UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended October 1, 2006
or
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission file number 333-126019-09
MAGNACHIP SEMICONDUCTOR LLC
(Exact name of Registrant as specified in its charter)
Delaware | 83-0406195 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
c/o MagnaChip Semiconductor S.A. 74, rue de Merl, B.P. 709, L-2017 Luxembourg, Grand Duchy of Luxembourg |
Not Applicable | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (352) 45-62-62
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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer. See the definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 ofthe Exchange
Act). Yes ¨ No x
As of November 1, 2006, the registrant had 52,720,784.0470 of the registrants common units outstanding.
MagnaChip Semiconductor LLC and Subsidiaries
TABLE OF CONTENTS
2
MagnaChip Semiconductor LLC and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited; in thousands of US dollars, except unit data)
Three months ended | Nine months ended | |||||||||||||||
October 1, 2006 |
October 2, 2005 |
October 1, 2006 |
October 2, 2005 |
|||||||||||||
Net sales |
$ | 171,283 | $ | 243,089 | $ | 582,039 | $ | 692,502 | ||||||||
Cost of sales |
150,422 | 181,177 | 500,579 | 544,234 | ||||||||||||
Gross profit |
20,861 | 61,912 | 81,460 | 148,268 | ||||||||||||
Selling, general and administrative expenses |
22,812 | 28,166 | 66,368 | 89,163 | ||||||||||||
Research and development expenses |
32,016 | 27,043 | 95,868 | 80,630 | ||||||||||||
Restructuring and impairment charges |
264 | | 93,948 | 8,720 | ||||||||||||
Operating income (loss) |
(34,231 | ) | 6,703 | (174,724 | ) | (30,245 | ) | |||||||||
Other income (expenses) |
||||||||||||||||
Interest expense, net |
(13,946 | ) | (14,944 | ) | (43,031 | ) | (42,836 | ) | ||||||||
Foreign currency gain (loss), net |
2,157 | (5,473 | ) | 40,914 | (4,667 | ) | ||||||||||
Loss before income taxes |
(46,020 | ) | (13,714 | ) | (176,841 | ) | (77,748 | ) | ||||||||
Income tax expenses (benefits) |
1,698 | (472 | ) | 6,831 | 256 | |||||||||||
Net loss |
$ | (47,718 | ) | $ | (13,242 | ) | $ | (183,672 | ) | $ | (78,004 | ) | ||||
Dividends accrued on preferred units |
2,731 | 2,506 | 8,070 | 7,379 | ||||||||||||
Net loss attributable to common units |
$ | (50,449 | ) | $ | (15,748 | ) | $ | (191,742 | ) | $ | (85,383 | ) | ||||
Net loss per common unit - Basic and diluted |
$ | (0.96 | ) | $ | (0.30 | ) | $ | (3.62 | ) | $ | (1.62 | ) | ||||
Weighted average number of units - Basic and diluted |
52,720,976 | 53,037,320 | 52,975,152 | 52,848,430 |
The accompanying notes are an integral part of these financial statements
3
MagnaChip Semiconductor LLC and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited; in thousands of US dollars, except unit data)
October 1, 2006 |
December 31, 2005 |
|||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents |
$ | 107,489 | $ | 86,574 | ||||
Restricted cash |
| 2,837 | ||||||
Accounts receivable, net |
82,187 | 112,053 | ||||||
Inventories, net |
59,289 | 88,677 | ||||||
Other receivables |
6,709 | 9,501 | ||||||
Other current assets |
12,728 | 10,148 | ||||||
Total current assets |
268,402 | 309,790 | ||||||
Property, plant and equipment, net | 355,431 | 485,077 | ||||||
Intangible assets, net | 145,784 | 191,389 | ||||||
Other non-current assets | 51,917 | 54,391 | ||||||
Total assets |
$ | 821,534 | $ | 1,040,647 | ||||
Liabilities and Unitholders Equity | ||||||||
Current liabilities | ||||||||
Accounts payable |
$ | 59,151 | $ | 93,911 | ||||
Other accounts payable |
28,030 | 35,368 | ||||||
Accrued expenses |
33,589 | 28,968 | ||||||
Other current liabilities |
5,108 | 10,102 | ||||||
Total current liabilities |
125,878 | 168,349 | ||||||
Long-term borrowings | 750,000 | 750,000 | ||||||
Accrued severance benefits, net | 61,778 | 55,124 | ||||||
Other non-current liabilities | 4,406 | 7,196 | ||||||
Total liabilities |
942,062 | 980,669 | ||||||
Commitments and contingencies | ||||||||
Series A redeemable convertible preferred units; 60,000 units authorized, 50,091 units issued and 0 unit outstanding at October 1, 2006 and December 31, 2005 |
| | ||||||
Series B redeemable convertible preferred units; 550,000 units authorized, 450,692 units issued and 93,997 units outstanding at October 1, 2006 and December 31, 2005 |
114,532 | 106,462 | ||||||
