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MAGNACHIP SEMICONDUCTOR Corp - Quarter Report: 2023 June (Form 10-Q)

10-Q
Table of Contents
 
 
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 June 30, 2023
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, Ltd.
15F, 76 Jikji-daero
436beon-gil
,
Heungdeok-gu
Cheongju-si,
Chungcheongbuk-do,
Republic of Korea 28581
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: +82 (2) 6903-3000
 
 
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 July 31, 2023, the registrant had 40,259,499 shares of common stock outstanding.
 
 
 


Table of Contents

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 June 30, 2023 and December 31, 2022

     3  
 

Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022

     4  
 

Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2023 and 2022

     5  
 

Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022

     6  
 

Magnachip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022

     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

     22  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     42  

Item 4.

 

Controls and Procedures

     43  

PART II OTHER INFORMATION

     44  

Item 1.

 

Legal Proceedings

     44  

Item 1A.

 

Risk Factors

     44  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     45  

Item 3.

 

Defaults Upon Senior Securities

     45  

Item 4.

 

Mine Safety Disclosures

     45  

Item 5.

 

Other Information

     45  

Item 6.

 

Exhibits

     46  

SIGNATURES

     47  

 

2


Table of Contents
http://fasb.org/us-gaap/2023#OtherLiabilitiesCurrent
PART I—FINANCIAL INFORMATION
 
Item 1.
Interim Consolidated Financial Statements (Unaudited)
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
    
June 30,

2023
   
December 31,

2022
 
              
    
(In thousands of U.S. dollars, except share data)
 
Assets
                
Current assets
                
Cash and cash equivalents
   $ 172,954     $ 225,477  
Accounts receivable, net
     35,009       35,380  
Inventories, net
     32,337       39,883  
Other receivables
     3,498       7,847  
Prepaid expenses
     9,553       10,560  
Hedge collateral (Note 6)
     2,120       2,940  
Other current assets (Note 16)
     19,070       15,766  
    
 
 
   
 
 
 
Total current assets
     274,541       337,853  
Property, plant and equipment, net
     101,067       110,747  
Operating lease
right-of-use
assets
     5,224       5,265  
Intangible assets, net
     1,706       1,930  
Long-term prepaid expenses
     7,430       10,939  
Deferred income taxes
     37,141       38,324  
Other
non-current
assets
     16,626       11,587  
    
 
 
   
 
 
 
Total assets
   $ 443,735     $ 516,645  
    
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
                
Current liabilities
                
Accounts payable
   $ 20,367     $ 17,998  
Other accounts payable
     8,473       9,702  
Accrued expenses (Note 5)
     10,456       9,688  
Accrued income taxes
     91       3,154  
Operating lease liabilities
     1,745       1,397  
Other current liabilities
     4,506       5,306  
    
 
 
   
 
 
 
Total current liabilities
     45,638       47,245  
Accrued severance benefits, net
     20,123       23,121  
Non-current
operating lease liabilities
     3,671       4,091  
Other
non-current
liabilities
     10,011       14,035  
    
 
 
   
 
 
 
Total liabilities
     79,443       88,492  
    
 
 
   
 
 
 
Commitments and contingencies (Note 16)
            
Stockholders’ equity
                
Common stock, $0.01 par value, 150,000,000 shares authorized, 56,449,782 shares issued and 40,133,898 outstanding at June 30, 2023 and 56,432,449 shares issued and 43,824,575 outstanding at December 31, 2022
     564       564  
Additional
paid-in
capital
     269,297       266,058  
Retained earnings
     310,089       335,506  
Treasury stock, 16,315,884 shares at June 30, 2023 and 12,607,874 shares at December 31, 2022, respectively
     (199,248     (161,422
Accumulated other comprehensive loss
     (16,410     (12,553
    
 
 
   
 
 
 
Total stockholders’ equity
     364,292       428,153  
    
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 443,735     $ 516,645  
    
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial
statements
.
 
3

Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unau
d
ited)
 
    
Three Months Ended
   
Six Months Ended
 
    
June 30,

2023
   
June 30,

2022
   
June 30,

2023
   
June 30,

2022
 
                          
    
(In thousands of U.S. dollars, except share data)
 
Revenues:
        
Net sales – standard products business
   $ 51,375     $ 91,288     $ 102,889     $ 185,298  
Net sales – transitional Fab 3 foundry services
     9,604       10,088       15,095       20,171  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues
     60,979       101,376       117,984       205,469  
Cost of sales:
                                
Cost of sales – standard products business
     37,867       63,620       75,179       119,700  
Cost of sales – transitional Fab 3 foundry services
     9,574       8,811       17,173       17,828  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total cost of sales
     47,441       72,431       92,352       137,528  
    
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
     13,538       28,945       25,632       67,941  
Operating expenses:
                                
Selling, general and administrative expenses
     12,137       12,736       24,302       26,899  
Research and development expenses
     11,255       13,410       24,553       25,364  
Early termination and other charges
     802       797       9,251       797  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     24,194       26,943       58,106       53,060  
    
 
 
   
 
 
   
 
 
   
 
 
 
Operating income (loss)
     (10,656     2,002       (32,474     14,881  
Interest income
     2,692       1,061       5,534       1,776  
Interest expense
     (200     (499     (456     (610
Foreign currency gain (loss), net
     1,237       (7,012     (2,193     (7,702
Other income (loss), net
     3       211       (32     429  
    
 
 
   
 
 
   
 
 
   
 
 
 
Income (loss) before income tax expense
     (6,924     (4,237     (29,621     8,774  
Income tax expense (benefit)
     (2,977     (897     (4,204     2,586  
    
 
 
   
 
 
   
 
 
   
 
 
 
Net income (loss)
   $ (3,947   $ (3,340   $ (25,417   $ 6,188  
    
 
 
   
 
 
   
 
 
   
 
 
 
Basic earnings (loss) per common share—
   $ (0.09   $ (0.07   $ (0.60   $ 0.14  
Diluted earnings (loss) per common share—
   $ (0.09   $ (0.07   $ (0.60   $ 0.13  
Weighted average number of shares—
                                
Basic
     41,741,310       44,897,278       42,561,514       45,248,293  
Diluted
     41,741,310       44,897,278       42,561,514       46,329,559  
The accompanying notes are an integral part of these consolidated financial statements.
 
4

Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (
Unaudited
)
 
    
Three Months Ended
   
Six Months Ended
 
    
June 30,

2023
   
June 30,

2022
   
June 30,

2023
   
June 30,

2022
 
                          
    
(In thousands of U.S. dollars)
 
Net income (loss)
   $ (3,947   $ (3,340   $ (25,417   $ 6,188  
    
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive loss
                                
Foreign currency translation adjustments
     (2,285     (6,862     (4,193     (9,907
Derivative adjustments
                                
Fair valuation of derivatives
     (375     (6,477     (1,510     (7,741
Reclassification adjustment for loss on derivatives included in net income (loss)
     1,243       1,796       1,846       2,558  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total other comprehensive loss
     (1,417     (11,543     (3,857     (15,090
    
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive loss
   $ (5,364   $ (14,883   $ (29,274   $ (8,902
    
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
5

Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (
Unaudited
)
 
 
  
 
 
 
 
 
  
Additional

Paid-In

Capital
 
 
 
 
 
 
 
 
Accumulated

Other

Comprehensive

Loss
 
 
 
 
 
  
Common Stock
 
 
Retained

Earnings
 
 
Treasury

Stock
 
 
Total
 
(In thousands of U.S. dollars, except share data)
  
Shares
 
 
Amount
 
Three Months Ended June 30, 2023:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2023
     42,589,315     $ 564      $ 267,187     $ 314,036     $ (173,441   $ (14,993   $ 393,353  
Stock-based compensation
     —         —          2,092       —         —         —         2,092  
Exercise of stock options
     2,600       0        18       —         —         —         18  
Settlement of restricted stock units
     10,000       0        (0     —         —         —           —  
Acquisition of treasury stock
     (2,468,017     —          —         —         (25,807     —         (25,807
Other comprehensive loss, net
     —         —          —         —         —         (1,417     (1,417
Net loss
     —         —          —         (3,947     —         —         (3,947
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2023
     40,133,898     $ 564      $ 269,297     $ 310,089     $ (199,248   $ (16,410   $ 364,292  
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Three Months Ended June 30, 2022:
                                                         
Balance at March 31, 2022
     44,894,385     $ 562      $ 261,830     $ 353,070     $ (148,523   $ (5,777   $ 461,162  
Stock-based compensation
     —         —          1,988       —         —         —         1,988  
Exercise of stock options
     1,000       0        5       —         —         —         5  
Settlement of restricted stock units
     8,333       0        (125     —         —         —         (125
Other comprehensive loss, net
     —         —          —         —         —         (11,543     (11,543
Net loss
     —         —          —         (3,340     —         —         (3,340
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2022
     44,903,718     $ 562      $ 263,698     $ 349,730     $ (148,523   $ (17,320   $ 448,147  
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
 
  
 
 
 
 
 
  
Additional

Paid-In

Capital
 
 
 
 
 
 
 
 
Accumulated

Other

Comprehensive

Loss
 
 
 
 
 
  
Common Stock
 
 
Retained

Earnings
 
 
Treasury

Stock
 
 
Total
 
(In thousands of U.S. dollars, except share data)
  
