FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All statements other than statements of historical facts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements.
These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in this section, in “Part II: Item 1A. Risk Factors” herein and in “Part I: Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2022 filed on February 22, 2023 (“2022 Form 10-K”).
All forward-looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information or future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Statements made in this Report, unless the context otherwise requires, that include the use of the terms “we,” “us,” “our” and “Magnachip” refer to Magnachip Semiconductor Corporation and its consolidated subsidiaries. The term “Korea” refers to the Republic of Korea or South Korea.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the related notes included elsewhere in this Report.
Overview
We are a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, IoT applications, consumer, computing, industrial and automotive applications. We have a proven record with more than 40 years of operating history, a portfolio of approximately 1,100 registered patents and pending applications and extensive engineering and manufacturing process expertise.
Our standard products business includes our Display Solutions and Power Solutions business lines.
Our Display Solutions line of products provide flat panel display solutions to major suppliers of large and small flat panel displays. These products include source and gate drivers and timing controllers that cover a wide range of flat panel displays used in mobile communications, automotives, entertainment devices, IT applications such as monitors, notebook PCs, tablet PC and TVs applied with liquid crystal display (LCD), organic light emitting diodes (OLED) and Micro light emitting diode (Micro LED) panel. Since 2007, we have designed and manufactured OLED display driver integrated circuit (IC) products. Our current portfolio of OLED solutions address a wide range of resolutions ranging from HD (High Definition) to UHD (Ultra High Definition) for a wide range of applications including smartphones, TVs, automotive and IT applications such as monitors, notebook PCs, tablet PCs as well as AR/VRs.
Our Power Solutions business line produces power management semiconductor products including discrete and integrated circuit solutions for power management in communications, consumer, computing, servers, automotive, and industrial applications. These products include metal oxide semiconductor field effect transistors (MOSFETs), insulated-gate bipolar transistors (IGBTs), AC-DC/DC-DC converters, LED drivers, regulators and power management integrated circuits (PMICs) for a range of devices, including televisions, smartphones, mobile phones, wearable devices, desktop PCs, notebooks, tablet PCs, other consumer electrics, automotive, and industrial applications such as power suppliers, e-bikes, solar inverters, LED lighting and motor drives.
Our wide variety of analog and mixed-signal semiconductor products combined with our mature technology platform allow us to address multiple high-growth end markets and rapidly develop and introduce new products and services in response to market demands. Our design center in Korea and substantial manufacturing operations place us at the core of the global electronics device supply chain. We believe this enables us to quickly and efficiently respond to our customers’ needs, and allows us to better serve and capture additional demand from existing and new customers. Certain of our OLED products are produced using external 12-inch foundries. Through a strategic cooperation with external 12-inch foundries, we are managing to ensure outsourcing wafers at competitive price and produce quality products.
To maintain and increase our profitability, we must accurately forecast trends in demand for electronics devices that incorporate semiconductor products we produce. We must understand our customers’ needs as well as the likely end market trends and demand in the markets they serve. We must also invest in relevant research and development activities and purchase necessary materials on a timely basis to meet our customers’ demand while maintaining our target margins and cash flow.
The semiconductor markets in which we participate are highly competitive. The prices of our products tend to decrease regularly over their useful lives, and such price decreases can be significant as new generations of products are introduced by us or our competitors. We strive to offset the impact of declining selling prices for existing products through cost reductions and the introduction of new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to mitigate the risk of losses from product obsolescence.
Demand for our products and services is driven by overall demand for communications, IoT, consumer and industrial products and can be adversely affected by periods of weak consumer and enterprise spending or by market share losses by our customers. In order to mitigate the impact of market volatility on our business, we continually strive to diversify our portfolio of products, customers, and target applications. We also expect that new competitors will emerge in these markets that may place increased pressure on the pricing for our products and services. While we believe we are well positioned competitively to compete in these markets and against these new competitors as a result of our long operating history, existing manufacturing capacity and our worldwide customer base, if we are not effective in competing in these markets, our operating results may be adversely affected.
Net sales for our standard products business are driven by design wins in which we are selected by an electronics original equipment manufacturer (OEM) or other potential customer to supply its demand for a particular product. A customer will often have more than one supplier designed into multi-source components for a particular product line. Once we have design wins and the products enter into mass production, we often specify the pricing of a particular product for a set period of time, with periodic discussions and renegotiations of pricing with our customers. In any given period, our net sales depend heavily upon the end-market demand for the goods in which our products are used, the inventory levels maintained by our customers and, in some cases, allocation of demand for components for a particular product among selected qualified suppliers.
In contrast to completely fabless semiconductor companies, our internal manufacturing capacity provides us with greater control over certain manufacturing costs and the ability to implement process and production improvements for our internally manufactured products, which can favorably impact gross profit margins. Our internal manufacturing capacity also allows for better control over delivery schedules, improved consistency over product quality and reliability and improved ability to protect intellectual property from misappropriation on these internally manufactured products. However, having internal manufacturing capacity exposes us to the risk of under-utilization of manufacturing capacity that results in lower gross profit margins, particularly during downturns in the semiconductor industry.