Total redeemable convertible preferred units |
114,532 | 106,462 | ||||||
Unitholders equity | ||||||||
Common units; 65,000,000 units authorized, 52,720,784 and 53,091,570 units issued and outstanding at October 1, 2006 and December 31, 2005, respectively |
52,721 | 53,092 | ||||||
Additional paid-in capital |
2,378 | 2,169 | ||||||
Accumulated deficit |
(321,834 | ) | (130,092 | ) | ||||
Accumulated other comprehensive income |
31,675 | 28,347 | ||||||
Total unitholders equity |
(235,060 | ) | (46,484 | ) | ||||
Total liabilities, redeemable convertible preferred units and unitholders equity |
$ | 821,534 | $ | 1,040,647 | ||||
The accompanying notes are an integral part of these financial statements
4
MagnaChip Semiconductor LLC and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited; in thousands of US dollars)
Nine months ended | ||||||||
October 1, 2006 | October 2, 2005 | |||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (183,672 | ) | $ | (78,004 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities |
||||||||
Depreciation and amortization |
145,481 | 154,748 | ||||||
Provision for severance benefits |
10,031 | 12,189 | ||||||
Amortization of debt issuance costs |
2,760 | 2,561 | ||||||
Loss (gain) on foreign currency translation, net |
(43,297 | ) | 5,451 | |||||
Impairment of long-lived assets |
92,540 | 7,996 | ||||||
Other |
1,443 | (2,522 | ) | |||||
Changes in operating assets and liabilities |
||||||||
Accounts receivable |
36,804 | (31,257 | ) | |||||
Inventories |
34,495 | 2,637 | ||||||
Other receivables |
3,230 | 65,323 | ||||||
Deferred tax assets |
1,405 | (12,853 | ) | |||||
Accounts payable |
(39,955 | ) | 12,233 | |||||
Other accounts payable |
(16,870 | ) | (76,377 | ) | ||||
Accrued expenses |
2,879 | 4,564 | ||||||
Other current assets |
(1,255 | ) | 2,684 | |||||
Other current liabilities |
(5,100 | ) | (438 | ) | ||||
Payment of severance benefits |
(7,116 | ) | (10,664 | ) | ||||
Other |
2,768 | (1,065 | ) | |||||
Net cash provided by operating activities |
36,571 | 57,206 | ||||||
Cash flows from investing activities |
||||||||
Purchase of plant, property and equipment |
(26,274 | ) | (39,839 | ) | ||||
Payments for intellectual property registration |
(1,746 | ) | (1,614 | ) | ||||
Acquisition of business, net of cash acquired of $4,620 thousand |
| (11,831 | ) | |||||
Proceeds from disposal of plant, property and equipment |
2,748 | 537 | ||||||
Proceeds from disposal of intangible assets |
2,801 | | ||||||
Decrease in restricted cash |
2,985 | 7,876 | ||||||
Other |
(700 | ) | 2,583 | |||||
Net cash used in investing activities |
(20,186 | ) | (42,288 | ) | ||||
Cash flows from financing activities |
||||||||
Repayment of short-term borrowings |
| (12,400 | ) | |||||
Exercise of unit options |
88 | | ||||||
Repurchase of common units |
(420 | ) | | |||||
Proceeds from short-term borrowings |
| 10,578 | ||||||
Other |
| (80 | ) | |||||
Net cash used in financing activities |
(332 | ) | (1,902 | ) | ||||
Effect of exchange rates on cash and cash equivalents |
4,862 | (385 | ) | |||||
Net increase in cash and cash equivalents |
20,915 | 12,631 | ||||||
Cash and cash equivalents |
||||||||
Beginning of the period |
86,574 | 58,396 | ||||||
End of the period |
$ | 107,489 | $ | 71,027 | ||||
The accompanying notes are an integral part of these financial statements
5
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited; tabular dollars in thousands, except unit data)
1. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of MagnaChip Semiconductor LLC and its subsidiaries (the Company) have been prepared in accordance with Accounting Principle Board (APB) Opinion No. 28, Interim Financial Reporting regarding interim financial information and, accordingly, do not include all of the information and note disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of the Companys management, the unaudited interim condensed consolidated financial statements include all normal recurring adjustments necessary to fairly present the information required to be set forth therein. All inter-company accounts and transactions have been eliminated. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the SEC on March 31, 2006. The results of operations for the three-month and nine-month periods ended October 1, 2006 are not necessarily indicative of the results to be expected for a full year or for any other periods.