Shares
 
 
Amount
 
Six Months Ended June 30, 2023:
  
 
  
 
 
 
 
Balance at December 31, 2022
     43,824,575     $ 564      $ 266,058     $ 335,506     $ (161,422   $ (12,553   $ 428,153  
Stock-based compensation
           —          3,212       —         —         —         3,212  
Exercise of stock options
     4,000       0        27       —         —         —         27  
Settlement of restricted stock units
     13,333       0        (0     —         —         —         —    
Acquisition of treasury stock
     (3,708,010     —          —         —         (37,826     —         (37,826
Other comprehensive loss, net
           —          —         —         —         (3,857     (3,857
Net loss
           —          —         (25,417     —         —         (25,417
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2023
     40,133,898     $ 564      $ 269,297     $ 310,089     $ (199,248   $ (16,410   $ 364,292  
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Six Months Ended June 30, 2022:
                                                         
Balance at December 31, 2021
     45,659,304     $ 559      $ 241,197     $ 343,542     $ (130,306   $ (2,230   $ 452,762  
Stock-based compensation
           —          3,626       —         —         —         3,626  
Exercise of stock options
     152,326       1        1,785       —         —         —         1,786  
Settlement of restricted stock units
     177,128       2        (127     —         —         —         (125
Acquisition of treasury stock
     (53,464     —          —         —         (1,000     —         (1,000
Accelerated stock repurchase
     (1,031,576     —          17,217       —         (17,217     —         —    
Other comprehensive loss, net
           —          —         —         —         (15,090     (15,090
Net income
           —          —         6,188       —         —         6,188  
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2022
     44,903,718     $ 562      $ 263,698     $ 349,730     $ (148,523   $ (17,320   $ 448,147  
    
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
6


Table of Contents
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (
Unaudited
)
 
    
Six Months Ended
 
    
June 30,

2023
   
June 30,

2022
 
    
(In thousands of U.S. dollars)
 
Cash flows from operating activities
                
Net income (loss)
   $ (25,417   $ 6,188  
Adjustments to reconcile net income (loss) to net cash provided by operating activities
                
Depreciation and amortization
     8,502       7,602  
Provision for severance benefits
     4,091       3,240  
Loss on foreign currency, net
     9,117       29,183  
Provision for inventory reserves
     1,121       5,282  
Stock-based compensation
     3,212       3,626  
Other, net
     450       712  
Changes in operating assets and liabilities
                
Accounts receivable, net
     (342     (12,377
Inventories
     4,911       (5,486
Other receivables
     4,407       11,640  
Other current assets
     395       (2,089
Accounts payable
     2,880       2,429  
Other accounts payable
     (6,488     (5,861
Accrued expenses
     1,104       (2,709
Accrued income taxes
     (2,972     (11,513
Other current liabilities
     (471     (2,153
Other
non-current
liabilities
     (214     570  
Payment of severance benefits
     (5,728     (2,934
Other, net
     (487     (385
    
 
 
   
 
 
 
Net cash provided by (used in) operating activities
     (1,929     24,965  
Cash flows from investing activities
                
Proceeds from settlement of hedge collateral
     3,335       2,805  
Payment of hedge collateral
     (2,586     (6,844
Purchase of property, plant and equipment
     (1,518     (1,511
Payment for intellectual property registration
     (163     (153
Payment of guarantee deposits
     (6,907     (1,049
Other, net
     1,445       14  
    
 
 
   
 
 
 
Net cash used in investing activities
     (6,394     (6,738
Cash flows from financing activities
                
Proceeds from exercise of stock options
     27       1,786  
Acquisition of treasury stock
     (36,840     (1,826
Repayment of financing related to water treatment facility arrangement
     (248     (261
Repayment of principal portion of finance lease liabilities
     (46     (32
    
 
 
   
 
 
 
Net cash used in financing activities
     (37,107     (333
Effect of exchange rates on cash and cash equivalents
     (7,093     (23,644
    
 
 
   
 
 
 
Net decrease in cash and cash equivalents
     (52,523     (5,750
Cash and cash equivalents
                
Cash and cash equivalents at beginning of period
     225,477       279,547  
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 172,954     $ 273,797  
    
 
 
   
 
 
 
Supplemental cash flow information
                
Cash paid for income taxes
   $ 3,599     $ 14,022  
Non-cash
investing activities
                
Property, plant and equipment additions in other accounts payable
   $ 477     $ 4,050  
Non-cash
financing activities
                
Unsettled common stock repurchases
   $ 1,379     $ —    
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, computing, industrial and automotive applications.
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 a wide range of applications including smartphones, TVs, automotive and IT applications such as monitors, notebook PCs, tablet PCs as well as AR/VRs. The Company’s Power Solutions products include discrete and integrated circuit solutions for power management in communications, consumer, computing, servers, automotive, and industrial applications.
On September 1, 2020, the Company completed the sale of the Company’s Foundry Services Group business and its fabrication facility located in Cheongju, Korea, known as “Fab 4”. Following the consummation of the sale, and for up to three years, the Company is expected to provide transitional foundry services associated with its fabrication facility located in Gumi, Korea, known as “Fab 3”, at an agreed upon cost plus
mark-up
(the “Transitional Fab 3 Foundry Services”).
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 (“U.S. GAAP”). These interim consolidated financial statements include normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair statement of the Company’s financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with Accounting Standards Codification (“ASC”) 270, “Interim Reporting” and, accordingly, do not include all of the information and note disclosures required by U.S. GAAP for complete financial statements. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for a full year or for any other periods.
The December 31, 2022 balance sheet data was derived from the Company’s audited financial statements, but does not include all disclosures required by U.S. GAAP. The interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2022.
There have been no material changes to the Company’s significant accounting policies as of and for the six months ended June 30, 2023 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, 2022.
 
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2. Inventories
Inventories as of June 30, 2023 and December 31, 2022 consist of the following (in thousands):
 
    
June 30,

2023
    
December 31,

2022
 
Finished goods
   $ 5,025      $ 6,799  
Semi-finished goods and
work-in-process
     35,379        40,265  
Raw materials
     6,664        7,460  
Materials
in-transit
     14        36  
Less: inventory reserve
     (14,745      (14,677
    
 
 
    
 
 
 
Inventories, net
   $ 32,337      $ 39,883  
    
 
 
    
 
 
 
Changes in inventory reserve for the three and six months ended June 30, 2023 and 2022 are as follows (in thousands):
 
    
Three Months

Ended
    
Six Months

Ended
    
Three Months

Ended
    
Six Months

Ended
 
                             
    
June 30, 2023
    
June 30, 2022
 
Beginning balance
   $ (14,941    $ (14,677    $ (5,555    $ (5,730
Change in reserve
                                   
Inventory reserve charged to costs of sales
     (2,023      (4,607      (6,093      (7,700
Sale of previously reserved inventory
     2,047        3,523        872        2,324  
    
 
 
    
 
 
    
 
 
    
 
 
 
       24        (1,084      (5,221      (5,376
Write off
     67        482        84        295  
Translation adjustments
     105        534        486        605  
    
 
 
    
 
 
    
 
 
    
 
 
 
Ending balance
   $ (14,745    $ (14,745    $ (10,206    $ (10,206
    
 
 
    
 
 
    
 
 
    
 
 
 
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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3. Property, Plant and Equipment
Property, plant and equipment as of June 30, 2023 and December 31, 2022 are comprised of the following (in thousands):
 
    
June 30,

2023
    
December 31,

2022
 
Buildings and related structures
   $ 24,048      $ 24,780  
Machinery and equipment
     134,806        137,666  
Finance lease
right-of-use
assets
     702        389  
Others
     33,689        33,890  
    
 
 
    
 
 
 
       193,245        196,725  
Less: accumulated depreciation
     (105,929      (101,502
Land
     12,583        13,034  
Construction in progress
     1,168        2,490  
    
 
 
    
 
 
 
Property, plant and equipment, net
   $ 101,067      $ 110,747  
    
 
 
    
 
 
 
Aggregate depreciation expenses totaled $8,183 thousand and $7,239 thousand for the six months ended June 30, 2023 and 2022, respectively.
4. Intangible Assets
Intangible assets as of June 30, 2023 and December 31, 2022 are comprised of the following (in thousands):
 
    
June 30, 2023
 
    
Gross

amount
    
Accumulated

amortization
    
Net

amount
 
Intellectual property assets
   $ 8,923      $ (7,217    $ 1,706  
    
 
 
    
 
 
    
 
 
 
Intangible assets
   $ 8,923      $ (7,217    $ 1,706  
    
 
 
    
 
 
    
 
 
 
 
    
December 31, 2022
 
    
Gross

amount
    
Accumulated

amortization
    
Net

amount
 
Intellectual property assets
   $ 9,111      $ (7,181    $ 1,930  
    
 
 
    
 
 
    
 
 
 
Intangible assets
   $ 9,111      $ (7,181    $ 1,930  
    
 
 
    
 
 
    
 
 
 
Aggregate amortization expenses for intangible assets totaled $319 thousand and $363 thousand for the six months ended June 30, 2023 and 2022, respectively.
5. Accrued Expenses
Accrued expenses as of June 30, 2023 and December 31, 2022 are comprised of the following (in thousands):
 
