, 2020 compared to operating income of $18.0 million the nine months ended September 30, 2019. As discussed above, the decrease in operating income of $0.2 million resulted primarily from a $3.6 million increase in selling, general and administrative expenses and a $0.6 million increase in other charges, which was nearly offset by a $4.0 million increase in gross profit.
48

Other Income
Interest
Expense.
 Interest expenses were $16.5 million and $16.6 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.
Foreign
Currency
Loss,
Net.
 Net foreign currency loss for the nine months ended September 30, 2020 was $13.6 million compared to net foreign currency loss of $44.2 million for the nine months ended September 30, 2019. The net foreign currency loss for the nine months ended September 30, 2020 and September 30, 2019 was due to the depreciation in value of the Korean won relative to the U.S. dollar during each period.
A substantial portion of our net foreign currency gain or loss is
non-cash
translation gain or loss associated with intercompany long-term loans to our Korean subsidiary, which are denominated in U.S. dollars, and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of September 30, 2020 and September 30, 2019, the outstanding intercompany loan balances including accrued interest between our Korean subsidiary and our Dutch subsidiary were $446.0 million and $679.6 million, respectively. The decrease in the outstanding intercompany loan balances including accrued interest was primarily attributable to our Korean subsidiary’s repayment of certain loans by our Dutch subsidiary to fund the redemption of the outstanding 2021 Notes on October 2, 2020. Foreign currency translation gain or loss from intercompany balances were included in determining our consolidated net income since the intercompany balances were not considered long-term investments in nature because management intended to settle these intercompany balances at their respective maturity dates.
Loss on Early Extinguishment of Long-Term Borrowings, Net.
For the nine months ended September 30, 2019, we repurchased a principal amount of $0.3 million and $0.9 million of the 2021 Notes and the Exchangeable Notes, respectively. In connection with these repurchases, we recognized a $0.04 million net loss.
Others,
Net.
Others were comprised of rental income, interest income, and gains and losses from valuation of derivatives which were designated as hedging instruments. Others for the nine months ended September 30, 2020 and September 30, 2019 was $2.3 million and $1.8 million, respectively.
Income Tax Expense
Income tax expense was $0.8 million and $3.3 million for the nine months ended September 30, 2020 and 2019, respectively. Income tax expense for the nine months ended September 30, 2020 was primarily attributable to interest on intercompany loan balances, which was offset in part by the income tax benefit due mainly to the foreign translation loss realized by our Korean subsidiary upon the repayment of a part of its intercompany loans by the Dutch subsidiary to fund the redemption of the 2021 Notes. Income tax expense for the nine month ended September 30, 2019 was primarily attributable to interest on intercompany loan balances. Income tax expense was recorded for our Korean subsidiary based on the estimated taxable income for the respective periods, combined with its ability to utilize net operating loss carryforwards up to 60% in 2019 and 2020.
Loss from Continuing Operations
As a result of the foregoing, loss from continuing operations improved by $33.4 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. As discussed above, the improvement in loss from continuing operations primarily resulted from a $17.0$30.5 million improvement in net foreign currency loss and a $2.5 million decrease in income tax expense.
Income (Loss) from Discontinued Operations, Net of Tax
On March 30, 2020, we entered into the Business Transfer Agreement for the sale of our Foundry Services Group business and Fab 4. As a result, the results of the Foundry Services Group business were classified as discontinued operations in our consolidated statements of operations and excluded from our continuing operations for all periods presented.
Income from discontinued operations, net of tax for the nine months ended September 30, 2020 was $289.2 million compared to loss from discontinued operations, net of tax of $1.0 million for the nine months ended September 30, 2019. The $290.2 million increase in income from discontinued operations, net of tax primarily resulted from a $287.1 million increase in gain on sale of discontinued operations, a $30.4 million increase in gross profit due in part to depreciation and amortization associated with the assets classified as those held for sale having been ceased starting in the second quarter of 2020, a $1.5 million increase in foreign currency gain, net, a $0.8 million decrease in restructuring and other charges, a $0.6 million decrease in research and development expenses and a $0.4$3.3 million decrease in selling, general and administrative expenses and a $2.8 million decrease in research and development expenses, which waswere offset in part by a $0.4$15.7 million increase in income tax expense.

expense, a $10.8 million increase in transaction costs, a $5.8 million increase in restructuring and other charges.