Recent accounting pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plan an amendment of SFAS No.87, 88, 106 and 132(R). This Statement requires an employer to recognize the over funded or under funded status of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 is effective for fiscal years ending after December 15, 2008. The Company does not expect that the implementation of SFAS No. 158 will have a material impact on its financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy, as defined and may be required to provide additional disclosures based on that hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption may have on its consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108 which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The guidance is applicable for fiscal years ending after November 15, 2006. The Company does not expect that adoption of SAB 108 will have a material impact on its consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of SFAS No. 109. FIN 48 clarifies the accounting for uncertain income tax positions accounted for in accordance with SFAS No. 109. The Interpretation stipulates recognition and measurement criteria in addition to classification, interim period accounting and significantly expanded disclosure provisions for uncertain tax positions that are expected to be taken in a companys tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that adoption of this Interpretation will have a material impact on its consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB Statement No. 140. This Statement addresses the accounting for recognized servicing assets and liabilities related to certain transfers of the servicers financial assets and for acquisitions or assumptions of obligations to service financial assets that do not relate to the financial assets of the servicer and its related parties. SFAS 156 requires that all recognized servicing assets and liabilities are initially measured at fair value, and subsequently measured at either fair value or by applying an amortization method for each class of recognized servicing assets and liabilities. SFAS 156 is effective in fiscal years beginning after September 15, 2006. The adoption of SFAS 156 is not expected to have a material impact on the Companys consolidated financial statements.
6
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140. This Statement amends SFAS No. 133 and SFAS No. 140, and improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting. Specifically, this Statement allows fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This Statement is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does not expect that adoption of this Statement will have a material impact on its consolidated financial statements.
2. Inventories
Inventories as of October 1, 2006 and December 31, 2005 consist of the following:
October 1, 2006 | December 31, 2005 | |||||||
Finished goods | $ | 20,471 | $ | 28,414 | ||||
Semi-finished goods and work-in-progress | 43,904 | 60,095 | ||||||
Raw materials | 7,756 | 5,814 | ||||||
Materials in-transit | 1,306 | 1,966 | ||||||
Less: Valuation allowance | (14,148 | ) | (7,612 | ) | ||||
Inventories, net | $ | 59,289 | $ | 88,677 | ||||
3. Property, plant and equipment
Property, plant and equipment as of October 1, 2006 and December 31, 2005 comprise the following:
October 1, 2006 | December 31, 2005 | |||||||
Buildings and related structures | $ | 159,612 | $ | 149,236 | ||||
Machinery and equipment | 358,319 | 472,388 | ||||||
Vehicles and others | 38,657 | 32,438 | ||||||
556,588 | 654,062 | |||||||
Less: Accumulated depreciation | (213,564 | ) | (181,806 | ) | ||||
Land | 12,270 | 11,492 | ||||||
Construction in-progress | 137 | 1,329 | ||||||
Property, plant and equipment, net | $ | 355,431 | $ | 485,077 | ||||
Assets held-for-sale
In connection with the sale of the Companys application processor business, which was finalized in January 2006, the Company identified and segregated related tangible assets as held-for-sale and ceased depreciating for such assets. As of October 1, 2006, the remaining amount of held-for-sale assets was $4,193 thousand in total.
4. Intangible Assets
Intangible assets as of October 1, 2006 and December 31, 2005 are as follows:
October 1, 2006 | December 31, 2005 | |||||||
Technology |
$ | 20,929 | $ | 23,911 | ||||
Customer relationships |
167,681 | 193,958 | ||||||
Goodwill |
15,095 | 15,095 | ||||||
Intellectual property assets |
9,555 | 10,969 | ||||||
Less: Accumulated amortization |
(67,476 | ) | (52,544 | ) | ||||
Intangible assets, net |
$ | 145,784 | $ | 191,389 | ||||
7
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
5. Product Warranties
The Company records, in other current liabilities, warranty liabilities for the estimated costs that may be incurred under its basic limited warranty. This warranty covers defective products, and related liabilities are accrued when product revenues are recognized. Factors that affect the Companys warranty liability include historical and anticipated rates of warranty claims and repair costs per claim to satisfy the Companys warranty obligation. As these factors are impacted by actual experience and future expectations, the Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts when necessary.
Changes in accrued warranty liabilities are as follows:
Three months ended | Nine months ended | |||||||||||||||
October 1, 2006 |
October 2, 2005 |
October 1, 2006 |
October 2, 2005 |
|||||||||||||
Beginning balance | $ | 207 | $ | 2,925 | $ | 1,036 | $ | 1,448 | ||||||||
Addition to (reversal of) warranty reserve | 12 | (1,518 | ) | (563 | ) | 1,500 | ||||||||||
Payments made | (69 | ) | (187 | ) | (377 | ) | (1,705 | ) | ||||||||
Translation adjustments | 2 | 17 | 56 | (6 | ) | |||||||||||
Ending balance | $ | 152 | $ | 1,237 | $ | 152 | $ | 1,237 | ||||||||
6. Long-term Borrowings
On December 23, 2004, two of the Companys subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company issued $500 million aggregate principal amount of Second Priority Senior Secured Notes consisting of $300 million aggregate principal amount of Floating Rate Second Priority Senior Secured Notes and $200 million aggregate principal amount of 6 7/8% Second Priority Senior Secured Notes. At the same time, such subsidiaries issued $250 million aggregate principal amount of 8% Senior Subordinated Notes.