    
June 30,

2023
    
December 31,

2022
 
Payroll, benefits and related taxes, excluding severance benefits
   $ 7,210      $ 7,620  
Withholding tax attributable to intercompany interest income
     886        43  
Outside service fees
     1,522        1,642  
Others
     838        383  
    
 
 
    
 
 
 
Accrued expenses
   $ 10,456      $ 9,688  
    
 
 
    
 
 
 
 
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6. Derivative Financial Instruments
The Company’s Korean subsidiary from time to time has entered into zero cost collar contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues.
Details of the zero cost collar contracts as of June 30, 2023 are as follows (in thousands):
 
Date of transaction
  
Total notional amount
    
Month of settlement
March 07, 2022
   $ 24,000      July 2023 to December 2023
April 27, 2022
   $ 24,000      July 2023 to December 2023
March 08, 2023
   $ 18,000      July 2023 to December 2023
April 03, 2023
   $ 23,000      December 2023 to June 2024
Details of the zero cost collar contracts as of December 31, 2022 are as follows (in thousands):
 
Date of transaction
  
Total notional amount
    
Month of settlement
January 04, 2022
   $ 30,000      January 2023 to June 2023
March 07, 2022
   $ 24,000      July 2023 to December 2023
April 27, 2022
   $ 42,000      January 2023 to December 2023
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 liabilities as of June 30, 2023 and December 31, 2022 are as follows (in thousands):
 
Derivatives designated as hedging instruments:
         
June 30,

2023
    
December 31,

2022
 
Liability Derivatives:
                          
Zero cost collars
     Other current liabilities      $ 1,776      $ 2,015  
Offsetting of derivative liabilities as of June 30, 2023 is as follows (in thousands):
 
As of June 30, 2023
  
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
   $ 1,776      $ —        $ 1,776      $ —        $ (1,120   $ 656  
Offsetting of derivative liabilities as of December 31, 2022 is as follows (in thousands):
 
As of December 31, 2022
  
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
   $ 2,015      $ —        $ 2,015      $ —        $ (1,940   $ 75  
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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 or loss (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing hedge components excluded from the assessment of effectiveness, are recognized in current earnings.
The following table summarizes the impact of derivative instruments on the consolidated statements of operations for the three months ended June 30, 2023 and 2022 (in thousands):
 
Derivatives in ASC
815 Cash Flow Hedging
Relationships
  
Amount of Loss

Recognized in

AOCI on

Derivatives
 
 
Location/Amount of

Loss

Reclassified from AOCI

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

Recognized in

Statement of Operations on Derivatives
 
 
  
Three Months Ended

June 30,
 
 
 
 
  
Three Months Ended

June 30,
 
 
 
 
  
Three Months Ended

June 30,
 
 
  
2023
 
 
2022
 
 
 
 
  
2023
 
 
2022
 
 
 
 
  
2023
 
 
2022
 
Zero cost collars
   $ (375   $ (6,477  
 
Net sales
 
   $ (1,243   $ (1,796  
 
Other income, net
 
   $ (20   $ 184  
    
 
 
   
 
 
   
 
 
 
  
 
 
   
 
 
   
 
 
 
  
 
 
   
 
 
 
     $ (375   $ (6,477  
 
 
 
   $ (1,243   $ (1,796  
 
 
 
   $ (20   $ 184  
    
 
 
   
 
 
   
 
 
 
  
 
 
   
 
 
   
 
 
 
  
 
 
   
 
 
 
The following table summarizes the impact of derivative instruments on the consolidated statements of operations for the six months ended June 30, 2023 and 2022 (in thousands):
 
Derivatives in ASC
815 Cash Flow Hedging
Relationships
  
Amount of Loss

Recognized in

AOCI on

Derivatives
 
 
Location/Amount of

Loss

Reclassified from AOCI

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

Recognized in

Statement of Operations on Derivatives
 
 
  
Six Months Ended

June 30,
 
 
 
 
  
Six Months Ended

June 30,
 
 
 
 
 
Six Months Ended

June 30,
 
 
  
2023
 
 
2022
 
 
 
 
  
2023
 
 
2022
 
 
 
 
 
2023
 
 
2022
 
Zero cost collars
 
$ (1,510   $ (7,741  
 
Net sales
 
   $ (1,846   $ (2,558  
 
Other income
(loss), net
 
   $ (74   $ 55  
 
 
 
 
   
 
 
   
 
 
 
  
 
 
   
 
 
   
 
 
 
  
 
 
   
 
 
 
 
 
$ (1,510   $ (7,741  
 
 
 
   $ (1,846   $ (2,558  
 
 
 
   $ (74   $ 55  
 
 
 
 
   
 
 
   
 
 
 
  
 
 
   
 
 
   
 
 
 
  
 
 
   
 
 
 
As of June 30, 2023, the amount expected to be reclassified from accumulated other comprehensive loss into loss within the next 12 months is $889 thousand.
The Company set aside cash deposit to the counterparty, Standard Chartered Bank Korea Limited (“SC”), as required for the zero cost collar contracts. This cash deposit is recorded as hedge collateral on the consolidated balance sheets. Cash deposits as of June 30, 2023 and December 31, 2022 are as follows (in thousands):
 
Counterparty
  
June 30,

2023
    
December 31,

2022
 
SC
   $ 1,000      $ 1,000  
    
 
 
    
 
 
 
Total
   $ 1,000      $ 1,000  
    
 
 
    
 
 
 
The Company is required to deposit additional cash collateral with Nomura Financial Investment (Korea) Co., Ltd. (“NFIK”) and SC for any exposure in excess of $500 thousand. As of June 30, 2023, $1,120 thousand of additional cash collateral was required by NFIK, and recorded as hedge collateral on the consolidated balance sheet. As of December 31, 2022, $1,840 thousand and $100 thousand of additional cash collateral were required by NFIK and SC, respectively, and recorded as hedge collateral on the consolidated balance sheet.
These zero cost collar contracts may be terminated by the counterparties 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.
 
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7. Fair Value Measurements
Fair Value of Financial Instruments
As of June 30, 2023, 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

June 30, 2023
 
  
Fair Value

Measurement

June 30, 2023
 
  
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)
   $ 1,776      $ 1,776        —        $ 1,776        —    
As of December 31, 2022, 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

December 31, 2022
 
  
Fair Value

Measurement

December 31, 2022
 
  
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)
   $ 2,015      $ 2,015        —        $ 2,015        —    
It
em
s 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.
 
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8. 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 June 30, 2023, 97% of all employees of the Company were eligible for severance benefits.
Changes in accrued severance benefits are as follows (in thousands):
 

 
  
Three Months Ended
 
  
Six Months Ended
 
  
Three Months Ended
 
  
Six Months Ended
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
  
June 30, 2023
 
  
June 30, 2022
 
Beginning balance
   $ 48,574      $ 48,496      $ 50,771      $ 51,567  
Provisions
     1,761        4,091        1,570        3,240  
Severance payments
     (4,857      (5,728      (1,545      (2,934
Translation adjustments
     (357      (1,738      (3,210      (4,287
    
 
 
    
 
 
    
 
 
    
 
 
 
       45,121        45,121        47,586        47,586  
Less: Cumulative contributions to
severance insurance deposit accounts
     (24,816      (24,816      (16,894      (16,894
The National Pension Fund
     (30      (30      (44      (44
Group severance insurance plan
     (152      (152      (182      (182
    
 
 
    
 
 
    
 
 
    
 
 
 
Accrued severance benefits, net
   $ 20,123      $ 20,123      $ 30,466      $ 30,466  
    
 
 
    
 
 
    
 
 
    
 
 
 
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.
Beginning in July 2018, the Company contributes 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 pursuant to Employee Retirement Benefit Security Act of Korea. 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 2023
   $ 168  
2024
     319  
2025
     739  
2026
     669  
2027
     372  
2028
     3,514  
2029 – 2033
     18,215  
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 years of age or older under the Employment Promotion for the Aged Act. The Company sets the retirement age of employees at 60.
 
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9. Early Termination and Other Charges
During the first quarter of 2023, the Company commenced the voluntary resignation program (the “
2023 Resignation
Pr
ogram”), which was available for the employees with more than 20 years of service. For the six months ended June 30, 2023, the Company recorded in its consolidated statement of operations $8,449 thousand of termination related charges as “early termination and other charges”, which were paid during the second quarter of 2023.
For the three and six months ended June 30, 2023, the Company also recorded $802 thousand of
one-time
employee incentives. For the three and six months ended June 30, 2022, the Company recorded $797 thousand of professional service fees and expenses incurred in connection with certain strategic evaluations.
10. 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 U.S. dollars and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of June 30, 2023 and December 31, 2022, the outstanding intercompany loan balances including accrued interest between the Korean subsidiary and the Dutch subsidiary were $293,077 thousand and $310,988 thousand, respectively. The Korean won to U.S. dollar exchange rates were 1,312.8:1 and 1,267.3:1 using the first base rate as of June 30, 2023 and December 31, 2022, respectively, as quoted by the KEB Hana Bank.
11. Income Taxes
The Company and its subsidiaries file income tax returns in Korea, Japan, Taiwan, the U.S. and in various other jurisdictions. The Company is subject to income or
non-income
tax examinations by tax authorities of these jurisdictions for all open tax years.
For the three and six months ended June 30, 2023, the Company recorded an income tax benefit of $2,977 thousand and $4,204 thousand, respectively, primarily attributable to the estimated taxable loss of its Korean subsidiary for the respective period.
For the three months ended June 30, 2022, the Company recorded an income tax benefit of $897 thousand primarily attributable to a decrease in its Korean subsidiary’s
pre-tax
income for the respective period due to the foreign currency translation loss recorded in its Korean subsidiary in connection with intercompany loans. For the six months ended June 30, 2022, the Company recorded an income tax expense of $2,586 thousand, primarily attributable to interest on intercompany loan balances and income tax in its Korean subsidiary and the U.S. parent entity based on the Company’s estimated taxable income for the respective period.
 