49

Net loss

Income (Loss)

As a result of the foregoing, a net lossincome of $23.7$278.4 million was recorded for the threenine months ended March 31,September 30, 2020 compared to a net loss of $34.1$45.3 million for the threenine months ended March 31,September 30, 2019. As discussed above, the decreaseincrease in net lossincome of $10.4$323.6 million primarily resulted from a $19.9$290.2 million increase in net income from discontinued operations, which was offset bynet of tax, mainly attributable to the completion of the sale of the Foundry Service Group business and Fab 4, and a $9.5$33.4 million increaseimprovement in net loss from continuing operations.

50

Liquidity and Capital Resources

Our principal capital requirements are to fund sales and marketing, invest in research and development and capital equipment, to make debt service payments and to fund working capital needs. We calculate working capital as current assets less current liabilities.

Our principal sources of liquidity are our cash, cash equivalents, our cash flows from operations and our financing activities. Our ability to manage cash and cash equivalents may be limited, as our primary cash flows are dictated by the terms of our sales and supply agreements, contractual obligations, debt instruments and legal and regulatory requirements. From time to time, we may sell accounts receivable to third parties under factoring agreements or engage in accounts receivable discounting to facilitate the collection of cash. For a description of our factoring arrangements and accounts receivable discounting, please see “Item 1. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 3. Sales of Accounts Receivable and Receivable Discount Program” included elsewhere in this Report. In addition, from time to time, we may make payments to our vendors on extended terms with their consent. As of March 31,September 30, 2020, we do not have any accounts payable on extended terms or payment deferment with our vendors.

On March 30,September 1, 2020, we entered intocompleted the BTA for thepreviously announced sale of our Foundry Services Group business and the Fab 4 which hasto the Buyer in exchange for a purchase price equal to the KRW equivalent of $344.7approximately $350.6 million, in cash, subject towhich included an estimated positive working capital adjustments set forthadjustment of approximately $5.9 million, pursuant to the terms of the Business Transfer Agreement, which was entered into on March 30, 2020. The purchase price was paid in a combination of U.S. Dollars in the BTA. The sale is expectedamount of $46.5 million and Korean Won in the amount of approximately KRW 360.6 billion.
On October 2, 2020, we redeemed of all of our outstanding 2021 Notes. We paid approximately $227.4 million to close within approximately four to six months from the datefully redeem all of the BTA, subject to customary closing conditions, whereupon we expect to use a portionoutstanding $224.25 million aggregate principal amount of the cash received2021 Notes at a redemption price equal to repay indebtedness and for general corporate purposes. We currently believe that we will have sufficient cash reserves from cash on hand and expected cash from operations, as well as cash received from the consummationsum of 100% of the BTA, to fund our operations as well as capital expenditures for the next twelve monthsprincipal amount plus accrued and the foreseeable future.

unpaid interest thereon.

On January 17, 2017, we issued an aggregate of $86.3 million in principal amount of our Exchangeable Notes. We may, from time to time, repurchase a portion of our outstanding 2021 Notes and our Exchangeable Notes through open market purchases or privately negotiated transactions subject to prevailing market conditions and our available cash reserves. In December 2018 and February 2019, we repurchased a principal amount equal to $1.6 million and $0.9 million, respectively, of the Exchangeable Notes in the open market. As of March 31,September 30, 2020, our Exchangeable Notes were reclassifiedrecorded as a current liability as their maturities were less than one year.

Cash Flows

We currently believe that we will have sufficient cash reserves from Operating Activities

Cash inflow provided by operating activities totaled $21.1 millioncash on hand and expected cash from operations to fund our operations as well as capital expenditures for the threenext twelve months ended March 31, 2020, compared to $11.7 million of cash outflow used in operating activities forand the three months ended March 31, 2019. The net operating cash inflow for the three months ended March 31, 2020 reflects our net loss of $23.7 million, as adjusted favorably by $55.8 million, which mainly consisted of depreciation and amortization, provision for severance benefits and net foreign currency loss, and net unfavorable impact of $11.0 million from changes of operating assets and liabilities.

foreseeable future.