Concurrently with the issuance of the Second Priority Senior Secured Notes, the Company entered into a new senior credit agreement with a syndicate of banks, financial institutions and other entities providing for a $100 million senior secured revolving credit facility. Interest is charged at current rates when drawn upon.
Details of long-term borrowings as of October 1, 2006 and December 31, 2005 are presented as below:
Maturity | Annual interest rate (%) | Amount of principal | |||||
Floating Rate Second Priority Senior Secured Notes |
2011 | 3 month LIBOR + 3.250 | $ | 300,000 | |||
6 7/8% Second Priority Senior Secured Notes |
2011 | 6.875 | 200,000 | ||||
8% Senior Subordinated Notes |
2014 | 8.000 | 250,000 | ||||
$ | 750,000 | ||||||
The senior secured revolving credit facility and Second Priority Senior Secured Notes are collateralized by substantially all of the assets of the Company. The notes will be paid in full upon maturity.
Each indenture governing the notes contains covenants that limit the ability of the Company and its subsidiaries to (i) incur additional indebtedness, (ii) pay dividends or make other distributions on its capital stock or repurchase, repay or redeem its capital stock, (iii) make certain investments, (iv) incur liens, (v) enter into certain types of transactions with affiliates, (vi) create restrictions on the payment of dividends or other amounts to the Company by its subsidiaries, and (vii) sell all or substantially all of its assets or merge with or into other companies.
8
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
Borrowings under the senior secured credit facility are subject to significant conditions, including compliance with financial ratios and other covenants and obligations.
As of October 1, 2006, the Company and all of its subsidiaries except for MagnaChip Semiconductor (Shanghai) Company Limited have jointly and severally guaranteed each series of the Second Priority Senior Secured Notes on a second priority senior secured basis. As of October 1, 2006, the Company and its subsidiaries except for MagnaChip Semiconductor Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited have jointly and severally guaranteed the Senior Subordinated Notes on an unsecured, senior subordinated basis. In addition, the Company and each of its current and future direct and indirect subsidiaries (subject to certain exceptions) will be guarantors of Second Priority Senior Secured Notes and Senior Subordinated Notes.
During the third quarter, the Company entered into the Fourth Amendment to Credit Agreement (as amended, the Credit Agreement), dated as of July 26, 2006 (the Amendment), with MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, as borrowers, the Subsidiary Guarantors party thereto, the Lenders party thereto (the Lenders), UBS AG, Stamford Branch, as administrative agent and collateral agent (the Agent), and U.S. Bank National Association (US Bank).
Under the Amendment, among other things, (i) the Company agreed to furnish to the Agent and the Lenders monthly financial statements along with an officers certificate with respect to the occurrence of any events of default under the Credit Agreement, (ii) certain restrictions were imposed on the Companys ability to make acquisitions and capital expenditures, (iii) the financial covenants set forth in Section 6.10 of the Credit Agreement were revised, (iv) the schedule of applicable margins under the Credit Agreement was revised, (v) the Lenders, the Agent and US Bank waived certain defaults and obligations, and (vi) the Agent consented to the Companys voting in favor of increasing the share capital of one of the Companys subsidiaries.
Interest Rate Swap
Effective June 27, 2005, the Company entered into an interest rate swap agreement (the Swap) that converted the variable interest rate of three-month London Inter-bank Offering Rate (LIBOR) plus 3.25% to a fixed interest rate of 7.34% on the Companys Floating Rate Second Priority Senior Secured Notes (the Notes). This Swap will be in effect until 15 June, 2008.
The Swap qualifies as an effective cash flow hedge under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The Company is utilizing the hypothetical derivative method to measure the effectiveness by comparing the changes in value of the actual derivative versus the change in fair value of the hypothetical derivative. Under this methodology, the actual swap was effective when compared to the hypothetical hedge.
For the nine-month period ended October 1, 2006, the Company recorded changes in the fair value of the Swap amounting to $87 thousand, under other comprehensive income in the accompanying condensed consolidated financial statements. In addition, during the same period, the Company recognized interest income of $1,973 thousand, which represents the differences between fixed and variable rates.
9
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
7. Accrued Severance Benefits
The majority of accrued severance benefits is for employees in the Companys Korean subsidiary. Pursuant to the Labor Standards Act of Korea, most employees and executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of October 1, 2006, 97% of all employees of the Company were eligible for severance benefits.