Our standard products business requires investments in capital equipment. Analog and mixed-signal manufacturing facilities and processes are typically distinguished by the design and process implementation expertise rather than the use of the most advanced equipment. Many of these processes also tend to migrate more slowly to smaller geometries due to technological barriers and increased costs. For example, some of our products use high-voltage technology that requires larger geometries and that may not migrate to smaller geometries for several years, if at all. As a result, our manufacturing base and strategy do not require substantial investment in leading edge process equipment for those products, allowing us to utilize our facilities and equipment over an extended period of time with moderate required capital investments. In addition, we are less likely to experience significant industry overcapacity, which can cause product prices to decline significantly. In general, we seek to invest in manufacturing capacity that can be used for multiple high-value applications over an extended period of time. In addition, we outsource manufacturing of those products which do require advanced technology and 12-inch and 8-inch wafer capacity, such as 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 had designed and manufactured OLED display driver ICs in our internal manufacturing facilities. As we expanded our design capabilities to products that require lower geometries unavailable at our existing manufacturing facilities, we began outsourcing manufacturing of certain OLED display driver ICs to external 12-inch foundries starting in the second half of 2015 and we have started outsourcing 8-inch wafer for OLED TV IC after the sale of our fabrication facility located in Cheongju, Korea in 2020. This additional source of manufacturing is an increasingly important part of our supply chain management. By outsourcing manufacturing of OLED products to external foundries, we are able to adapt dynamically to changing customer requirements and address growing markets without substantial capital investments by us. However, relying on external foundries exposes us to the risk of being unable to secure manufacturing capacity in the case of facing with a worldwide shortage of foundry services. Although we are working strategically with external foundries to ensure long-term wafer capacity, if these efforts are unsuccessful, our ability to deliver products to our customers may be negatively impacted, which would adversely affect our relationship with customers and opportunities to secure new design-wins.
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.
Recent Developments
Voluntary Resignation Program
During the first quarter of 2023, we commenced a voluntary resignation program (the “Program”), which was available for the employees with more than 20 years of service. For the three months ended March 31, 2023, we recorded in our consolidated statement of operations $8.4 million of termination related charges as “early termination charges”, which are expected to be paid during the second quarter of 2023.
Expanded Stock Repurchase Program
On August 31, 2022, our Board of Directors authorized an expansion of the previously announced stock repurchase program from $75.0 million to $87.5 million of our common stock. We have already repurchased shares worth $37.5 million under the program through an accelerated stock repurchase agreement on December 21, 2021 with JPMorgan Chase Bank, National Association. The remaining $50.0 million of the expanded $87.5 million program has been and will be repurchased in the open market or through privately negotiated transactions. In connection with the repurchase program, we established a stock trading plan with Oppenheimer & Co. Inc. in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
From September 2022 to December 2022, we repurchased 1,235,650 shares of our common stock in the open market for an aggregate purchase price of $12.5 million and a price per share of $10.13 under the stock repurchase program.
During the first quarter of 2023, we repurchased 1,238,472 shares of our common stock in the open market for an aggregate purchase price of $11.9 million and a price per share of $9.60 under the stock repurchase program.
Global Semiconductor Industry Trends
Increases in demand for semiconductor products resulted in a global shortage of manufacturing capacity over the prior two years. As a result, we may experience increased costs to manufacture our products and may not be able to manufacture and deliver all of the orders placed by our customers. Specifically, if we are unable to secure manufacturing capacity from the external foundries we rely on, our ability to deliver products to our customers may be negatively impacted. Also, shortage of manufacturing capacity may lead to an increase in our manufacturing costs. Our principal pricing strategy is to pass on the increased manufacturing costs to our customers; however, we may not be fully able to do this in all cases.
In an effort to minimize the potential adverse impact of the supply shortage, we continue to work strategically with certain external foundries to help ensure long-term wafer capacity. If these efforts are unsuccessful, however, such shortage could limit our ability to meet demand for our products in the future, which would adversely affect our reputation and competitive position, resulting in a negative impact on results of operations.
We are not able to foresee when the shortage of manufacturing capacity will subside, but we are beginning to see some indicators of improvement of such supply shortage situation. However, the global shortage for semiconductor products over the prior two years has led to overbooking backordered demand and oversupply. Additionally, the current global macroeconomic conditions, including remaining effects from the COVID-19 pandemic, inflation and higher interest rates, uncertainty caused by geopolitical conflict between the Russian and Ukraine and escalated trade tensions between the U.S. and China have led to weaker end-market demand and an oversupply of inventory. We continue to monitor these trends and uncertainties, and any decline in end-market demand and increase in inventory levels could negatively impact our financial condition and results of operations.
COVID-19 Pandemic
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and governmental authorities throughout the world implemented numerous restrictions and containment measures that resulted in rapidly changing market and economic conditions. Many of these restrictions and containment measures have since been lifted or scaled back. We will continue to monitor and evaluate the nature and scope of the impact of the COVID-19 pandemic to its business, consolidated results of operations, and financial condition, and may take actions it deems necessary or appropriate to respond in the event of a reemergence of the pandemic.
Developments in Export Control Regulations
On October 7, 2022, the Bureau of Industry and Security of the U.S. Department of Commerce published changes to U.S. export control regulations (U.S. Export Regulations), including new restrictions on Chinese entities’ ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. Further, on October 12, 2022, a new rule went into effect requiring U.S. persons to obtain a license prior to engaging in certain activities that could “support” certain end-uses and end-users, including those related to weapons of mass destruction. Additionally, on October 21, 2022, the Bureau of Industry and Security brought into effect a series of new Foreign Direct Product (FDP) rules and various new controls on advanced computing items, significantly expanding the scope of items that are subject to export control under the U.S. Export Regulations. Based on our understanding of the current U.S. Export Regulations and related rules, we do not anticipate that they will have a material impact on our business. Additional changes to the U.S. Export Regulations are expected, but the scope or timing of such changes is unknown. We will continue to monitor such developments, including potential additional trade restrictions, and other regulatory or policy changes by the U.S. and foreign governments.