Working Capital
Our working capital balance as of March 31,September 30, 2020 was $175.5$244.9 million, compared to $245.5 million as of December 31, 2019. The $70.0 million decreaseincrease in working capital was primarily attributable to a reclassification of $82.3 million for our Exchangeable Notes, which was recordedincreased cash and cash equivalents as a current portionresult of long-term borrowings, net in the first quartercompletion of 2020, as the maturity is less than one year. This decreasesale of our Foundry Services Group business and Fab 4, which was offset in part by reclassification of the outstanding Exchangeable Notes and 2021 Notes, which were reclassified as a $13.5current liability in the first and third quarter of 2020, respectively.
Cash Flows from Operating Activities
Cash inflow provided by operating activities totaled $51.5 million increase in accounts receivable, net.

for the nine months ended September 30, 2020, compared to $30.0 million of cash inflow provided by operating activities for the nine months ended September 30, 2019. The net operating cash inflow for the nine months ended September 30, 2020 reflects our net loss of $8.7 million, excluding gain on sale of discontinued operations, as adjusted favorably by $45.3 million, which mainly consisted of net foreign currency loss, depreciation and amortization, provision for severance benefits, and net favorable impact of $15.0 million from changes of operating assets and liabilities.

Cash Flows from Investing Activities

Cash outflow used ininflow provided by investing activities totaled $7.1$334.0 million for the threenine months ended March 31,September 30, 2020, compared to $9.8$22.6 million of cash outflow used in investing activities for the threenine months ended March 31,September 30, 2019. The $2.7$356.6 million decreaseincrease in cash inflow was primarily attributable to $350.6 million of proceeds received from the sale of the Foundry Services Group business and Fab 4, a $7.9$4.6 million net decrease in purchase of plant, propertyhedge collateral and equipment, which was offset in part by a $5.8$1.1 million net increasedecrease in hedge collateral.

guarantee deposits.

51

Cash Flows from Financing Activities

Cash outflow used ininflow provided by financing activities totaled $1.2$1.1 million for the threenine months ended March 31,September 30, 2020, compared to $3.7$3.3 million of cash outflow used in financing activities for the threenine months ended March 31,September 30, 2019. The financing cash outflowinflow for the threenine months ended March 31,September 30, 2020 was primarily attributable to $2.7 million of proceeds received from the issuance of common stock in connection with the exercise of stock options, which was offset in part by a payment of $1.0 million for the repurchase of our common stock to satisfy tax withholding obligation in connection with the vesting of restricted stock units. The financing cash outflow for the threenine months ended March 31,September 30, 2019 was primarily attributable to a payment of $1.2 million for the repurchases of 2021 Notes and Exchangeable Notes in the first quarter of 2019 and a payment of $2.4 million for the repurchases of our common stock in January 2019 pursuant to our stock repurchase plan.

plan, which was offset in part by $1.0 million of proceeds received from the issuance of common stock in connection with the exercise of stock options.

For additional cash flow information associated with our discontinued operation, please see “Item 1. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 2 – Discontinued Operations and Assets Held for Sale” included elsewhere in this Report.

Capital Expenditures

We routinely make capital expenditures for fabrication facility maintenance, enhancement of our existing facilities and reinforcement of our global research and development capability.capabilities. For the threenine months ended March 31,September 30, 2020, capital expenditures for plant, property and equipment were $3.4$16.4 million, a $7.9which remained flat, compared to $16.7 million or 70.1%, decrease from $11.2 millionof capital expenditures for the three monthsnine month ended March 31,September 30, 2019. The decrease was mainly due to the timing of our equipment deployment. The capital expenditures for the threenine months ended March 31,September 30, 2020 and 2019 were related to meeting our customer demand, and supporting technology and facility improvement at our fabrication facilities.