Changes in the carrying value of accrued severance benefits are as follows:
Three months ended | Nine months ended | |||||||||||||||
October 1, 2006 |
October 2, 2005 |
October 1, 2006 |
October 2, 2005 |
|||||||||||||
Beginning balance | $ | 60,793 | $ | 53,870 | $ | 56,967 | $ | 52,925 | ||||||||
Provisions | 4,675 | 4,063 | 10,031 | 12,189 | ||||||||||||
Transferred from acquired company | | | | 196 | ||||||||||||
Severance payments | (2,557 | ) | (3,201 | ) | (7,116 | ) | (10,664 | ) | ||||||||
Effect of foreign currency translation and other | 669 | (694 | ) | 3,698 | (608 | ) | ||||||||||
Ending balance | 63,580 | 54,038 | 63,580 | 54,038 | ||||||||||||
Less: Cumulative contributions to the National Pension Fund |
(866 | ) | (950 | ) | (866 | ) | (950 | ) | ||||||||
Group severance insurance plan |
(936 | ) | (922 | ) | (936 | ) | (922 | ) | ||||||||
$ | 61,778 | $ | 52,166 | $ | 61,778 | $ | 52,166 | |||||||||
The severance benefits are funded approximately 2.83% and 3.46% as of October 1, 2006 and October 2, 2005, respectively, through the Companys National Pension Fund and group severance insurance plan which will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.
In addition, the Company expects to pay the following future benefits to its employees upon their normal retirement age:
Severance benefit | |||
2006 2008 | $ | | |
2009 | 70 | ||
2010 | 213 | ||
2011 2015 | 1,705 |
The above amounts were determined based on the 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 employees that will cease working with the Company before their normal retirement ages.
10
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
8. Redeemable Convertible Preferred Unit
The Company issued 49,727 units as Series A redeemable convertible preferred units (the Series A) and 447,420 units as Series B redeemable convertible preferred units (the Series B) on September 23, 2004 and additionally issued 364 units of Series A and 3,272 units of Series B on November 30, 2004, respectively. All of Series A were redeemed by cash on December 27, 2004 and parts of Series B were redeemed by cash on December 15, 2004 and December 27, 2004.
Changes in Series B for the three and nine months ended October 1, 2006 are as follows:
Three months ended | ||||||||||
October 1, 2006 | October 2, 2005 | |||||||||
Units | Amount | Units | Amount | |||||||
Beginning of period |
93,997 | $ | 111,801 | 93,997 | $ | 101,407 | ||||
Accrual of preferred dividends |
| 2,731 | | 2,506 | ||||||
End of period |
93,997 | $ | 114,532 | 93,997 | $ | 103,913 | ||||
Nine months ended | ||||||||||
October 1, 2006 | October 2, 2005 | |||||||||
Units | Amount | Units | Amount | |||||||
Beginning of period |
93,997 | $ | 106,462 | 93,997 | $ | 96,534 | ||||
Accrual of preferred dividends |
| 8,070 | | 7,379 | ||||||
End of period |
93,997 | $ | 114,532 | 93,997 | $ | 103,913 | ||||
The Series B were issued to the original purchasers of the Company in 2004. Holders of Series B receive dividends which are cumulative, whether or not earned or declared by the board of directors. The cumulative cash dividends accrue at the rate of 10% per unit per annum on the Series B original issue price, compounded semi-annually.
9. Earnings per Unit
The following table illustrates the computation of basic and diluted loss per common unit for the three and nine months ended October 1, 2006 and October 2, 2005:
Three months ended | Nine months ended | |||||||||||||||
October 1, 2006 |
October 2, 2005 |
October 1, 2006 |
October 2, 2005 |
|||||||||||||
Net loss |
$ | (47,718 | ) | $ | (13,242 | ) | $ | (183,672 | ) | $ | (78,004 | ) | ||||
Dividends to preferred unitholders |
2,731 | 2,506 | 8,070 | 7,379 | ||||||||||||
Net loss attributable to common units |
$ | (50,449 | ) | $ | (15,748 | ) | $ | (191,742 | ) | $ | (85,383 | ) | ||||
Weighted-average common units outstanding |
52,720,976 | 53,037,320 | 52,975,152 | 52,848,430 | ||||||||||||
Basic and diluted loss per unit |
$ | (0.96 | ) | $ | (0.30 | ) | $ | (3.62 | ) | $ | (1.62 | ) | ||||
The following outstanding redeemable convertible preferred units issued, options granted and warrants issued were excluded from the computation of diluted loss per unit as they would have an anti-dilutive effect on the calculation:
October 1, 2006 |
October 2, 2005 | |||
Redeemable convertible preferred units |
93,997 | 93,997 | ||
Options |
4,909,152 | 3,536,080 | ||
Warrant (subsequently expired) |
5,079,254 | 5,079,254 |
11
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
In connection with the acquisition of the Companys business from Hynix Semiconductor Inc. on October 6, 2004, by Citigroup Venture Capital Equity Partners, L.P., or CVC, Francisco Partners L.P., or Francisco Partners, CVC Asia Pacific Limited, or CVC Asia Pacific (the Original Acquisition), the Company issued a warrant to Hynix which enables Hynix to purchase 5,079,254 common units of the Company at an exercise price of $1.00 per unit. This warrant expired unexercised in accordance with its terms on October 6, 2006.
