MAGNACHIP SEMICONDUCTOR Corp - Quarter Report: 2020 March (Form 10-Q)

 

 

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, 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 April 30, 2020, the registrant had 35,065,248 shares of common stock outstanding.

 

 

 

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

				Page No.
PART I FINANCIAL INFORMATION					3
Item 1.		Interim Consolidated Financial Statements (Unaudited)			3
		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019			3
		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019			4
		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019			5
		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019			6
		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019			7
		MagnaChip Semiconductor Corporation and Subsidiaries Notes to Consolidated Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			45
Item 4.		Controls and Procedures			46
PART II OTHER INFORMATION					47
Item 1.		Legal Proceedings			47
Item 1A.		Risk Factors			47
Item 6.		Exhibits			48
SIGNATURES					49

 

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 lease right-of-use assets			1,413				1,876
Intangible assets, net			2,583				2,769
Long-term prepaid expenses			4,117				5,757
Other non-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
Other non-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
Additional paid-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

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

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

 

4

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

 

		Three Months Ended
		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	)

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	)

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	)
Other non-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	)

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, 2020, the Company entered into a definitive Business Transfer Agreement (the “BTA”) for the sale of its Foundry Services Group business and its fabrication facility located in Cheongju (“Fab 4”), the larger of the Company’s two 8-inch manufacturing facilities, to Magnus Semiconductor, LLC, a Korean limited liability company, or one of its wholly owned subsidiaries (the “Buyer”) for a purchase price equal to the KRW equivalent of $344.7 million in cash, subject to working capital adjustments set forth in the BTA. The Buyer is a special purpose company formed by Alchemist Capital Partners Korea Co., Ltd. and Credian Partners, Inc. This planned divestiture of the Foundry Services Group business and Fab 4 will allow 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 the Foundry Services Group were 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 GAAP”). These interim consolidated financial statements include normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair statement of the Company’s financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with Accounting Standards Codification 270, “Interim Reporting” and, accordingly, do not include all of the information and note disclosures required by US GAAP for complete financial statements, except for the changes below. The results of operations for the three months ended March 31, 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, 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. 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 months ended March 31, 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”) 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. 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 No. 2019-12, “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 Update No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. In April 2019, the FASB issued Accounting Standards Update No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2019-04”), and in November 2019, the FASB issued Accounting Standards Update No. 2019-11, “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 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.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 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, 2020, the Company entered into the BTA for the sale of its Foundry Services Group business and Fab 4. 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 prior 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 both of the continuing and discontinued businesses. The sale is expected to close within approximately four to six months from the date of the BTA, subject to customary closing conditions.

The following table summarizes the results from discontinued operations, net of tax, for the three months ended March 31, 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	)

For the three months ended March 31, 2020 and 2019, the Company recorded $2,115 thousand and $743 thousand, respectively, in professional fees incurred in connection with the Foundry Services Group business and Fab 4, and recorded such costs as restructuring and other charges in the above. For the three months ended March 31, 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, which are included in assets and liabilities held for sale 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
Other non-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
Other non-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.

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	)

 

11

3. Sales of Accounts Receivable and Receivable Discount Program

The Company has entered into an agreement to sell selected trade accounts receivable to a financial institution from time to time since March 2012. After the sale, the Company does not retain any interest in the receivables and the applicable financial institution collects these accounts receivable directly from the customer. There was no sale of these accounts receivable for the three months ended March 31, 2020. For the three months ended March 31, 2019, the proceeds from the sales of these accounts receivable totaled $7,989 thousand and these sales resulted in pre-tax losses of $25 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, 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 and work-in-process			25,342				28,815
Raw materials			7,916				8,449
Materials in-transit			231				—
Less: inventory reserve			(4,807	)			(5,947	)
Inventories, net		$	37,130			$	41,404

Changes in inventory reserve for the three months ended March 31, 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	)

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.

 

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5. Property, Plant and Equipment

Property, plant and equipment as of March 31, 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 lease right-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

Aggregate depreciation expenses totaled $2,409 thousand and $2,412 thousand for the three months ended March 31, 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, 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

 

		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 thousand and $139 thousand for the three months ended March 31, 2020 and 2019, respectively.

 

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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 4 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 the Company’s leases

Supplemental balance sheets information related to leases as of March 31, 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		Other non-current liabilities			112				251
Finance		Other non-current liabilities			182				208
Total lease liabilities				$	1,653			$	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	%

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 of right-of-use assets			16				17
Interest on lease liabilities			5				6
Total lease cost		$	489			$	548

The above table does not include an immaterial cost of short-term leases for the three months ended March 31, 2020 and 2019.

 

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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

The aggregate future lease payments for operating and finance leases as of March 31, 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

8. Accrued Expenses

Accrued expenses as of March 31, 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

 

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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 US dollar denominated revenues.

Details of derivative contracts as of March 31, 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

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

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, 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			$	—

Offsetting of derivative liabilities as of March 31, 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

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

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

 

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The following table summarizes the impact of derivative instruments on the consolidated statements of operations for the three months ended March 31, 2020 and 2019 (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	)

As of March 31, 2020, the amount expected to be reclassified from accumulated other comprehensive income into loss within the next twelve months is $3,401 thousand.

The Company set aside $10,550 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, 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 and $1,070 thousand of additional cash collateral were required and recorded as hedge collateral on the consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively.

These 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.

10. Fair Value Measurements

Fair Value of Financial Instruments

As of March 31, 2020, the following table represents the Company’s 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				—

 

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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

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.”

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, 2020 and 2019, the Company did not have any assets or liabilities measured at fair value on a non-recurring basis.

 

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11. Borrowings

Borrowings as of March 31, 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

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.

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 months ended March 31, 2020 and 2019 were $1,416 thousand and $1,408 thousand, respectively.

 

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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 months ended March 31, 2020 and 2019 were $3,943 thousand and $3,930 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.

 

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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, 2020, 98% of all employees of the Company were eligible for severance benefits.

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

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

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.

 

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13. Foreign Currency 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 dollars and are affected by changes in the exchange rate between the Korean won and the US dollar. As of March 31, 2020 and December 31, 2019, the outstanding intercompany loan balances including accrued interest between the Korean subsidiary and the Dutch subsidiary were $684,021 thousand and $686,485 thousand, respectively. The Korean won to US dollar exchange rates were 1,222.6:1, 1,157.8:1 using the first base rate as of March 31, 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 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 loss from continuing operations before income tax expense for the three months ended March 31, 2020 and 2019 was $29,775 thousand and $20,759 thousand, respectively. For the three months ended March 31, 2020 and 2019, the Company recorded an income tax expense on continuing of $1,303 thousand and $796 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.

 

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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, 2020, the Company entered into the BTA to sell its Foundry business and Fab 4. The planned 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 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

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

 

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