52

Contractual Obligations

The following summarizes our contractual obligations as of March 31,September 30, 2020:

   Payments Due by Period 
   Total   Remainder
of
2020
   2021   2022   2023   2024   Thereafter 
   (In millions) 

Exchangeable Notes(1)

  $87.9   $ 2.1   $85.8   $ —    $ —    $ —    $ —  

Senior notes(2)

   246.5    7.4    239.1    —      —      —      —   

Operating leases(3)

   1.5    1.2    0.2    0.0    0.0    —      —   

Finance leases(3)

   0.3    0.1    0.1    0.1    0.1    —      —   

Water Treatment Services(3)(4)

   30.0    3.0    3.8    3.8    3.7    3.6    12.2 

Others(5)

   10.7    7.5    3.2    0.0    0.0    0.0    —   

   
Payments Due by Period
 
   
Total
   
Remainder
of
2020
   
2021
   
2022
   
2023
   
2024
   
Thereafter
 
   
(In millions)
 
Exchangeable Notes(1)
  $85.8   $—     $ 85.8   $—     $—     $—     $—   
Senior Notes(2)
   227.4    227.4    —      —      —      —      —   
Operating leases(3)
   2.2    0.4    1.5    0.3    0.0    —      —   
Finance leases(3)
   0.2    0.0    0.1    0.1    0.1    —      —   
Water Treatment Services(3)(4)
   29.2    1.0    4.0    3.9    3.9    3.7    12.7 
Others(5)
   13.0    4.5    5.2    1.4    0.8    0.6    0.4 
(1)

Interest payments as well as $83.7 million aggregate principal amount of the Exchangeable Notes outstanding as of March 31,September 30, 2020, which bear interest at a rate of 5.0% per annum and are scheduled to mature in 2021 if not earlier exchanged at the price of approximately $8.26 per share of common stock.

(2)

Interest payments as well as $224.3 million aggregate principal amount of the 2021 Notes outstanding as of March 31,September 30, 2020, which bearbore interest at a rate of 6.625% per annum and arewere scheduled to mature in 2021 if not earlier redeemed.

2021. The notice of redemption was issued in September and the redemption occurred in October after the September 30, 2020 reference date.
(3)

Assumes constant currency exchange rate for Korean won to USU.S. dollars of 1,222.6:1,173.5:1, the exchange rate as of March 31,September 30, 2020.

(4)

Includes future payments for water treatment services for our fabrication facility in Gumi, Korea based on the contractual terms.

(5)

Includes license agreements, funding obligations for the accrued severance benefits and other contractual obligations.

The indenturesindenture relating to the Exchangeable Notes and the 2021 Notes containcontains covenants as detailed in “Item 1. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 11. Borrowings” in this Report. Those covenants are subject to a number of exceptions and qualifications. Certain of those restrictive covenants will terminate if the Exchangeable Notes or the 2021 Notes are rated investment grade at any time.

We lease office space and equipment under various operating lease agreements that expire through 2023.

We are a party to an arrangement for the water treatment facility in Gumi, Korea, which includes a
10-year
service agreement.

Beginning in July 2018, we have contributed a certain percentage of severance benefits, accrued for eligible employees for their services beginning January 1, 2018, to certain severance insurance deposit accounts. These accounts consist of time deposits and other guaranteed principal and interest, and are maintained at insurance companies, banks or security companies for the benefit of employees. We deduct the contributions made to these severance insurance deposit accounts from our accrued severance benefits. As of March 31,September 30, 2020, our accrued severance benefits totaled $48.8$52.0 million and cumulative contributions to these severance insurance deposit accounts amounted to $1.6 million. Our related cash payments for future contributions are $3.3$3.4 million for the remaining period of 2020, to the extent that our obligations are contractual, fixed and reasonably estimable.

We follow USU.S. GAAP guidance on uncertain tax positions. Our unrecognized tax benefits totaled $0.4 million as of March 31,September 30, 2020. These unrecognized tax benefits have been excluded from the above table because we cannot estimate the period of cash settlement with the respective taxing authorities.

Off-Balance
Sheet Arrangements

As of March 31,September 30, 2020, we did not have any
off-balance
sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation
S-K.

53

Critical Accounting Policies and Estimates

Preparing financial statements in conformity with USU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in our consolidated financial statements and accompanying notes.

We believe that our significant accounting policies, which are described further in Note 1 to our consolidated financial statements in our Annual Report on Form
10-K
for our fiscal year ended December 31, 2019, or our 2019 Form
10-K,
are critical due to the fact that they involve a high degree of judgment and estimates about the effects of matters that are inherently uncertain. We base these estimates and judgments on historical experience, knowledge of current conditions and other assumptions and information that we believe to be reasonable. Estimates and assumptions about future events and their effects cannot be determined with certainty. Accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the business environment in which we operate changes.