10. Equity Incentive Plans
The Company adopted two equity incentive plans effective October 6, 2004 and March 21, 2005, respectively, which are administered by the Compensation Committee designated by the board of directors. Employees, consultants and non-employee directors are eligible for the grant of options to purchase the Companys common units or restricted common units subject to terms and conditions determined by the Committee. The term of options in no event exceed ten years from the date of grant. As of October 1, 2006, an aggregate maximum of 7,890,864 common units were authorized and reserved for all future and outstanding grants of options.
Unit options are generally granted with exercise prices of no less than the fair market value of the Companys common units on the grant date. Generally, options vest and become exercisable in periodic installments, with 25% of the options vesting on the first anniversary of the grant date and 6.25% of options vesting on the last day of each calendar quarter thereafter. In most cases, the requisite service period, or the period during which a grantee is required to provide service in exchange for option grants, coincides with the vesting period.
Restricted units are issued upon the exercise of certain options to purchase restricted common units. Restricted units issued are subject to restrictions which generally lapse in installments over a four-year period.
The following summarizes unit option and restricted unit activities for the three and nine months ended October 1, 2006:
Number of restricted units |
Number of options |
Weighted average (in US dollars) |
Weighted average remaining contractual life | |||||
Outstanding at January 1, 2006 | 1,726,062 | 3,780,643 | 1.6 | |||||
Granted |
| 1,808,500 | 1.4 | |||||
Exercised |
n/a | 41,688 | 2.0 | |||||
Forfeited / Repurchased |
409,348 | 439,569 | 1.6 | |||||
Released from restriction |
517,936 | n/a | ||||||
Outstanding at July 2, 2006 | 798,778 | 5,107,886 | 1.5 | |||||
Granted |
| 41,000 | 3.0 | |||||
Exercised |
n/a | 4,375 | 1.4 | |||||
Forfeited |
| 235,359 | 1.3 | |||||
Released from restriction |
88,406 | n/a | ||||||
Outstanding at October 1, 2006 | 710,372 | 4,909,152 | 1.5 | 8.7 years | ||||
Exercisable at October 1, 2006 | n/a | 1,409,701 | 1.6 | 8.1 years |
Effective January 1, 2006, the Company adopted SFAS 123(R), Share-Based Payment (revised 2004). As the Company elected to use the modified prospective application method, no restatement was made to the condensed consolidated statements of operations for prior interim periods or fiscal years. Under SFAS 123(R), the Company is required to measure compensation cost for all unit-based awards at fair value on the date of grant and recognize compensation expense over the grantees requisite service period. As permitted under SFAS No. 123(R), the Company elected to recognize compensation expense for all options with graded vesting based on the graded attribution method.
12
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
Total unit option related compensation expense for the three and nine months ended October 1, 2006 was $67 thousand and $170 thousand, respectively. As of October 1, 2006, total unrecognized compensation cost of $458 thousand is expected to be recognized over a weighted average future period of 1.54 years.
Prior to the first quarter of 2006, the Company accounted for its unit-based compensation using the intrinsic value method prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, and provided the required pro forma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation. The following presents pro forma net loss and per unit data as if the fair value based method had been applied to account for the unit-based compensation for three and nine months ended October 2, 2005:
Three months ended October 2, 2005 |
Nine months ended October 2, 2005 |
|||||||
As reported net loss |
$ | (13,242 | ) | $ | (78,004 | ) | ||
Add: Amortization of non-cash deferred unit compensation expense determined under the intrinsic value method as reported in net loss, net of tax |
| | ||||||
Deduct: Total unit-based compensation expense determined under the fair value method for all awards, net of tax |
(109 | ) | (327 | ) | ||||
Pro forma net loss |
$ | (13,351 | ) | $ | (78,331 | ) | ||
Pro forma loss per unit |
$ | (0.30 | ) | $ | (1.62 | ) | ||
The Company utilizes the Black-Scholes option-pricing model to measure the fair value of each option grant. The following summarizes the grant-date fair value of options granted during the specified periods and assumptions used in the Black-Scholes option-pricing model on a weighted average basis:
Three months ended | ||||||
October 1, 2006 | October 2, 2005 | |||||
Grant-date fair value of options (in US dollars) | 0.05 | 0.09 | ||||
Expected term | 2.3Years | 2.3Years | ||||
Risk-free interest rate | 5.1 | % | 3.9 | % | ||
Expected volatility | 44.9 | % | 53.7 | % | ||
Expected dividends | | |
Nine months ended | ||||||
October 1, 2006 | October 2, 2005 | |||||
Grant-date fair value of options (in US dollars) | 0.25 | 0.22 | ||||
Expected term | 2.3Years | 2.2Years | ||||
Risk-free interest rate | 4.9 | % | 3.0 | % | ||
Expected volatility | 46.7 | % | 60.3 | % | ||
Expected dividends | | |
The expected term of each option grant was based on employees expected exercises and post-vesting employment termination behavior and the risk free interest rate was based on the U.S. Treasury yield curve for the period corresponding to the expected term at the time of grant. The expected volatility was estimated using historical volatility of share prices of similar public entities. No dividends were assumed for this calculation of option value.