Explanation and Reconciliation of Non-U.S. GAAP Measures
Adjusted EBITDA, Adjusted Operating Income and Adjusted Net Income
We use the terms Adjusted EBITDA, Adjusted Operating Income and Adjusted Net Income (including on a per share basis) in this Report. Adjusted EBITDA, as we define it, is a non-U.S. GAAP measure. We define Adjusted EBITDA for the periods indicated as EBITDA (as defined below), adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss, net, (iii) derivative valuation loss, net and (iv) early termination charges. EBITDA for the periods indicated is defined as net income (loss) before interest income, interest expense, income tax expense (benefit), and depreciation and amortization.
See the footnotes to the table below for further information regarding these items. We present Adjusted EBITDA as a supplemental measure of our performance because:
| | • | we believe that Adjusted EBITDA, by eliminating the impact of a number of items that we do not consider to be indicative of our core ongoing operating performance, provides a more comparable measure of our operating performance from period-to-period and may be a better indicator of future performance; |
| | • | we believe that Adjusted EBITDA is commonly requested and used by securities analysts, investors and other interested parties in the evaluation of a company as an enterprise level performance measure that eliminates the effects of financing, income taxes and the accounting effects of capital spending, as well as other one time or recurring items described above; and |
| | • | we believe that Adjusted EBITDA is useful for investors, among other reasons, to assess a company’s period-to-period core operating performance and to understand and assess the manner in which management analyzes operating performance. |
We use Adjusted EBITDA in a number of ways, including:
| | • | for planning purposes, including the preparation of our annual operating budget; |
| | • | to evaluate the effectiveness of our enterprise level business strategies; |
| | • | in communications with our Board of Directors concerning our consolidated financial performance; and |
| | • | in certain of our compensation plans as a performance measure for determining incentive compensation payments. |
We encourage you to evaluate each adjustment and the reasons we consider them appropriate. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Adjusted EBITDA is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to net income or any other performance measure derived in accordance with U.S GAAP, or as an alternative to cash flows from operating activities as a measure of liquidity. A reconciliation of net income (loss) to Adjusted EBITDA is as follows:
| | | Three Months Ended March 31, 2023 | | | Three Months Ended March 31, 2022 | |
| | | (Dollars in millions) | |
| Net Income (loss) | | $ | (21.5 | ) | | $ | 9.5 | |
| Interest income | | | (2.8 | ) | | | (0.7 | ) |
| Interest expense | | | 0.3 | | | | 0.1 | |
| Income tax expense (benefit) | | | (1.2 | ) | | | 3.5 | |
| Depreciation and amortization | | | 4.4 | | | | 3.9 | |
| EBITDA | | | (20.9 | ) | | | 16.3 | |
| Adjustments: | | | | | | | | |
| Equity-based compensation expense(a) | | | 1.1 | | | | 1.6 | |
| Foreign currency loss, net(b) | | | 3.4 | | | | 0.7 | |
| Derivative valuation loss, net(c) | | | 0.1 | | | | 0.1 | |
| Early termination charges(d) | | | 8.4 | | | | — | |
| Adjusted EBITDA | | $ | (7.9 | ) | | $ | 18.8 | |
| (a) | This adjustment eliminates the impact of non-cash equity-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses as supplemental information. |
| (b) | This adjustment mainly eliminates the impact of non-cash foreign currency translation associated with intercompany debt obligations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily non-cash gains or losses, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results. |
| (c) | This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in U.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance. |
| (d) | For the three months ended March 31, 2023, this adjustment eliminates the termination related charges of $8.4 million in connection with the Program that we offered to certain employees during the first quarter of 2023. As this adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is excluded. |
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
| • | Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
| • | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| • | Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; |
| • | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often need to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| • | Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees; |
| • | Adjusted EBITDA does not reflect the costs of holding certain assets and liabilities in foreign currencies; and |
| • | other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.
We present Adjusted Operating Income as supplemental measures of our performance. We prepare Adjusted Operating Income by adjusting operating income (loss) to eliminate the impact of equity-based compensation expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted Operating Income is useful to investors to provide a supplemental way to understand our underlying operating performance and allows investors to monitor and understand changes in our ability to generate income from ongoing business operations.
Adjusted Operating Income is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to operating income or any other performance measure derived in accordance with U.S GAAP. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Operating Income differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Operating Income, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Operating Income for the periods indicated as operating income adjusted to exclude (i) equity-based compensation expense and (ii) early termination charges.
The following table summarizes the adjustments to operating income (loss) that we make in order to calculate Adjusted Operating Income (Loss) for the periods indicated:
| | | Three Months Ended March 31, 2023 | | | Three Months Ended March 31, 2022 | |
| | | (Dollars in millions) | |
| Operating income (loss) | | $ | (21.8 | ) | | $ | 12.9 | |
| Adjustments: | | | | | | | | |
| Equity-based compensation expense(a) | | | 1.1 | | | | 1.6 | |
| Early termination charges(b) | | | 8.4 | | | | — | |
| Adjusted Operating Income (Loss) | | $ | (12.2 | ) | | $ | 14.5 | |
| (a) | This adjustment eliminates the impact of non-cash equity-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses as supplemental information. |
| (b) | For the three months ended March 31, 2023, this adjustment eliminates the termination related charges of $8.4 million in connection with the Program that we offered to certain employees during the first quarter of 2023. As this adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is excluded. |
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 net income or any other performance measure derived in accordance with U.S GAAP, or as an alternative to cash flows from operating activities as a measure of liquidity. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Net Income (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, net, (iii) derivative valuation loss, net, (iv) early termination charges and (v) income tax effect on non-GAAP adjustments.