A description of our critical accounting policies that involve significant management judgementjudgment appears in our 2019 Form
10-K,
under “Management’s Discussion and Analysis of Financial Conditions and Reports of Operations—Critical Accounting Policies and Estimates.” There have been no material changes in the matters for which we make accounting estimates in the preparation of our consolidated financial statements for the threenine months ended March 31,September 30, 2020, except for those related to discontinued operations as a result of changes in reporting that relate to the sale of the Foundry Services Group business and Fab 4.

Discontinued Operations.
We review the presentation of the planned disposition of the Foundry Services Group business and Fab 4 based on the available information and events that have occurred. The review consists of evaluating whether the disposition meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business, and if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results. In addition, we evaluate whether the Foundry Services Group business and Fab 4 have met the criteria as assets held for sale. In order for a planned disposition to be classified as assets held for sale, the established criteria must be met as of the reporting date, including an active program to market the sale and the expected disposition of within one year.

The assets classified as held for sale are recorded at the lower of carrying amounts or estimated fair value less costs to sell and depreciation and amortization ceases on the that the held for sale criteria are met.

The Foundry Services Group business and Fab 4 is presented as discontinued operations beginning in the first quarter 2020 since all the criteria described above are met. For a divestiture that qualifies as a discontinued operation, all comparative periods presented are reclassified in the consolidated balance sheet. Additionally, the results of operations of a discontinued operation are reclassified to income or loss from discontinued operations, net of tax, for all periods presented. See “Item 1. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 2 - 2—Discontinued Operations and Assets Held for Sale” for additional information.

RecentAccounting Pronouncements

For a full description of new accounting pronouncements and recently adopted accounting pronouncements, please see “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 1. Business, Basis of Presentation and Significant Accounting Policies” in this Report.

54

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to the market risk that the value of a financial instrument will fluctuate due to changes in market conditions, primarily from changes in foreign currency exchange rates and interest rates. In the normal course of our business, we are subject to market risks associated with interest rate movements and currency movements on our assets and liabilities.

Foreign Currency Exposures

We have exposure to foreign currency exchange rate fluctuations on net income from our subsidiaries denominated in currencies other than USU.S. dollars, as our foreign subsidiaries in Korea, Taiwan, China, Japan and Hong Kong use local currency as their functional currency. From time to time these subsidiaries have cash and financial instruments in local currency. The amounts held in Japan, Taiwan, Hong Kong and China are not material in regards to foreign currency movements. However, based on the cash and financial instruments balance at March 31,September 30, 2020 for our Korean subsidiary, a 10% devaluation of the Korean won against the USU.S. dollar would have resulted in a decrease of $0.2$8.5 million in our USU.S. dollar financial instruments and cash balances.

See “Note 9. Derivative Financial Instruments” to our consolidated financial statements under “Item 1. Interim Consolidated Financial Statements” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Impact of Foreign Currency Exchange Rates on Reported Results of Operations” for additional information regarding our foreign exchange hedging activities.

Interest Rate Exposures

As of March 31,September 30, 2020, $83.74 million aggregate principal amount of our Exchangeable Notes were outstanding. Interest on the Exchangeable Notes accrues at a fixed rate of 5.0% per annum and is paid semi-annually every March 1 and September 1 of each year until the Exchangeable Notes mature on March 1, 2021. As of March 31,September 30, 2020, $224.25 million aggregate principal amount of our 2021 Notes were also outstanding.outstanding; however, we redeemed all outstanding 2021 Notes on October 2, 2020. Interest on the 2021 Notes accruesaccrued at a fixed rate of 6.625% per annum and iswas paid semi-annually every January 15 and July 15 of each year until the 2021 Notes mature on July 15, 2021.year. Since the interest rates are and were fixed, we have no market interest rate risk related to the Exchangeable Notes and the 2021 Notes.