The total cash received from employees as a result of option exercises was $6 thousand and $88 thousand for the three and nine months ended October 1, 2006, respectively. None of the options exercised during these periods had any intrinsic value.
13
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
11. Restructuring and Impairment Charges
In the second quarter of 2006, the Company recorded impairment charges of $92,540 thousand related to one of its fabrication facilities and certain related technology and customer-based intangible assets in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-lived assets. During the same quarter, the Company recorded restructuring charges of $1,144 thousand in association with changes in certain of the Companys management and related severance agreements. In addition, during the third quarter of 2006, the Company executed an early retirement for certain qualified employees and, as a result, recognized restructuring charges of $264 thousand.
12. Comprehensive Income
Comprehensive income is as follows:
Three months ended | Nine months ended | |||||||||||||||
October 1, 2006 |
October 2, 2005 |
October 1, 2006 |
October 2, 2005 |
|||||||||||||
Net loss |
$ | (47,718 | ) | $ | (13,242 | ) | $ | (183,672 | ) | $ | (78,004 | ) | ||||
Change in fair value of derivatives |
(3,223 | ) | 2,962 | 87 | 3,045 | |||||||||||
Foreign currency translation effect |
(1,648 | ) | (1,246 | ) | 3,241 | 1,286 | ||||||||||
Comprehensive loss |
$ | (52,589 | ) | $ | (11,526 | ) | $ | (180,344 | ) | $ | (73,673 | ) | ||||
13. Segment Information
The Company has determined, based on the nature of its operations and products offered to customers, that its reportable segments are Display Solutions, Imaging Solutions, and Semiconductor Manufacturing Services. The Display Solutions segments primary products are flat panel display drivers and the Imaging Solutions segments primary products are CMOS image sensors. The Semiconductor Manufacturing Service segment provides for wafer foundry services to clients. Net sales and gross profit for the All other category primarily relates to certain business activities that do not constitute operating or reportable segments.
The Companys chief operating decision maker (CODM) as defined by SFAS 131, Disclosure about Segments of an Enterprise and Relate Information, allocates resources to and assesses the performance of each segment using information about its revenue and gross profit. The Company does not identify or allocate assets by segments, nor does the CODM evaluate operating segments using discrete asset information. In addition, the Company does not allocate interest income or expense, other income or expense, or income tax to the segments. Management does not evaluate segments based on these criteria.
Prior to the third quarter of 2006, the Company had a single reportable segment. During the third quarter of 2006, subsequent to the appointment of new CODM, the Company changed the manner in which the CODM reviewed the Companys operational results and made significant business decisions to include disaggregated financial information of its three primary business units. Segment information for the third quarter of 2005 was prepared in conformity with the current segment structure.
14
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
The following sets forth information relating to the reportable segments:
Three months ended | Nine months ended | ||||||||||||
October 1, 2006 |
October 2, 2005 |
October 1, 2006 |
October 2, 2005 | ||||||||||
Net Sales | |||||||||||||
Display Solutions |
$ | 56,056 | $ | 92,638 | $ | 215,116 | $ | 223,715 | |||||
Imaging Solutions |
12,691 | 36,952 | 47,691 | 130,418 | |||||||||
Semiconductor Manufacturing Services |
84,440 | 92,069 | 280,838 | 250,723 | |||||||||
All other |
18,096 | 21,430 | 38,394 | 87,646 | |||||||||
Total segment net sales |
$ | 171,283 | $ | 243,089 | $ | 582,039 | $ | 692,502 | |||||
Gross Profit | |||||||||||||
Display Solutions |
$ | 5,238 | $ | 23,260 | $ | 31,308 | $ | 45,251 | |||||
Imaging Solutions |
2,708 | 7,231 | (5,302 | ) | 22,986 | ||||||||
Semiconductor Manufacturing Services |
5,037 | 30,059 | 46,259 | 76,466 | |||||||||
All other |
7,878 | 1,362 | 9,195 | 3,565 | |||||||||
Total segment gross profit |
$ | 20,861 | $ | 61,912 | $ | 81,460 | $ | 148,268 | |||||
14. Condensed Consolidating Financial Statements
The senior secured credit facility and Second Priority Senior Secured Notes are each fully and unconditionally guaranteed by the Company and all of its subsidiaries, except for MagnaChip Semiconductor (Shanghai) Company Limited. The Senior Subordinated Notes are fully and unconditionally guaranteed by the Company and all of its subsidiaries, except for MagnaChip Semiconductor, Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited. The Senior Subordinated Notes are structurally subordinated to the creditors of our principal manufacturing subsidiary, MagnaChip Semiconductor, Ltd. (Korea), which accounts for a majority of our net sales and substantially all of our assets.