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12. Geographic and Other Information
The following sets forth information relating to the single operating segment (in thousands):
 
    
Three Months Ended
    
Six Months Ended
 
    
June 30,

2023
    
June 30,

2022
    
June 30,

2023
    
June 30,

2022
 
Revenues
                                   
Standard products business
                                   
Display Solutions
   $ 9,657      $ 28,336      $ 20,498      $ 57,521  
Power Solutions
     41,718        62,952        82,391        127,777  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total standard products business
     51,375        91,288        102,889        185,298  
Transitional Fab 3 foundry services
     9,604        10,088        15,095        20,171  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues
   $ 60,979      $ 101,376      $ 117,984      $ 205,469  
    
 
 
    
 
 
    
 
 
    
 
 
 
 

 
  
Three Months Ended
 
  
Six Months Ended
 
 
  
June 30,

2023
 
  
June 30,

2022
 
  
June 30,

2023
 
  
June 30,

2022
 
Gross Profit
  
  
  
  
Standard products business
   $ 13,508      $ 27,668      $ 27,710      $ 65,598  
Transitional Fab 3 foundry services
     30        1,277        (2,078      2,343  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total gross profit
   $ 13,538      $ 28,945      $ 25,632      $ 67,941  
    
 
 
    
 
 
    
 
 
    
 
 
 
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
    
Six Months Ended
 
    
June 30,

2023
    
June 30,

2022
    
June 30,

2023
    
June 30,

2022
 
Korea
   $ 14,394      $ 31,168      $ 30,890      $ 62,198  
Asia Pacific (other than Korea)
     35,024        56,068        66,925        114,328  
United States
     236        2,492        1,281        5,356  
Europe
     1,721        1,560        3,793        3,416  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 51,375      $ 91,288      $ 102,889      $ 185,298  
    
 
 
    
 
 
    
 
 
    
 
 
 
For the three months ended June 30, 2023 and 2022, of the Company’s net sales – standard products business in Asia Pacific (other than Korea), net sales – standard products business in China and Hong Kong together represented 67.5% and 56.5%, respectively, and net sales—standard products business in Vietnam represented 11.3% and 26.7%, respectively. For the six months ended June 30, 2023 and 2022, of the Company’s net sales – standard products business in Asia Pacific (other than Korea), net sales – standard products business in China and Hong Kong represented 62.9% and 64.0%, respectively, and net sales—standard products business in Vietnam represented 14.4% and 20.4%, respectively.
Net sales from the Company’s top ten largest customers in the standard products business (which does not include the Transitional Fab 3 Foundry Services) accounted for 72% and 73% for the three months ended June 30, 2023 and 2022, respectively, and 70% and 72% for the six months ended June 30, 2023 and 2022, respectively.
For the three months ended June 30, 2023, the Company had two customers that represented 15.1% and 13.5% of its net sales—standard products business, respectively. For the six months ended June 30, 2023, the Company had two customers that represented 15.0% and 14.4% of its net sales—standard products business, respectively. For the three months ended June 30, 2022, the Company had two customers that represented 26.7% and 13.3% of its net sales – standard products business. For the six months ended June 30, 2022, the Company had two customers that represented 26.1% and 13.1% of its net sales – standard products business.
As of June 30, 2023, the Company’s accounts receivable was concentrated with four customers at June 30, 2023, who represented a total of 59% of its accounts receivable – standard products business (which does not include the Transitional Fab 3 Foundry Services), compared with four customers at December 31, 2022, who represented 56% of its accounts receivable – standard products business (which does not include the Transitional Fab 3 Foundry Services).
 
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13. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following as of June 30, 2023 and December 31, 2022, respectively (in thousands):
 
    
June 30,

2023
    
December 31,

2022
 
Foreign currency translation adjustments
   $ (15,521    $ (11,328
Derivative adjustments
     (889      (1,225
    
 
 
    
 
 
 
Total
   $ (16,410    $ (12,553
    
 
 
    
 
 
 
Changes in accumulated other comprehensive loss for the three months ended June 30, 2023 and 2022 are as follows (in thousands):
 
Three Months Ended June 30, 2023
  
Foreign

currency

translation

adjustments
    
Derivative

adjustments
    
Total
 
Beginning balance
   $ (13,236    $ (1,757    $ (14,993
    
 
 
    
 
 
    
 
 
 
Other comprehensive loss before reclassifications
     (2,285      (375      (2,660
Amounts reclassified from accumulated other comprehensive loss
     —          1,243        1,243  
    
 
 
    
 
 
    
 
 
 
Net current-period other comprehensive loss
     (2,285      868        (1,417
    
 
 
    
 
 
    
 
 
 
Ending balance
   $ (15,521    $ (889    $ (16,410
    
 
 
    
 
 
    
 
 
 
 
Three Months Ended June 30, 2022
  
Foreign

currency

translation

adjustments
    
Derivative

adjustments
    
Total
 
Beginning balance
   $ (3,815    $ (1,962    $ (5,777
    
 
 
    
 
 
    
 
 
 
Other comprehensive loss before reclassifications
     (6,862      (6,477      (13,339
Amounts reclassified from accumulated other comprehensive loss
     —          1,796        1,796  
    
 
 
    
 
 
    
 
 
 
Net current-period other comprehensive loss
     (6,862      (4,681      (11,543
    
 
 
    
 
 
    
 
 
 
Ending balance
   $ (10,677    $ (6,643    $ (17,320
    
 
 
    
 
 
    
 
 
 
Changes in accumulated other comprehensive loss for the six months ended June 30, 2023 and 2022 are as follows (in thousands):
 
Six Months Ended June 30, 2023
  
Foreign

currency

translation

adjustments
    
Derivative

adjustments
    
Total
 
Beginning balance
   $ (11,328    $ (1,225    $ (12,553
    
 
 
    
 
 
    
 
 
 
Other comprehensive loss before reclassifications
     (4,193      (1,510      (5,703
Amounts reclassified from accumulated other comprehensive loss
     —          1,846        1,846  
    
 
 
    
 
 
    
 
 
 
Net current-period other comprehensive loss
     (4,193      336        (3,857
    
 
 
    
 
 
    
 
 
 
Ending balance
   $ (15,521    $ (889    $ (16,410
    
 
 
    
 
 
    
 
 
 
 
Six Months Ended June 30, 2022
  
Foreign

currency

translation

adjustments
    
Derivative

adjustments
    
Total
 
Beginning balance
   $ (770    $ (1,460    $ (2,230
    
 
 
    
 
 
    
 
 
 
Other comprehensive loss before reclassifications
     (9,907      (7,741      (17,648
Amounts reclassified from accumulated other comprehensive loss
     —          2,558        2,558  
    
 
 
    
 
 
    
 
 
 
Net current-period other comprehensive loss
     (9,907      (5,183      (15,090
    
 
 
    
 
 
    
 
 
 
Ending balance
   $ (10,677    $ (6,643    $ (17,320
    
 
 
    
 
 
    
 
 
 

1
7

14. Stock Repurchases
Accelerated Stock Repurchase Program
On December 21, 2021, the Board of Directors authorized the Company to repurchase up to $75,000 thousand of its outstanding common stock and the Company entered into an accelerated stock repurchase agreement
dated December 21, 2021
(the “ASR Agreement”) with JPMorgan Chase Bank, National Association (“JPM”) to repurchase an aggregate of $37,500 thousand of its common stock.
Pursuant to the terms of the ASR Agreement, the Company paid to JPM $37,500 thousand in cash and received an initial delivery of 994,695 shares of its common stock in the open market for an aggregate purchase price of $20,073 thousand and a price per share of $20.18 on December 22, 2021.
As of December 31, 2021, the Company accounted for the remaining portion of the ASR Agreement as a forward contract indexed to its own common stock and recorded $17,427 thousand in additional
paid-in
capital in stockholders’ equity in its consolidated balance sheets.
In March 2022, the previously announced repurchase of $37,500 thousand of the Company’s common stock was completed pursuant to the ASR Agreement, and as a result, the Company additionally received 1,031,576 shares of its common stock for an aggregate purchase price of $17,217 thousand at a price per share of $16.69, which was reclassified as treasury stock from additional
paid-in
capital in stockholder’s equity in its consolidated balance sheets.
Expanded Stock Repurchase Program
On August 31, 2022, the Board of Directors authorized an expansion of the Company’s previously announced stock repurchase program from $75,000 thousand to $87,500 thousand of its common stock. The remaining $50,000 thousand of the expanded $87,500 thousand program was
 
expected
to be repurchased in the open market or through privately negotiated transactions.
In June 2023, the Company completed the repurchase of its common stock
under its expanded stock repurchase program
using the remaining $50,000 thousand
through open market purchase
s
.
From September 2022 to December 2022, the Company repurchased 1,235,650 shares of its common stock in the open market for an aggregate purchase price of $12,511 thousand and a price per share of $10.13 under the
 
expanded
stock repurchase program.
During the first half of 2023, the Company repurchased 3,705,443 shares of its common stock in the open market for an aggregate purchase price of $37,429 thousand and a price per share of $10.10 under the
expanded
stock repurchase program.
 