55

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and PrincipalChief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In connection with the preparation of this Report, we carried out an evaluation under the supervision of and with the participation of our management, including our Chief Executive Officer and PrincipalChief Financial Officer, as of March 31,September 30, 2020, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules
13a-15(e)
and
15d-15(e)
under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and PrincipalChief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31,September 30, 2020.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31,September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

56

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

For a discussion of legal proceedings, see “Part I: Item 3. Legal Proceedings” of our 2019 Form
10-K.

See also “Part I: Item 1A. Risk Factors” and Note 18 of our 2019 Form
10-K
for additional information.

Item 1A.

Risk Factors

The Company is subject to risks and uncertainties, any of which could have a significant or material adverse effect on our business, financial condition, liquidity or consolidated financial statements. You should carefully consider the risk factors disclosed in Part I, Item 1A of our 2019 Form
10-K (including
(including that the impact of the
COVID-19
pandemic may also exacerbate the risks discussed therein), herein and other reports we have filed with the SEC. The risks described herein and therein are not the only ones we face. This information should be considered carefully together with the other information contained in this Report and the other reports and materials the Company files with the SEC.

Risks Related to COVID-19
Our business, results of operations and financial condition and prospects may be materially and adversely affected by the recent
COVID-19
pandemic.

COVID-19,
a virus causing potentially deadly respiratory tract infections, which has spread rapidly and enveloped most of the world, is a global public health crisis. On March 11, 2020, the World Health Organization characterized the
COVID-19
outbreak as a pandemic. Governments in affected countries are imposing travel bans, quarantines and other emergency public health measures. In response to the virus, national and local governments in numerous countries around the world have implemented substantial lockdown measures, and other countries and local governments may enact similar policies. Private sector companies are also taking precautionary measures, such as requiring employees to work remotely, imposing travel restrictions and temporarily closing businesses and facilities. These restrictions, and future prevention and mitigation measures, are likely to have an adverse impact on global economic conditions, which could materially adversely affect our future operations. Uncertainties regarding the economic impact of the
COVID-19
outbreak are likely to result in sustained market turmoil, which could also negatively impact our business, financial condition and cash flows.

These measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners. The disruptions to our operations caused by the
COVID-19
outbreak may result in inefficiencies, delays and additional costs in our research and development, sales and marketing, and customer service efforts that we cannot fully mitigate through remote or other alternative work arrangements. Also, some suppliers of materials used in the production of our products may be located in areas that have been or will be more severely impacted by
COVID-19,
which could limit our ability to obtain sufficient materials for our products. In addition, the severe global economic disruption caused by
COVID-19
may cause our customers and
end-users
of our products to suffer significant economic hardship, which could result in decreased demand for our products in the future and materially adversely affect our business, results of operations, financial condition (including liquidity) and prospects.

The impact of the
COVID-19
pandemic continues to evolve and its duration and ultimate disruption on our customers,
end-users,
overall demand for our products, supply chain, and the related financial impact to us, cannot be estimated at this time. Should such disruption continue for an extended period of time, the impact could have a more severe adverse effect on our business, results of operations and financial condition (including liquidity). Additionally, weaker economic conditions generally could result in impairment in value of our tangible or intangible assets, or our ability to raise additional capital, if needed.

Risks Related to Independent Subcontractors
We rely on a number of independent subcontractors and the failure of any of these independent subcontractors to perform as required could adversely affect our operating results.
A substantial portion of our net sales are derived from semiconductor devices assembled in packages or on film. The packaging and testing of semiconductors require technical skills and specialized equipment. For the portion of packaging and testing that we outsource, we use subcontractors located in Korea, China, Taiwan and Thailand. We rely on these subcontractors to package and test our devices with acceptable quality and yield levels, and, while we specify quality standards, we are not able to directly oversee their
day-to-day
operations and the packaging and testing of our devices. Onboarding of a new subcontractor, including as a result of
57