The following table summarizes the adjustments to net income (loss) that we make in order to calculate Adjusted Net Income (Loss) (including on a per share basis) for the periods indicated:
| | | Three Months Ended March 31, 2023 | | | Three Months Ended March 31, 2022 | |
| | | (Dollars in millions, except per share data) | |
| Net Income (Loss) | | $ | (21.5 | ) | | $ | 9.5 | |
| Adjustments: | | | | | | | | |
| Equity-based compensation expense(a) | | | 1.1 | | | | 1.6 | |
| Foreign currency loss, net(b) | | | 3.4 | | | | 0.7 | |
| Derivative valuation loss, net(c) | | | 0.1 | | | | 0.1 | |
| Early termination charges(d) | | | 8.4 | | | | — | |
| Income tax effect on non-GAAP adjustments(e) | | | (1.9 | ) | | | 1.0 | |
| Adjusted Net Income (Loss) | | $ | (10.4 | ) | | $ | 12.9 | |
| Reported earnings (loss) per share—basic | | $ | (0.49 | ) | | $ | 0.21 | |
| Reported earnings (loss) per share—diluted | | $ | (0.49 | ) | | $ | 0.20 | |
| Weighted average number of shares—basic | | | 43,390,832 | | | | 45,603,208 | |
| Weighted average number of shares—diluted | | | 43,390,832 | | | | 46,693,294 | |
| Adjusted earnings (loss) per share—basic | | $ | (0.24 | ) | | $ | 0.28 | |
| Adjusted earnings (loss) per share—diluted | | $ | (0.24 | ) | | $ | 0.28 | |
| Weighted average number of shares—basic | | | 43,390,832 | | | | 45,603,208 | |
| Weighted average number of shares—diluted | | | 43,390,832 | | | | 46,693,294 | |
| (a) | This adjustment eliminates the impact of non-cash equity-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. We believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses as supplemental information. |
| (b) | This adjustment mainly eliminates the impact of non-cash foreign currency translation associated with intercompany debt obligations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily non-cash gains or losses, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results. |
| (c) | This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in U.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance. |
| (d) | For the three months ended March 31, 2023, this adjustment eliminates the termination related charges of $8.4 million in connection with the Program that we offered to certain employees during the first quarter of 2023. As this adjustment meaningfully impacted our operating results and are not expected to represent an ongoing operating expense or income to us, we believe our operating performance results are more usefully compared if this adjustment is excluded. |
| (e) | For the three months ended March 31, 2023 and 2022, income tax effect on non-GAAP adjustments were calculated by calculating the tax expense of each jurisdiction with or without the non-GAAP adjustments. For the three months ended March 31, 2023, income tax effect on non-GAAP adjustments related to our Korean subsidiary and the U.S parent entity were negative $1.2 million and negative $0.7 million, respectively. For the three months ended March 31, 2022, this adjustment eliminates the income tax effect on non-GAAP adjustments of $1.0 million related to our Korean subsidiary using a calculation method that we compare the tax expense of our Korean subsidiary with and without the non-GAAP adjustments. |
We believe that all adjustments to net income (loss) used to calculate Adjusted Net Income (Loss) was applied consistently to the periods presented.
Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
| • | Adjusted Net Income does not reflect changes in, or cash requirements for, our working capital needs; |
| • | Adjusted Net Income does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees; |
| • | Adjusted Net Income 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 differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted Net Income should not be considered as a measure of profitability of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted Net Income only as a supplement.
Factors Affecting Our Results of Operations
Net Sales. We derive substantially all of our sales (net of sales returns and allowances) from our standard products business. We outsource manufacturing of mobile OLED products to external 12-inch foundries. Our product inventory is primarily located in Korea and is available for drop shipment globally. Outside of Korea, we maintain limited product inventory, and our sales representatives generally relay orders to our factories in Korea for fulfillment. We have strategically located our sales offices near concentrations of major customers. Our sales offices are located in Korea, Japan, Taiwan and Greater China. Our network of authorized agents and distributors is in the United States, Europe and the Asia Pacific region.
We recognize revenue when a customer obtains control of the product, which is generally upon product shipment, delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement. For the three months ended March 31, 2023 and 2022, we sold products to 120 and 140 customers, respectively, and our net sales to our ten largest customers represented 71% and 72% of our net sales—standard products business, respectively.
We will provide the Transitional Fab 3 Foundry Services up to September 1, 2023 at an agreed upon cost plus a 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 material costs consist of costs of raw materials, such as silicon wafers, chemicals, gases and tape and packaging supplies. We use processes that require specialized raw materials, such as silicon wafers, that are generally available from a limited number of suppliers. If demand increases or supplies decrease, the costs of our raw materials could increase significantly.
Labor Costs. A significant portion of our employees are located in Korea. Under Korean labor laws, most employees and certain executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of March 31, 2023, approximately 97% of our employees were eligible for severance benefits.
Depreciation Expense. We periodically evaluate the carrying values of long-lived assets, including property, plant and equipment and intangible assets, as well as the related depreciation periods. We depreciated our property, plant and equipment using the straight-line method over the estimated useful lives of our assets. Depreciation rates vary from 30-40 years on buildings to 3 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.
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 28-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.