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15. Earnings (Loss) Per Share
The following table illustrates the computation of basic and diluted earnings (loss) per common share for the three and six months ended June 30, 2023 and 2022:
 
    
Three Months Ended
    
Six Months Ended
 
    
June 30,

2023
    
June 30,

2022
    
June 30,

2023
    
June 30,

2022
 
                             
    
(In thousands of U.S. dollars, except share data)
 
Basic earnings (loss) per share
                                   
Net income (loss)
   $ (3,947    $ (3,340    $ (25,417    $ 6,188  
Basic weighted average common stock outstanding
     41,741,310        44,897,278        42,561,514        45,248,293  
Basic earnings (loss) per common share
   $ (0.09    $ (0.07    $ (0.60    $ 0.14  
Diluted earnings (loss) per share
                                   
Net income (loss)
   $ (3,947    $ (3,340    $ (25,417    $ 6,188  
Basic weighted average common stock outstanding
     41,741,310        44,897,278        42,561,514        45,248,293  
Net effect of dilutive equity awards
     —          —          —          1,081,266  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted weighted average common stock outstanding
     41,741,310        44,897,278        42,561,514        46,329,559  
Diluted earnings (loss) per share
   $ (0.09    $ (0.07    $ (0.60    $ 0.13  
Diluted earnings (loss) per share adjusts basic earnings (loss) per share for the potentially dilutive impact of stock options and restricted stock units. As the Company has reported loss for the three and six months ended June 30, 2023 and three months ended June 30, 2022, all potentially dilutive securities are antidilutive and accordingly not considered, therefore basic net loss per share equals diluted net loss per share.
The following outstanding instruments were excluded from the computation of diluted earnings (loss) per share, as they have an anti-dilutive effect on the calculation:
 
    
Three Months Ended
    
Six Months Ended
 
    
June 30,

2023
    
June 30,

2022
    
June 30,

2023
    
June 30,

2022
 
Options
     903,558        1,145,551        903,558        130,000  
Restricted Stock Units
     1,538,791        1,121,574        1,538,791        —    
 
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16. Commitments and Contingencies
Advances to Suppliers
The Company, from time to time, may make advances in form of prepayments or deposits to suppliers, including external foundries, to meet its planned production. The Company recorded advances of $4,117 thousand and $6,605 thousand as other current assets as of June 30, 2023 and December 31, 2022, respectively.

 
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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.
 
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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.

 

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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.

 

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Recent Developments

New Stock Repurchase Program

On July 19, 2023, our Board of Directors authorized a new $50 million stock buyback program. Purchases may be made in the open market or in privately negotiated transactions, depending upon market conditions and other factors. The actual number of shares purchased, and the timing of purchases, will be at our discretion.

Prior 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 repurchased shares worth $37.5 million under the prior 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 was expected to be repurchased in the open market or through privately negotiated transactions.

In June 2023, we completed the repurchase of our common stock under the prior expanded stock repurchase program using the remaining $50 million through open market purchases.

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 prior expanded stock repurchase program.

During the first half of 2023, we repurchased 3,705,443 shares of our common stock in the open market for an aggregate purchase price of $37.4 million and a price per share of $10.10 under the prior expanded stock repurchase program.

COVID-19

Many of the restrictions and containment measures implemented to combat COVID-19 have since been lifted or scaled back, and we are not currently experiencing any significant impact to our business as a result of COVID-19. We will continue to monitor and evaluate the nature and scope of the impact of COVID-19 on our business in the event of a reemergence of the pandemic.

Macroeconomic Industry Conditions

The semiconductor industry continues to face a number of macroeconomic challenges, including rising inflation, increased interest rates, supply chain disruptions, capacity constraints, inventory corrections, shifting customer and end-user demand, and fluctuations in currency rates, any one and all of which can cause volatility and unpredictability in the market. The length and severity of these macroeconomic events and their overall impact on our business, results of operations and financial condition remain uncertain.

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.

 

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Table of Contents

Explanation and Reconciliation of Non-U.S. GAAP Measures

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

We use the terms Adjusted EBITDA, Adjusted Operating Income (Loss) and Adjusted Net Income (Loss) (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 (gain), net, (iii) derivative valuation loss (gain), net and (iv) early termination and other 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
June 30,
2023
     Six Months
Ended
June 30,
2023
     Three Months
Ended
June 30,
2022
     Six Months
Ended
June 30,
2022
 
                             
     (Dollars in millions)  

Net income (loss)

   $ (3.9    $ (25.4    $ (3.3    $ 6.2  

Interest income

     (2.7      (5.5      (1.1      (1.8

Interest expense

     0.2        0.5        0.5        0.6  

Income tax expense (benefit)

     (3.0      (4.2      (0.9      2.6  

Depreciation and amortization

     4.1        8.5        3.7        7.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ (5.3    $ (26.2    $ (1.1    $ 15.2  

Adjustments:

           

Equity-based compensation expense(a)

     2.1        3.2        2.0        3.6  

Foreign currency loss (gain), net(b)

     (1.2      2.2        7.0        7.7  

Derivative valuation loss (gain), net(c)

     0.0        0.1        (0.2      (0.1

Early termination and other charges(d)

     0.8        9.3        0.8        0.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ (3.6    $ (11.5    $ 8.5      $ 27.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(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 six months ended June 30, 2023, this adjustment eliminates the termination related charges of $8.4 million in connection with the 2023 Resignation Program that we offered to certain employees during the first quarter of 2023. For the three and six months ended June 30, 2023, this adjustment eliminates $0.8 million of one-time employee incentives. For the three and six months ended June 30, 2022, this adjustment eliminates $0.8 million of professional service fees and expenses incurred in connection with certain strategic evaluations. 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.

 

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We present Adjusted Operating Income (Loss) as supplemental measures of our performance. We prepare Adjusted Operating Income (Loss) 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 (Loss) 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 (Loss) 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 (Loss) 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 (Loss) for the periods indicated as operating income adjusted to exclude (i) equity-based compensation expense and (ii) early termination and other 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
June 30,
2023
     Six Months
Ended
June 30,
2023
     Three Months
Ended
June 30,
2022
     Six Months
Ended
June 30,
2022
 
                             
     (Dollars in millions)  

Operating income (loss)

   $ (10.7    $ (32.5    $ 2.0      $ 14.9  

Adjustments:

           

Equity-based compensation expense(a)

     2.1        3.2        2.0        3.6  

Early termination and other charges(b)

     0.8        9.3        0.8        0.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Operating Income (Loss)

   $ (7.8    $ (20.0    $ 4.8      $ 19.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 six months ended June 30, 2023, this adjustment eliminates the termination related charges of $8.4 million in connection with the 2023 Resignation Program that we offered to certain employees during the first quarter of 2023. For the three and six months ended June 30, 2023, this adjustment eliminates $0.8 million of one-time employee incentives. For the three and six months ended June 30, 2022, this adjustment eliminates $0.8 million of professional service fees and expenses incurred in connection with certain strategic evaluations. 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.

 

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We present Adjusted Net Income (Loss) (including on a per share basis) as a further supplemental measure of our performance. We prepare Adjusted Net Income (Loss) (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 (Loss) (including on a per share basis) is particularly useful because it reflects the impact of our asset base and capital structure on our operating performance. We present Adjusted Net Income (Loss) (including on a per share basis) for a number of reasons, including:

 

   

we use Adjusted Net Income (Loss) (including on a per share basis) in communications with our Board of Directors concerning our consolidated financial performance without the impact 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 (Loss) (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 (Loss) (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 (Loss) (including on a per share basis) differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Net Income (Loss) (including on a per share basis), you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Net Income (Loss) (including on a per share basis); for the periods indicated as net income (loss), adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss (gain), net, (iii) derivative valuation loss (gain), net, (iv) early termination and other 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
June 30,
2023
     Six Months
Ended
June 30,
2023
     Three Months
Ended
June 30,
2022
     Six Months
Ended
June 30,
2022
 
                             
     (Dollars in millions, except per share data)  

Net income (loss)

   $ (3.9    $ (25.4    $ (3.3    $ 6.2  

Adjustments:

           

Equity-based compensation expense(a)

     2.1        3.2        2.0        3.6  

Foreign currency loss (gain), net(b)

     (1.2      2.2        7.0        7.7  

Derivative valuation loss (gain), net(c)

     0.0        0.1        (0.2      (0.1

Early termination and other charges(d)

     0.8        9.3        0.8        0.8  

Income tax effect on non-GAAP adjustments(e)

     (0.2      (2.2      4.3        5.2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Net Income (Loss)

   $ (2.5    $ (12.8    $ 10.6      $ 23.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Reported earnings (loss) per share – basic