switching from one subcontractor to another, takes approximately three to six months to verify the subcontractor’s capabilities and an additional six to twelve months to receive approval from our customers to use such subcontractor. We could be adversely affected by political disorders, labor disruptions, public health issues (including viral outbreaks such as the
COVID-19
coronavirus) and natural disasters where our subcontractors are located due to the time it would take to onboard a new subcontractor. If our semiconductor packagers and test service subcontractors experience problems in packaging and testing our semiconductor devices, experience prolonged quality or yield problems, experience shutdowns or delays associated with public health issues (such as those associated with the
COVID-19
coronavirus), or decrease the capacity of their operations available to us, our operating results could be adversely affected.
Risks Related to Our International Operations and Trade
Recent changes in international trade policy and the imposition and threats of international tariffs, including tariffs applied to goods traded between the United States and China, could materially and adversely affect our business and results of operations.
Since the beginning of 2018, there have been increasing public threats and, in some cases, legislative or executive action, from U.S. and foreign leaders regarding instituting tariffs against foreign imports of certain materials. More specifically, since March of 2018, the U.S. and China have applied tariffs to certain of each other’s exports. The institution of trade tariffs globally, and between the U.S. and China specifically, may negatively impact the affected countries’ economic conditions, which could negatively affect demand for our products in those countries and materially and adversely affect our business and results of operations of our customers serving the affected markets. Furthermore, imposition of tariffs could increase costs of the
end-user
products we supply that we may not be able to pass on to our customers, which could in turn cause a decrease in the sales of our products and services and materially and adversely affect our business and results of operations.
Expanded trade restrictions imposed by the United States may limit our ability to sell to certain customers.
On August 17, 2020, the U.S. Department of Commerce expanded the scope of export restrictions as applied to products directed to Huawei and its affiliates listed on the Bureau of Industry and Security’s Entity List (collectively, “
Huawei
”). While prior restrictions had minimal effect on our ability to supply to customers, the newly expanded restriction would limit our ability to supply to a variety of customers who we believe incorporate our products to those customers’ products directly or indirectly sold to Huawei. As of the date of this Quarterly Report, we are uncertain on the seriousness of the restriction’s impact or duration, nor are we certain about the future trajectory of our business from customers who directly or indirectly supply Huawei with products that incorporate our products. If required by the new restrictions, we will consider applying for export license in order to continue to sell to the affected customers, but at this moment we are unsure whether our application, if we were to apply, will be successful. There is also a possibility that the export restrictions may be further expanded to target other companies besides Huawei, which may have additional impact on our ability to sell to our customers. The export restriction may also affect our contractors, suppliers or customers, and we cannot assure that they will not violate the restriction. Their violations of the restriction may result in fines or criminal sanctions against us, and it may also damage our reputation.
58

Item 6.

Exhibits.

Exhibit

Number

  

Description

10.1Separation Agreement, dated as of March  26, 2020 among MagnaChip Semiconductor, Ltd. (Korea), MagnaChip Semiconductor Corporation and Jonathan W. Kim. (incorporated by reference to Exhibit 10.1 to our Current Report onForm  8-K filed on March 27, 2020).
10.2Business Transfer Agreement, dated as of March  31, 2020 among by and among Magnus Semiconductor, LLC, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor, Ltd. (incorporated by reference to Exhibit 10.1 to our Current Report onForm  8-K filed on March 31, 2020)
31.1
#
  Certification pursuant toRule 13a-14(a) orRule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer.
31.2
#
  Certification pursuant to Rule13a-14(a) orRule 15d-14(a) of the Securities Exchange Act of 1934 of the Principal Financial Officer.
32.1†  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive OfficerOfficer..
32.2†  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer.
101.INS
#
  XBRL Instance Document.
101.SCH
#
  XBRL Taxonomy Extension Schema Document.
101.CAL
#
  XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
#
  XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
#
  XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
#
  XBRL Taxonomy Extension Presentation Linkbase Document.
104The cover page from this Quarterly Report on Form
10-Q,
formatted in Inline XBRL.

Footnotes:

# 

Filed herewith

Furnished herewith

59

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  

MAGNACHIP SEMICONDUCTOR CORPORATION

(Registrant)

Dated: May 11,November 6, 2020  By: 

/s/ Young-Joon Kim

   Young-Joon Kim
   

Chief Executive Officer

(Principal Executive Officer)

Dated: May 11,November 6, 2020  By: 

/s/ Theodore S. Kim

Young Soo Woo
   Theodore S. KimYoung Soo Woo
   

Chief ComplianceFinancial Officer Executive Vice President,

General Counsel and Secretary

(Principal Financial Officer)

49

60