Impact of Foreign Currency Exchange Rates on Reported Results of Operations. Historically, a portion of our revenues and cost of sales and greater than the majority of our operating expenses have been denominated in non-U.S. currencies, principally the Korean won, and we expect that this will remain true in the future. Because we report our results of operations in U.S. dollars converted from our non-U.S. revenues and expenses based on monthly average exchange rates, changes in the exchange rate between the Korean won and the U.S. dollar could materially impact our reported results of operations and distort period to period comparisons. In particular, because of the difference in the amount of our consolidated revenues and expenses that are in U.S. dollars relative to Korean won, depreciation in the U.S. dollar relative to the Korean won could result in a material increase in reported costs relative to revenues, and therefore could cause our profit margins and operating income to appear to decline materially, particularly relative to prior periods. The converse is true if the U.S. dollar were to appreciate relative to the Korean won. Moreover, our foreign currency gain or loss would be affected by changes in the exchange rate between the Korean won and the U.S. dollar as a substantial portion of non-cash translation gain or loss is associated with the intercompany long-term loans to our Korean subsidiary, which is denominated in U.S. dollars. As of March 31, 2023, the outstanding intercompany loan balance including accrued interest between our Korean subsidiary and our Dutch subsidiary was $301.9 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 zero cost collar contracts in order to mitigate a portion of the impact of U.S. dollar-Korean won exchange rate fluctuations on our operating results. Obligations under these foreign currency zero cost collar contracts must be cash collateralized if our exposure exceeds certain specified thresholds. These zero cost collar contracts may be terminated by a counterparty in a number of circumstances, including if our total cash and cash equivalents is less than $30.0 million at the end of a fiscal quarter unless a waiver is obtained from the counterparty. We cannot assure that any hedging technique we implement will be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on our results of operations.
Foreign Currency Gain or Loss. Foreign currency translation gains or losses on transactions by us or our subsidiaries in a currency other than our or our subsidiaries’ functional currency are included in foreign currency gain (loss), net in our statements of operations. A substantial portion of this net foreign currency gain or loss relates to non-cash translation gain or loss related to the principal balance of intercompany balances at our Korean subsidiary that are denominated in U.S. dollars. This gain or loss results from fluctuations in the exchange rate between the Korean won and U.S. dollar.
Income Taxes. We record our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax basis of our assets and liabilities. We exercise significant management judgment in determining our provision for income taxes, deferred tax assets and liabilities. We assess whether it is more likely than not that the deferred tax assets existing at the period-end will be realized in future periods. In such assessment, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent results of operations. In the event we were to determine that we would be able to realize the deferred income tax assets in the future in excess of their net recorded amount, we would adjust the valuation allowance, which would reduce the provision for income taxes.
We are subject to income- or non-income-based tax examinations by tax authorities of the U.S., Korea and multiple other foreign jurisdictions for all open tax years. Significant estimates and judgments are required in determining our worldwide provision for income- or non-income based taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.
Capital Expenditures. We primarily invest in manufacturing equipment, software design tools and other tangible assets mainly for fabrication facility maintenance, capacity expansion and technology improvement. Capacity expansions and technology improvements typically occur in anticipation of increases in demand. We typically pay for capital expenditures in partial installments with portions due on order, delivery and final acceptance. Our capital expenditures mainly include our payments for the purchase of property, plant and equipment.
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.
Results of Operations – Comparison of Three Months Ended March 31, 2023 and 2022
The following table sets forth consolidated results of operations for the three months ended March 31, 2023 and 2022:
| | | Three Months Ended March 31, 2023 | | | Three Months Ended March 31, 2022 | | | | |
| | | Amount | | | % of Total Revenues | | | Amount | | | % of Total Revenues | | | Change Amount | |
| | | (Dollars in millions) | |
| Revenues | | | | | | | | | | | | | | | |
| Net sales – standard products business | | $ | 51.5 | | | | 90.4 | % | | $ | 94.0 | | | | 90.3 | % | | $ | (42.5 | ) |
| Net sales – transitional Fab 3 foundry services | | | 5.5 | | | | 9.6 | | | | 10.1 | | | | 9.7 | | | | (4.6 | ) |
| Total revenues | | | 57.0 | | | | 100.0 | | | | 104.1 | | | | 100.0 | | | | (47.1 | ) |
| Cost of sales | | | | | | | | | | | | | | | | | | | | |
| Cost of sales – standard products business | | | 37.3 | | | | 65.5 | | | | 56.1 | | | | 53.9 | | | | (18.8 | ) |
| Cost of sales – transitional Fab 3 foundry services | | | 7.6 | | | | 13.3 | | | | 9.0 | | | | 8.7 | | | | (1.4 | ) |
| Total cost of sales | | | 44.9 | | | | 78.8 | | | | 65.1 | | | | 62.5 | | | | (20.2 | ) |
| Gross profit | | | 12.1 | | | | 21.2 | | | | 39.0 | | | | 37.5 | | | | (26.9 | ) |
| Selling, general and administrative expenses | | | 12.2 | | | | 21.3 | | | | 14.2 | | | | 13.6 | | | | (2.0 | ) |
| Research and development expenses | | | 13.3 | | | | 23.3 | | | | 12.0 | | | | 11.5 | | | | 1.3 | |
| Early termination charges | | | 8.4 | | | | 14.8 | | | | — | | | | — | | | | 8.4 | |