   $ (0.09    $ (0.60    $ (0.07    $ 0.14  

Reported earnings (loss) per share – diluted

   $ (0.09    $ (0.60    $ (0.07    $ 0.13  

Weighted average number of shares – basic

     41,741,310        42,561,514        44,897,278        45,248,293  

Weighted average number of shares – diluted

     41,741,310        42,561,514        44,897,278        46,329,559  

Adjusted earnings (loss) per share – basic

   $ (0.06    $ (0.30    $ 0.24      $ 0.52  

Adjusted earnings (loss) per share – diluted

   $ (0.06    $ (0.30    $ 0.23      $ 0.51  

Weighted average number of shares – basic

     41,741,310        42,561,514        44,897,278        45,248,293  

Weighted average number of shares – diluted

     41,741,310        42,561,514        45,937,515        46,329,559  

 

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Table of Contents

 

(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 six months ended June 30, 2023, this adjustment eliminates the termination related charges of $8.4 million in connection with the 2023 Resignation Program that we offered to certain employees during the first quarter of 2023. For the three and six months ended June 30, 2023, this adjustment eliminates $0.8 million of one-time employee incentives. For the three and six months ended June 30, 2022, this adjustment eliminates $0.8 million of professional service fees and expenses incurred in connection with certain strategic evaluations. 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 and six months ended June 30, 2023 and 2022, income tax effect on non-GAAP adjustments were calculated by calculating the tax expense (benefit) of each jurisdiction with or without the non-GAAP adjustments. For the three and six months ended June 30, 2023, this adjustment eliminates the income tax effect on non-GAAP adjustments of negative $0.2 million and negative $2.2 million, respectively, which mainly related to our Korean subsidiary. For the three and six months ended June 30, 2022, this adjustment eliminates the income tax effect on non-GAAP adjustments of $4.3 million and $5.2 million, respectively, which mainly related to our Korean subsidiary.

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

 

   

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

 

   

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

 

   

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

 

   

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

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

 

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Table of Contents

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 six months ended June 30, 2023 and 2022, we sold products to 138 and 158 customers, respectively, and our net sales to our ten largest customers represented 70% 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 June 30, 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.

 

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Table of Contents

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 June 30, 2023, the outstanding intercompany loan balance including accrued interest between our Korean subsidiary and our Dutch subsidiary was $293.1 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.

 

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Results of Operations – Comparison of Three Months Ended June 30, 2023 and 2022

The following table sets forth consolidated results of operations for the three months ended June 30, 2023 and 2022:

 

                                                                                              
     Three Months Ended
June 30, 2023
    Three Months Ended
June 30, 2022
       
     Amount     % of
Total Revenues
    Amount     % of
Total Revenues
    Change
Amount
 
                                
     (Dollars in millions)  

Revenues

          

Net sales – standard products business

   $ 51.4       84.3   $ 91.3       90.0   $ (39.9

Net sales – transitional Fab 3 foundry services

     9.6       15.7       10.1       10.0       (0.5
  

 

 

     

 

 

     

 

 

 

Total revenues

     61.0       100.0       101.4       100.0       (40.4

Cost of sales

          

Cost of sales – standard products business

     37.9       62.1       63.6       62.8       (25.8

Cost of sales – transitional Fab 3 foundry services

     9.6       15.7       8.8       8.7       0.8  
  

 

 

     

 

 

     

 

 

 

Total cost of sales

     47.4       77.8       72.4       71.4       (25.0
  

 

 

     

 

 

     

 

 

 

Gross profit

     13.5       22.2       28.9       28.6       (15.4

Selling, general and administrative expenses

     12.1       19.9       12.7       12.6       (0.6

Research and development expenses

     11.3       18.5       13.4       13.2       (2.2

Other charges

     0.8       1.3       0.8       0.8       0.0  
  

 

 

     

 

 

     

 

 

 

Operating income (loss)

     (10.7     (17.5     2.0       2.0       (12.7

Interest income

     2.7       4.4       1.1       1.0       1.6  

Interest expense

     (0.2     (0.3     (0.5     (0.5     0.3  

Foreign currency gain (loss), net

     1.2       2.0       (7.0     (6.9     8.2  

Others, net

     0.0       0.0       0.2       0.2       (0.2
  

 

 

     

 

 

     

 

 

 
     3.7       6.1       (6.2     (6.2     10.0  
  

 

 

     

 

 

     

 

 

 

Loss before income tax expense

     (6.9     (11.4     (4.2     (4.2     (2.7

Income tax benefit

     (3.0     (4.9     (0.9     (0.9     (2.1
  

 

 

     

 

 

     

 

 

 

Net loss

   $ (3.9     (6.5   $ (3.3     (3.3   $ (0.6
  

 

 

     

 

 

     

 

 

 

 

                                                                                         
     Three Months Ended
June 30, 2023
    Three Months Ended
June 30, 2022
       
     Amount      % of
Total Revenues
    Amount      % of
Total Revenues
    Change
Amount
 
                                  
     (Dollars in millions)  

Revenues

            

Net sales – standard products business

            

Display Solutions

   $ 9.7        15.8   $ 28.3        28.0   $ (18.7

Power Solutions

     41.7        68.4       63.0        62.0       (21.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total standard products business

     51.4        84.3       91.3        90.0       (39.9

Net sales – transitional Fab 3 foundry services

     9.6        15.7       10.1        10.0       (0.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

   $ 61.0        100.0   $ 101.4        100.0   $ (40.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

                                                                                                   
     Three Months Ended
June 30, 2023
    Three Months Ended
June 30, 2022
       
     Amount      % of
Net Sales
    Amount      % of
Net Sales
    Change
Amount
 
                                  
     (Dollars in millions)  

Gross Profit

            

Gross profit – standard products business

   $ 13.5        26.3   $ 27.7        30.3   $ (14.2

Gross profit – transitional Fab 3 foundry services

     0.0        0.3       1.3        12.7       (1.2
  

 

 

      

 

 

      

 

 

 

Total gross profit

   $ 13.5        22.2   $ 28.9        28.6   $ (15.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Revenues

Total revenues were $61.0 million for the three months ended June 30, 2023, a $40.4 million, or 39.8%, decrease compared to $101.4 million for the three months ended June 30, 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 $51.4 million for the three months ended June 30, 2023, a $39.9 million, or 43.7%, decrease compared to $91.3 million for the three months ended June 30, 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, lingering weakness in Chinese smartphone orders and a lack of new design-wins caused by a 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 $9.6 million and $10.1 million for the three months ended June 30, 2023 and 2022, respectively.

Gross Profit

Total gross profit was $13.5 million for the three months ended June 30, 2023 compared to $28.9 million for the three months ended June 30, 2022, a $15.4 million, or 53.2%, decrease. Gross profit as a percentage of net sales for the three months ended June 30, 2023 decreased to 22.2% compared to 28.6% for the three months ended June 30, 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 $13.5 million for the three months ended June 30, 2023, which represented a $14.2 million, or 51.2%, decrease from gross profit of $27.7 million for the three months ended June 30, 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 June 30, 2023 decreased to 26.3% compared to 30.3% for the three months ended June 30, 2022. The year-over-year decrease in gross profit as a percentage of net sales was primarily attributable to an unfavorable product mix as well as higher manufacturing input costs such as electricity and wages, and a significant drop in the utilization rate of our internal fabrication facility in Gumi.

 

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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 June 30, 2023 and 2022:

 

     Three Months Ended
June 30, 2023
    Three Months Ended
June 30, 2022
       
     Amount      % of
Net Sales –
standard
products
business
    Amount      % of
Net Sales –
standard
products
business
    Change
Amount
 
                                  
     (Dollars in millions)  

Korea

   $ 14.4        28.0   $ 31.2        34.1   $ (16.8

Asia Pacific (other than Korea)

     35.0        68.2       56.1        61.4       (21.0

United States

     0.2        0.5       2.5        2.7       (2.3

Europe

     1.7        3.3       1.6        1.7       0.2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ 51.4        100.0   $ 91.3        100.0   $ (39.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net sales – standard products business in Korea for the three months ended June 30, 2023 decreased from $31.2 million to $14.4 million compared to the three months ended June 30, 2022, or by $16.8 million, or 53.8%, 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 mobile OLED display driver ICs and 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 June 30, 2023 decreased to $35.0 million from $56.1 million in the three months ended June 30, 2022, or by $21.0 million, or 37.5%, 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, lingering weakness in Chinese smartphone orders and a lack of new design-wins caused by a 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, primarily for e-bikes, and IGBTs mainly for solar inverters also unfavorably affected this quarter.

Operating Expenses

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $12.1 million, or 19.9% of total revenues, for the three months ended June 30, 2023, compared to $12.7 million, or 12.6% of total revenues, for the three months ended June 30, 2022. The decrease of $0.6 million, or 4.7%, was primarily attributable to a decrease in employee compensation including certain incentives, a decrease in certain sales and marketing expense, and a decrease in running royalties recognized based on the revenue of certain mobile OLED display driver ICs, which were offset in part by an increase in professional fees mainly comprised of legal and consulting fees.

Research and Development Expenses. Research and development expenses were $11.3 million, or 18.5% of total revenues, for the three months ended June 30, 2023, compared to $13.4 million, or 13.2% of total revenues, for the three months ended June 30, 2022. The decrease of $2.2 million, or 16.1%, was primarily attributable to a decrease in development activities for our 28-nanometer OLED display driver ICs, and a decrease in employee compensation including certain incentives.

Other Charges. For the three months ended June 30, 2023, we recorded $0.8 million of one-time employee incentives. For the three months ended June 30, 2022, we recorded $0.8 million of professional service fees and expenses incurred in connection with certain strategic evaluations.