| Operating income (loss) | | | (21.8 | ) | | | (38.3 | ) | | | 12.9 | | | | 12.4 | | | | (34.7 | ) |
| Interest income | | | 2.8 | | | | 5.0 | | | | 0.7 | | | | 0.7 | | | | 2.1 | |
| Interest expense | | | (0.3 | ) | | | (0.4 | ) | | | (0.1 | ) | | | (0.1 | ) | | | (0.1 | ) |
| Foreign currency loss, net | | | (3.4 | ) | | | (6.0 | ) | | | (0.7 | ) | | | (0.7 | ) | | | (2.7 | ) |
| Others, net | | | (0.0 | ) | | | (0.1 | ) | | | 0.2 | | | | 0.2 | | | | (0.3 | ) |
| | | | (0.9 | ) | | | (1.5 | ) | | | 0.1 | | | | 0.1 | | | | (1.0 | ) |
| Income (loss) before income tax expense | | | (22.7 | ) | | | (39.8 | ) | | | 13.0 | | | | 12.5 | | | | (35.7 | ) |
| Income tax expense (benefit) | | | (1.2 | ) | | | (2.2 | ) | | | 3.5 | | | | 3.3 | | | | (4.7 | ) |
| Net income (loss) | | $ | (21.5 | ) | | | (37.7 | ) | | $ | 9.5 | | | | 9.2 | | | $ | (31.0 | ) |
| | | Three Months Ended March 31, 2023 | | | Three Months Ended March 31, 2022 | | | | |
| | | Amount | | | % of Total Revenues | | | Amount | | | % of Total Revenues | | | Change Amount | |
| | | (Dollars in millions) | |
| Revenues | | | | | | | | | | | | | | | |
| Net sales – standard products business | | | | | | | | | | | | | | | |
| Display Solutions | | $ | 10.8 | | | | 19.0 | % | | $ | 29.2 | | | | 28.0 | % | | $ | (18.3 | ) |
| Power Solutions | | | 40.7 | | | | 71.4 | | | | 64.8 | | | | 62.3 | | | | (24.2 | ) |
| Total standard products business | | | 51.5 | | | | 90.4 | | | | 94.0 | | | | 90.3 | | | | (42.5 | ) |
| Net sales – transitional Fab 3 foundry services | | | 5.5 | | | | 9.6 | | | | 10.1 | | | | 9.7 | | | | (4.6 | ) |
| Total revenues | | $ | 57.0 | | | | 100.0 | % | | $ | 104.1 | | | | 100.0 | % | | $ | (47.1 | ) |
| | | Three Months Ended March 31, 2023 | | | Three Months Ended March 31, 2022 | | | | |
| | | Amount | | | % of Net Sales | | | Amount | | | % of Net Sales | | | Change Amount | |
| | | (Dollars in millions) | |
| Gross Profit | | | | | | | | | | | | | | | |
| Gross profit – standard products business | | $ | 14.2 | | | | 27.6 | % | | $ | 37.9 | | | | 40.3 | % | | $ | (23.7 | ) |
| Gross profit – transitional Fab 3 foundry services | | | (2.1 | ) | | | (38.4 | ) | | | 1.1 | | | | 10.6 | | | | (3.2 | ) |
| Total gross profit | | $ | 12.1 | | | | 21.2 | % | | $ | 39.0 | | | | 37.5 | % | | $ | (26.9 | ) |
Revenues
Total revenues were $57.0 million for the three months ended March 31, 2023, a $47.1 million, or 45.2%, decrease compared to $104.1 million for the three months ended March 31, 2022. 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 $51.5 million for the three months ended March 31, 2023, a $42.5 million, or 45.2%, decrease compared to $94.0 million for the three months ended March 31, 2022. The decrease in net sales from our Display Solutions business line was primarily attributable to a decrease in revenue from our mobile OLED display driver ICs stemming from a lower customer demand resulting from weak global macroeconomic conditions, and a lack of new design-wins caused by supply shortage in 2022 (in particular for 28nm 12 inch OLED wafers) at external 12 inch foundries. The decrease in net sales from our Power Solutions business line was attributable to lower demand for power products such as MOSFETs, including high-end MOSFETs, primarily for TVs, smartphones and e-bikes, due mainly to the industry-wide slowdown.
The transitional Fab 3 foundry services. Net sales from the transitional Fab 3 foundry services were $5.5 million and $10.1 million for the three months ended March 31, 2023 and 2022, respectively.
Gross Profit
Total gross profit was $12.1 million for the three months ended March 31, 2023 compared to $39.0 million for the three months ended March 31, 2022, a $26.9 million, or 69.0%, decrease. Gross profit as a percentage of net sales for the three months ended March 31, 2023 decreased to 21.2% compared to 37.5% for the three months ended March 31, 2022. The decrease in gross profit and gross profit as a percentage of net sales was primarily due to our standard products business as further described below.
The standard products business. Gross profit from our standard products business was $14.2 million for the three months ended March 31, 2023, which represented a $23.7 million, or 62.6%, decrease from gross profit of $37.9 million for the three months ended March 31, 2022. The decrease in gross profit was primarily attributable to a significant decrease in net sales from our standard product business as explained above. Gross profit as a percentage of net sales for the three months ended March 31, 2023 decreased to 27.6% compared to 40.3% for the three months ended March 31, 2022. The year-over-year decrease in gross profit as a percentage of net sales was primarily attributable to an unfavorable product mix and a significant drop in the utilization rate of our internal fabrication facility in Gumi. Gross profit as a percentage of net sales for the three months ended March 31, 2022 was higher due to an increase in average selling price benefited from the favorable pricing environment.
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 three months ended March 31, 2023 and 2022:
| | | Three Months Ended March 31, 2023 | | | Three Months Ended March 31, 2022 | | | | |
| | | Amount | | | % of Net Sales – standard products business | | | Amount | | | % of Net Sales – standard products business | | | Change Amount | |
| | | (Dollars in millions) | |
| Korea | | $ | 16.5 | | | | 32.0 | % | | $ | 31.0 | | | | 33.0 | % | | $ | (14.5 | ) |
| Asia Pacific (other than Korea) | | | 31.9 | | | | 62.0 | | | | 58.3 | | | | 62.0 | | | | (26.4 | ) |
| United States | | | 1.0 | | | | 2.0 | | | | 2.9 | | | | 3.0 | | | | (1.8 | ) |
| Europe | | | 2.1 | | | | 4.0 | | | | 1.9 | | | | 2.0 | | | | 0.2 | |
| | | $ | 51.5 | | | | 100.0 | % | | $ | 94.0 | | | | 100.0 | % | | $ | (42.5 | ) |
Net sales – standard products business in Korea for the three months ended March 31, 2023 decreased from $31.0 million to $16.5 million compared to the three months ended March 31, 2022, or by $14.5 million, or 46.8%, primarily due to lower demand for power products such as MOSFETs, including high-end MOSFETs, primarily for TVs and smartphone applications. Weak demand for our OLED TV display driver ICs also unfavorably affected this quarter.
Net sales – standard products business in Asia Pacific (other than Korea) for the three months ended March 31, 2023 decreased to $31.9 million from $58.3 million in the three months ended March 31, 2022, or by $26.4 million, or 45.2%, primarily due to a decrease in revenue from our mobile OLED display driver ICs stemming from a lower customer demand resulting from weak global macroeconomic conditions, and a lack of new design-wins caused by supply shortage in 2022 (in particular for 28nm 12 inch OLED wafers) at external 12 inch foundries. The decreased demand for our power products such as MOSFETs, including high-end MOSFETs, primarily for smartphones and e-bikes, also unfavorably affected this quarter.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $12.2 million, or 21.3% of total revenues, for the three months ended March 31, 2023, compared to $14.2 million, or 13.6% of total revenues, for the three months ended March 31, 2022. The decrease of $2.0 million, or 14.1%, was primarily attributable to a decrease in employee compensation including certain incentives and benefit related accruals. This decrease also resulted from a decrease in professional fees mainly comprised of legal and consulting fees.
Research and Development Expenses. Research and development expenses were $13.3 million, or 23.3% of total revenues, for the three months ended March 31, 2023, compared to $12.0 million, or 11.5% of total revenues, for the three months ended March 31, 2022. The increase of $1.3 million, or 11.2%, was primarily attributable to an increase in development activities for our 28-nanometer OLED display driver ICs, which was offset in part by a decrease in certain employee incentives.
Early Termination Charges. For the three months ended March 31, 2023, we recorded in our consolidated statement of operations $8.4 million of termination related charges in connection with the Program that we offered to certain employees during the first quarter of 2023.
Operating Income (Loss)
As a result of the foregoing, operating loss of $21.8 million was recorded for the three months ended March 31, 2023 compared to operating income of $12.9 million for the three months ended March 31, 2022. As discussed above, the decrease in operating income of $34.7 million resulted primarily from a $26.9 million decrease in gross profit, an $8.4 million increase in early termination charges and a $1.3 million increase in research and development expenses. This decrease in operating income was offset in part by a $2.0 million decrease in selling, general and administrative expenses.
Other Income (Expense)
Interest Income. Interest income was $2.8 million and $0.7 million for the three months ended March 31, 2023 and March 31, 2022, respectively. The increase of $2.1 million, or 297.5%, was primarily attributable to an increase in interest income on cash and cash equivalents held by our Korean subsidiary, which benefited from the favorable financial market environment.
Interest Expense. Interest expense was $0.3 million and $0.1 million for the three months ended March 31, 2023 and March 31, 2022, respectively.
Foreign Currency Loss, Net. Net foreign currency loss for the three months ended March 31, 2023 was $3.4 million compared to net foreign currency loss of $0.7 million for the three months ended March 31, 2022. The net foreign currency loss for the three months ended March 31, 2023 and March 31, 2022 was due to the depreciation in value of the Korean won relative to the U.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 U.S. dollars, and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of March 31, 2023 and March 31, 2022, the outstanding intercompany loan balances, including accrued interest between our Korean subsidiary and our Dutch subsidiary, were $301.9 million and $348.5 million, respectively. Foreign currency translation gain or loss from intercompany balances were included in determining our consolidated net income (loss) 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.
Income Tax Expense (Benefit)
Income tax benefit was $1.2 million for the three months ended March 31, 2023, which was primarily attributable to the estimated taxable loss in our Korean subsidiary for the respective period.
Income tax expense was $3.5 million for the three months ended March 31, 2022, which was primarily attributable to the estimated taxable income in our Korean subsidiary for the respective period.
Net Income (Loss)
As a result of the foregoing, a net loss of $21.5 million was recorded for the three months ended March 31, 2023 compared to a net income of $9.5 million for the three months ended March 31, 2022. As discussed above, the $31.0 million decrease in net income was primarily attributable to a $34.7 million decrease in operating income and a $2.7 million increase in net foreign currency loss, which was offset in part by a $4.7 million decrease in income tax expense and a $2.1 million increase in interest income.
Liquidity and Capital Resources
Our principal capital requirements are to fund sales and marketing, invest in research and development and capital equipment, 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, cash flows from operations and 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. In addition, from time to time, we may make payments to our vendors on extended terms with their consent. As of March 31, 2023, we did not have any accounts payable on extended terms or payment deferment with our vendors.
As of June 29, 2018, our Korean subsidiary entered into an arrangement whereby it (i) acquired a water treatment facility from SK hynix for $4.2 million to support our fabrication facility in Gumi, Korea, and (ii) subsequently sold the water treatment facility for $4.2 million to a third party management company that we engaged to run the facility for a 10-year term beginning July 1, 2018. As of March 31, 2023, the outstanding obligation of this arrangement is approximately $23.7 million for remaining service term through 2028.
As of March 31, 2023, cash and cash equivalents held by our Korean subsidiary were $193.0 million, which represents 91% of our total cash and cash equivalents on a consolidated basis. We currently believe that we will have sufficient cash reserves from cash on hand and expected cash from operations to fund our operations as well as capital expenditures for the next 12 months and the foreseeable future.