Operating Income (Loss)

As a result of the foregoing, operating loss of $10.7 million was recorded for the three months ended June 30, 2023 compared to operating income of $2.0 million for the three months ended June 30, 2022. As discussed above, the decrease in operating income of $12.7 million resulted primarily from a $15.4 million decrease in gross profit, which was offset in part by a $2.2 million decrease in research and development expenses and a $0.6 million decrease in selling, general and administrative expenses.

 

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Table of Contents

Other Income (Expense)

Interest Income. Interest income was $2.7 million and $1.1 million for the three months ended June 30, 2023 and June 30, 2022, respectively. The increase of $1.6 million, or 153.7%, was primarily attributable to an increase in interest income on cash and cash equivalents held by our Korean subsidiary, which benefited from increased market interest rates.

Interest Expense. Interest expense was $0.2 million and $0.5 million for the three months ended June 30, 2023 and June 30, 2022, respectively.

Foreign Currency Gain (Loss), Net. Net foreign currency gain for the three months ended June 30, 2023 was $1.2 million compared to net foreign currency loss of $7.0 million for the three months ended June 30, 2022.

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 June 30, 2023 and June 30, 2022, the outstanding intercompany loan balances, including accrued interest between our Korean subsidiary and our Dutch subsidiary, were $293.1 million and $352.6 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 Benefit

Income tax benefit was $3.0 million for the three months ended June 30, 2023, which was primarily attributable to the estimated taxable loss in our Korean subsidiary for the respective period.

Income tax benefit was $0.9 million for the three months ended June 30, 2022, which was primarily attributable to a decrease in our Korean subsidiary’s pre-tax income for the respective period due to the foreign currency translation in connection with intercompany loans.

Net Loss

As a result of the foregoing, a net loss of $3.9 million was recorded for the three months ended June 30, 2023 compared to a net loss of $3.3 million for the three months ended June 30, 2022. As discussed above, the $0.6 million increase in net loss was primarily attributable to a $12.7 million decrease in operating income, which was offset in part by an $8.2 million improvement in net foreign currency loss, a $2.1 million increase in income tax benefit and a $1.6 million increase in interest income.

 

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Table of Contents

Results of Operations – Comparison of Six Months Ended June 30, 2023 and 2022

The following table sets forth consolidated results of operations for the six months ended June 30, 2023 and 2022:

 

                                                                
     Six Months Ended
June 30, 2023
    Six Months Ended
June 30, 2022
       
     Amount     % of
Total Revenues
    Amount     % of
Total Revenues
    Change
Amount
 
                                
     (Dollars in millions)  

Revenues

          

Net sales – standard products business

   $ 102.9       87.2   $ 185.3       90.2   $ (82.4

Net sales – transitional Fab 3 foundry services

     15.1       12.8       20.2       9.8       (5.1
  

 

 

     

 

 

     

 

 

 

Total revenues

     118.0       100.0       205.5       100.0       (87.5

Cost of sales

          

Cost of sales – standard products business

     75.2       63.7       119.7       58.3       (44.5

Cost of sales – transitional Fab 3 foundry services

     17.2       14.6       17.8       8.7       (0.7
  

 

 

     

 

 

     

 

 

 

Total cost of sales

     92.4       78.3       137.5       66.9       (45.2
  

 

 

     

 

 

     

 

 

 

Gross profit

     25.6       21.7       67.9       33.1       (42.3

Selling, general and administrative expenses

     24.3       20.6       26.9       13.1       (2.6

Research and development expenses

     24.6       20.8       25.4       12.3       (0.8

Early termination and other charges

     9.3       7.8       0.8       0.4       8.5  
  

 

 

     

 

 

     

 

 

 

Operating income (loss)

     (32.5     (27.5     14.9       7.2       (47.4

Interest income

     5.5       4.7       1.8       0.9       3.8  

Interest expense

     (0.5     (0.4     (0.6     (0.3     0.2  

Foreign currency loss, net

     (2.2     (1.9     (7.7     (3.7     5.5  

Others, net

     (0.0     (0.0     0.4       0.2       (0.5
  

 

 

     

 

 

     

 

 

 
     2.9       (2.4     (6.1     (3.0     9.0  
  

 

 

     

 

 

     

 

 

 

Income (loss) before income tax expense

     (29.6     (25.1     8.8       4.3       (38.4

Income tax expense (benefit)

     (4.2     (3.6     2.6       1.3       (6.8
  

 

 

     

 

 

     

 

 

 

Net income (loss)

   $ (25.4     (21.5   $ 6.2       3.0     $ (31.6
  

 

 

     

 

 

     

 

 

 

 

                                                                     
     Six Months Ended
June 30, 2023
    Six Months Ended
June 30, 2022
       
     Amount      % of
Total Revenues
    Amount      % of
Total Revenues
    Change
Amount
 
                                  
     (Dollars in millions)  

Revenues

            

Net sales – standard products business

            

Display Solutions

   $ 20.5        17.4   $ 57.5        28.0   $ (37.0

Power Solutions

     82.4        69.8       127.8        62.2       (45.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total standard products business

     102.9        87.2       185.3        90.2       (82.4

Net sales – transitional Fab 3 foundry services

     15.1        12.8       20.2        9.8       (5.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

   $ 118.0        100.0   $ 205.5        100.0   $ (87.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

                                                                                         
     Six Months Ended
June 30, 2023
    Six Months Ended
June 30, 2022
       
     Amount     % of
Net Sales
    Amount      % of
Net Sales
    Change
Amount
 
                                 
     (Dollars in millions)  

Gross Profit

           

Gross profit – standard products business

   $ 27.7       26.9   $ 65.6        35.4   $ (37.9

Gross profit – transitional Fab 3 foundry services

     (2.1     (13.8     2.3        11.6       (4.4
  

 

 

     

 

 

      

 

 

 

Total gross profit

   $ 25.6       21.7   $ 67.9        33.1   $ (42.3
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Revenues

Total revenues were $118.0 million for the six months ended June 30, 2023, an $87.5 million, or 42.6%, decrease compared to $205.5 million for the six months ended June 30, 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 $102.9 million for the six months ended June 30, 2023, an $82.4 million, or 44.5%, decrease compared to $185.3 million for the six months ended June 30, 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, lingering weakness in Chinese smartphone orders and a lack of new design-wins caused by a 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 $15.1 million and $20.2 million for the six months ended June 30, 2023 and 2022, respectively.

Gross Profit

Total gross profit was $25.6 million for the six months ended June 30, 2023 compared to $67.9 million for the six months ended June 30, 2022, a $42.3 million, or 62.3%, decrease. Gross profit as a percentage of net sales for the six months ended June 30, 2023 decreased to 21.7% compared to 33.1% for the six months ended June 30, 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 $27.7 million for the six months ended June 30, 2023, which represented a $37.9 million, or 57.8%, decrease from gross profit of $65.6 million for the six months ended June 30, 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 six months ended June 30, 2023 decreased to 26.9% compared to 35.4% for the six months ended June 30, 2022. The year-over-year decrease in gross profit as a percentage of net sales was primarily attributable to an unfavorable product mix as well as higher manufacturing input costs such as electricity and wages, and a significant drop in the utilization rate of our internal fabrication facility in Gumi.

 

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Table of Contents

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 six months ended June 30, 2023 and 2022:

 

     Six Months Ended
June 30, 2023
    Six Months Ended
June 30, 2022
       
     Amount      % of
Net Sales –
standard
products
business
    Amount      % of
Net Sales –
standard
products
business
    Change
Amount
 
                                  
     (Dollars in millions)  

Korea

   $ 30.9        30.0   $ 62.2        33.6   $ (31.3

Asia Pacific (other than Korea)

     66.9        65.0       114.3        61.7       (47.4

United States

     1.3        1.2       5.4        2.9       (4.1

Europe

     3.8        3.7       3.4        1.8       0.4  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ 102.9        100.0   $ 185.3        100.0   $ (82.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net sales – standard products business in Korea for the six months ended June 30, 2023 decreased from $62.2 million to $30.9 million compared to the six months ended June 30, 2022, or by $31.3 million, or 50.3%, 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 in the first half of 2023.

Net sales – standard products business in Asia Pacific (other than Korea) for the six months ended June 30, 2023 decreased to $66.9 million from $114.3 million in the six months ended June 30, 2022, or by $47.4 million, or 41.5%, 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, lingering weakness in Chinese smartphone orders and a lack of new design-wins caused by a 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, primarily for e-bikes, and IGBTs mainly for solar inverters also unfavorably affected in the first half of 2023.

Operating Expenses

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $24.3 million, or 20.6% of total revenues, for the six months ended June 30, 2023, compared to $26.9 million, or 13.1% of total revenues, for the six months ended June 30, 2022. The decrease of $2.6 million, or 9.7%, was primarily attributable to a decrease in employee compensation including certain incentives and benefit related accruals, a decrease in certain sales and marketing expenses, and a decrease in running royalties recognized based on the revenue of certain mobile OLED display driver ICs, which were offset in part by an increase in professional fees mainly comprised of legal and consulting fees.

Research and Development Expenses. Research and development expenses were $24.6 million, or 20.8% of total revenues, for the six months ended June 30, 2023, compared to $25.4 million, or 12.3% of total revenues, for the six months ended June 30, 2022. The decrease of $0.8 million, or 3.2%, was primarily attributable to a decrease in employee compensation including certain incentives.

Early Termination and Other Charges. For the six months ended June 30, 2023, we recorded $8.4 million of termination related charges in connection with the 2023 Resignation Program that we offered to certain employees during the first quarter of 2023. During the same period, we also recorded $0.8 million of one-time employee incentives. For the six months ended June 30, 2022, we recorded $0.8 million of professional service fees and expenses incurred in connection with certain strategic evaluations.

Operating Income (Loss)

As a result of the foregoing, operating loss of $32.5 million was recorded for the six months ended June 30, 2023 compared to operating income of $14.9 million for the six months ended June 30, 2022. As discussed above, the decrease in operating income of $47.4 million resulted primarily from a $42.3 million decrease in gross profit and an $8.5 million increase in early termination and other charges, which were offset in part by a $2.6 million decrease in selling, general and administrative expenses and a $0.8 million decrease in research and development expenses.

 

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Table of Contents

Other Income (Expense)

Interest Income. Interest income was $5.5 million and $1.8 million for the six months ended June 30, 2023 and June 30, 2022, respectively. The increase of $3.8 million, or 211.6%, was primarily attributable to an increase in interest income on cash and cash equivalents held by our Korean subsidiary, which benefited from increased market interest rates.

Interest Expense. Interest expense was $0.5 million and $0.6 million for the six months ended June 30, 2023 and June 30, 2022, respectively.

Foreign Currency Loss, Net. Net foreign currency loss for the six months ended June 30, 2023 was $2.2 million compared to net foreign currency loss of $7.7 million for the six months ended June 30, 2022. The net foreign currency loss for the six months ended June 30, 2023 and June 30, 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 June 30, 2023 and June 30, 2022, the outstanding intercompany loan balances, including accrued interest between our Korean subsidiary and our Dutch subsidiary, were $293.1 million and $352.6 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 $4.2 million for the six months ended June 30, 2023, which was primarily attributable to the estimated taxable loss in our Korean subsidiary for the respective period.

Income tax expense was $2.6 million for the six months ended June 30, 2022, which was primarily attributable to interest on intercompany loan balances and income tax in our Korean subsidiary and the U.S. parent entity based on the estimated taxable income for the respective period.

Net Income (Loss)

As a result of the foregoing, a net loss of $25.4 million was recorded for the six months ended June 30, 2023 compared to a net income of $6.2 million for the six months ended June 30, 2022. As discussed above, the $31.6 million decrease in net income was primarily attributable to a $47.4 million decrease in operating income, which was offset in part by a $6.8 million increase in income tax benefit, a $5.5 million improvement in net foreign currency loss and a $3.8 million increase in interest income.

 

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Table of Contents

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 June 30, 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 June 30, 2023, the outstanding obligation of this arrangement is approximately $22.4 million for remaining service term through 2028.

As of June 30, 2023, cash and cash equivalents held by our Korean subsidiary were $166.3 million, which represents 96% 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 June 30, 2023 was $228.9 million compared to $290.6 million as of December 31, 2022. The $61.7 million decrease was primarily attributable to a $52.5 million decrease in cash and cash equivalents resulted primarily from our continued execution of expanded stock repurchase program, and the 2023 Resignation Program that we offered and paid to certain employees during the first half of 2023.

Cash Flows from Operating Activities

Cash outflow used in operating activities totaled $1.9 million for the six months ended June 30, 2023, compared to $25.0 million of cash inflow provided by operating activities for the six months ended June 30, 2022. The net operating cash outflow for the six months ended June 30, 2023 reflects our net loss of $25.4 million, as adjusted favorably by $26.5 million, which mainly consisted of depreciation and amortization, provision for severance benefits, and net foreign currency loss, and net unfavorable impact of $3.0 million from changes of operating assets and liabilities.

Cash Flows from Investing Activities

Cash outflow used in investing activities totaled $6.4 million for the six months ended June 30, 2023, compared to $6.7 million of cash outflow used in investing activities for the six months ended June 30, 2022. The $0.3 million decrease was primarily attributable to a $4.8 million net decrease in hedge collateral, which was offset in part by a $4.4 million net increase in guarantee deposits.

Cash Flows from Financing Activities

Cash outflow used in financing activities totaled $37.1 million for the six months ended June 30, 2023, compared to $0.3 million of cash outflow used in financing activities for the six months ended June 30, 2022. The financing cash outflow for the six months ended June 30, 2023 was primarily attributable to a payment of $36.4 million for the repurchases of our common stock pursuant to our expanded 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 outflow for the six months ended June 30, 2022 was primarily attributable to a payment of $1.8 million for the repurchase of our common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock units, which was offset entirely by $1.8 million of proceeds received from the issuance of common stock in connection with the exercise of stock options.

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 six months ended June 30, 2023, capital expenditures for property, plant and equipment were $1.5 million, which remained flat, compared to $1.5 million for the six months ended June 30, 2022. The capital expenditures for the six months ended June 30, 2023 and 2022 were related to meeting our customer demand and supporting technology and facility improvement at our fabrication facility.

 

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Table of Contents

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.

 

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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 June 30, 2023 for our Korean subsidiary, a 10% devaluation of the Korean won against the U.S. dollar would have resulted in a decrease of $0.4 million in our U.S. dollar financial instruments and cash balances.

See “Note 6. 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.

 

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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 June 30, 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 June 30, 2023.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

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.

 

Item 1A.

Risk Factors

The Company is subject to risks and uncertainties, any of which could have a significant or material adverse effect on our business, financial condition, liquidity or consolidated financial statements.

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.

Expanded trade restrictions imposed by Korea may further restrict our ability to sell to certain customers or engage in potential strategic opportunities.

Korea has been expanding its trade restrictions on the export (including various means of outflow, such as sale, transfer or certain licensing outside Korea) of technologies in order to support and foster technologies important to Korea’s economy and national security, which may prevent us from achieving our business objectives or may adversely affect our business.

On July 14, 2021, the OLED Display Driver IC (“OLED DDI”) design technology for display panels was designated as a “national core technology” (“NCT”) under the Act on Prevention of Leakage and Protection of Industrial Technology of Korea (the “ITA”). Since then, the Act on Special Measures for Strengthening and Protecting the Competitiveness of the National High-Tech Strategic Industry (the “Special Act”) was enacted and became effective on August 4, 2022, and more recently, on June 2, 2023, the Korean Ministry of Trade, Industry and Energy (the “MOTIE”) designated 17 technologies, including the OLED DDI design technology for display panels, as National High-Tech Strategic Technology (“NHST”) under the Special Act.

In the ordinary course of business, our Korean subsidiary may provide certain information relating to its products, including the OLED DDI, to customers, suppliers and vendors, and such disclosure of information may be subject to both the NCT and NHST trade restrictions. Since the addition of the OLED DDI design technology to the NCT list in July 2021, we have filed prior-reports with the MOTIE for the export of our OLED DDI product-related information to certain overseas vendors that manufacture our products, and all such reports have thus far been accepted by the MOTIE. There is no assurance, however, that prior-reports for the export of our product-related information will be continue to be accepted by the MOTIE in the future. In the event that any such prior-report is not accepted, we may be unable to continue our business with the overseas customers, suppliers or vendors, including the manufacturing and delivery of our OLED DDI products.

In addition, our Korean subsidiary is required to obtain approval from the MOTIE in the event that there is any M&A transaction with respect to our Korean subsidiary that results in non-Korean ownership of 50% or more, or the exertion of control over the appointment of officers by a non-Korean person or entity as the largest shareholder. There is no assurance that the MOTIE will approve if such transaction is pursued in the future.

 

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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 June 30, 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)
 

April 2023

     325,501      $ 9.15        325,501      $ 22,622  

May 2023

     706,634      $ 9.58        706,634      $ 15,849  

June 2023(1)

     1,435,882      $ 11.00        1,434,836        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,468,017      $ 10.35        2,466,971        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes 1,046 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 was expected to be repurchased in the open market or through privately negotiated transactions. In June 2023, the Company completed the repurchase of its common stock under the prior expanded stock repurchase program using remaining $50 million through open market purchases.

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

Securities Trading Plans of Directors and Executive Officers

During our last fiscal quarter, no director or officer, as defined in Rule 16a-1(f), adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” each as defined in Regulation S-K Item 408.

 

 

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Item 6.

Exhibits.

 

Exhibit

Number

  

Description

10.1    Agreement, dated as of April 11, 2023, by and among Magnachip Semiconductor Corporation, Jackson Square Advisors LLC, GT Investments II Corp and Gilbert Nathan (incorporated by reference to Exhibit 10.1 to our Current Report on form 8-K filed on April 13, 2023).
31.1#    Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer.
31.2#    Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer.
32.1†    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer.
32.2†    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer.
101.INS#    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:

 

# 

Filed herewith

Furnished herewith

 

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SIGNATURES

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

 

   

MAGNACHIP SEMICONDUCTOR CORPORATION

(Registrant)

Dated: August 8, 2023     By:  

/s/ Young-Joon Kim

      Young-Joon Kim
     

Chief Executive Officer

(Principal Executive Officer)

Dated: August 8, 2023     By:  

/s/ Shin Young Park

      Shin Young Park
     

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

 

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