Working Capital
Our working capital balance as of March 31, 2023 was $261.6 million compared to $290.6 million as of December 31, 2022. The $29.0 million decrease was primarily attributable to a $13.4 million decrease in cash and cash equivalents resulted primarily from our stock repurchase program and a $7.4 million increase in accrued expense resulted primarily from termination related charges under the Program.
Cash Flows from Operating Activities
Cash inflow provided by operating activities totaled $7.9 million for the three months ended March 31, 2023, compared to $12.8 million of cash inflow provided by operating activities for the three months ended March 31, 2022. The net operating cash inflow for the three months ended March 31, 2023 reflects our net loss of $21.5 million, as adjusted favorably by $18.3 million, which mainly consisted of depreciation and amortization, provision for severance benefits, and net foreign currency loss, and net favorable impact of $11.1 million from changes of operating assets and liabilities.
Cash Flows from Investing Activities
Cash outflow used in investing activities totaled $3.6 million for the three months ended March 31, 2023, compared to $2.1 million of cash outflow used in investing activities for the three months ended March 31, 2022. The $1.5 million increase was primarily attributable to a $3.4 million increase in guarantee deposits, which was offset in part by a $1.1 million net decrease in hedge collateral and a $0.8 million decrease in purchase of property, plant and equipment.
Cash Flows from Financing Activities
Cash outflow used in financing activities totaled $12.4 million for the three months ended March 31, 2023, compared to $0.8 million of cash inflow provided by financing activities for the three months ended March 31, 2022. The financing cash outflow for the three months ended March 31, 2023 was primarily attributable to a payment of $11.9 million for the repurchases of our common stock pursuant to our stock repurchase program and a payment of $0.4 million for the repurchase of our common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock units. The financing cash inflow for the three months ended March 31, 2022 was primarily attributable to $1.8 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 $0.8 million for the repurchase of our common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock units.
Capital Expenditures
We routinely make capital expenditures for fabrication facility maintenance, enhancement of our existing facility and reinforcement of our global research and development capability. For the three months ended March 31, 2023, capital expenditures for property, plant and equipment were $0.1 million, a $0.8 million, or 85.7%, decrease from $0.9 million for the three months ended March 31, 2022. The capital expenditures for the three months ended March 31, 2023 and 2022 were related to meeting our customer demand and supporting technology and facility improvement at our fabrication facility.
Critical Accounting Policies and Estimates
Preparing financial statements in conformity with U.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, 2022, or our 2022 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 judgement appears in our 2022 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 other material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates included in our 2022 Form 10-K.
| 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. In the normal course of our business, we are subject to market risks associated with 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 U.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, 2023 for our Korean subsidiary, a 10% devaluation of the Korean won against the U.S. dollar would have resulted in a decrease of $0.5 million in our U.S. dollar financial instruments and cash balances.
See “Note 7. 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.
| 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 Chief 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 Chief Financial Officer, as of March 31, 2023, 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 Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2023.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
For a discussion of legal proceedings, see “Part I: Item 3. Legal Proceedings” of our 2022 Form 10-K.
See also “Item 1A. Risk Factors” in this Report and “Part I: Item 1A. Risk Factors” of our 2022 Form 10-K for additional information.
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.
In addition to the other information contained in this Report and the other reports and materials the Company files with the SEC, investors should carefully consider the risk factors disclosed in Part I, Item 1A of our 2022 Form 10-K as well as in our subsequent filings with the SEC. The risks described herein and therein are not the only ones we face.
There have been no material changes to the risk factors disclosed in Part I, Item 1A of our 2022 Form 10-K.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table shows the monthly activity related to our repurchases of common stock for the quarter ended March 31, 2023.
Period | | Total Number of Shares Purchased(1) | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | | | Approximate dollar value of Shares that may yet be Purchased under the Plans or Programs (in thousands)(2) | |
| January 2023 | | | 210,192 | | | $ | 10.45 | | | | 210,192 | | | $ | 35,292 | |
| February 2023 | | | 222,314 | | | $ | 10.16 | | | | 222,314 | | | $ | 33,033 | |
| March 2023(1) | | | 807,487 | | | $ | 9.22 | | | | 805,966 | | | $ | 25,601 | |
| Total | | | 1,239,993 | | | $ | 9.60 | | | | 1,238,472 | | | $ | 25,601 | |
| (1) | Includes 1,521 shares withheld to satisfy tax withholding obligations in connection with the vesting of restricted stock units issued under our equity incentive plans. |
| (2) | On August 31, 2022, the Company’s Board of Directors authorized an expansion of the Company’s previously announced stock repurchase program from $75 million to $87.5 million of the Company’s common stock. The Company has already repurchased shares worth $37.5 million under the program through an accelerated stock repurchase agreement on December 21, 2021 with JPMorgan Chase Bank, National Association. The remaining $50.0 million of the expanded $87.5 million program will be repurchased in the open market or through privately negotiated transactions. In connection with the repurchase program, the Company established a stock trading plan with Oppenheimer & Co. Inc. in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. |
| Item 3. | Defaults Upon Senior Securities |
Not applicable.
| Item 4. | Mine Safety Disclosures |
Not applicable.
None.
Exhibit Number | Description |
| | |
31.1# | |
| | |
31.2# | |
| | |
32.1† | |
| | |
32.2† | |
| | |
101.INS# | Inline XBRL Instance Document. |
| | |
101.SCH# | Inline XBRL Taxonomy Extension Schema Document. |
| | |
101.CAL# | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
101.DEF# | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
101.LAB# | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| | |
101.PRE# | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
Footnotes:
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 8, 2023 | By: | /s/ Young-Joon Kim
|
| | | Young-Joon Kim |
| | | Chief Executive Officer and Interim Chief Financial Officer |
| | | (Principal Executive Officer and Principal Financial Officer) |