Below are condensed consolidating balance sheets as of October 1, 2006 and December 31, 2005, condensed consolidating statements of operations for the three and nine months ended October 1, 2006 and October 2, 2005 and condensed consolidating statements of cash flows for the nine months ended October 1, 2006 and October 2, 2005 of those entities that guarantee the Senior Subordinated Notes, those that do not, MagnaChip Semiconductor LLC, and the co-issuers.
15
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
Condensed Consolidating Statement of Operations
For the three months ended October 1, 2006
MagnaChip Semiconductor LLC (Parent) |
Co-Issuers | Non-Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Net sales | $ | | $ | | $ | 163,459 | $ | 90,972 | $ | (83,148 | ) | $ | 171,283 | |||||||||||
Cost of sales | | | 147,484 | 77,306 | (74,368 | ) | 150,422 | |||||||||||||||||
Gross profit | | | 15,975 | 13,666 | (8,780 | ) | 20,861 | |||||||||||||||||
Selling, general and administrative expenses | 18 | 231 | 19,197 | 3,420 | (54 | ) | 22,812 | |||||||||||||||||
Research and development expenses | | | 37,053 | 3,828 | (8,865 | ) | 32,016 | |||||||||||||||||
Restructuring and impairment charges | | | 264 | | | 264 | ||||||||||||||||||
Operating income (loss) | (18 | ) | (231 | ) | (40,539 | ) | 6,418 | 139 | (34,231 | ) | ||||||||||||||
Other income (expenses) | 2 | (4,287 | ) | (10,787 | ) | 3,283 | | (11,789 | ) | |||||||||||||||
Income (loss) before income taxes, equity in loss of related equity investment |
(16 | ) | (4,518 | ) | (51,326 | ) | 9,701 | 139 | (46,020 | ) | ||||||||||||||
Income tax expenses | | 40 | 50 | 1,608 | | 1,698 | ||||||||||||||||||
Income (loss) before equity in loss of related Investment |
(16 | ) | (4,558 | ) | (51,376 | ) | 8,093 | 139 | (47,718 | ) | ||||||||||||||
Loss of related investment | (47,702 | ) | (48,981 | ) | | (51,473 | ) | 148,156 | | |||||||||||||||
Net loss | $ | (47,718 | ) | $ | (53,539 | ) | $ | (51,376 | ) | $ | (43,380 | ) | $ | 148,295 | $ | (47,718 | ) | |||||||
Dividends accrued on preferred units | 2,731 | | | | | 2,731 | ||||||||||||||||||
Net loss attributable to common units | $ | (50,449 | ) | $ | (53,539 | ) | $ | (51,376 | ) | $ | (43,380 | ) | $ | 148,295 | $ | (50,449 | ) | |||||||
16
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
Condensed Consolidating Statement of Operations
For the nine months ended October 1, 2006
MagnaChip Semiconductor LLC (Parent) |
Co-Issuers | Non-Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Net sales | $ | | $ | | $ | 561,282 | $ | 291,357 | $ | (270,600 | ) | $ | 582,039 | |||||||||||
Cost of sales | | | 494,361 | 263,159 | (256,941 | ) | 500,579 | |||||||||||||||||
Gross profit | | | 66,921 | 28,198 | (13,659 | ) | 81,460 | |||||||||||||||||
Selling, general and administrative expenses | 86 | 748 | 56,969 | 8,619 | (54 | ) | 66,368 | |||||||||||||||||
Research and development expenses | | | 99,798 | 10,813 | (14,743 | ) | 95,868 | |||||||||||||||||
Restructuring and impairment charges | | | 93,723 | 225 | | 93,948 | ||||||||||||||||||
Operating income (loss) | (86 | ) | (748 | ) | (183,569 | ) | 8,541 | 1,138 | (174,724 | ) | ||||||||||||||
Other income (expenses) | 2 | 6,134 | 2,481 | (10,734 | ) | | (2,117 | ) | ||||||||||||||||
Income (loss) before income taxes, equity in loss of related equity investment |
(84 | ) | 5,386 | (181,088 | ) | (2,193 | ) | 1,138 | (176,841 | ) | ||||||||||||||
Income tax expenses | | 122 | 50 | 6,659 | | 6,831 | ||||||||||||||||||
Income (loss) before equity in loss of related Investment |
(84 | ) | 5,264 | (181,138 | ) | (8,852 | ) | 1,138 | (183,672 | ) | ||||||||||||||
Loss of related investment | (183,588 | ) | (193,848 | ) | | (181,611 | ) | 559,047 | | |||||||||||||||
Net loss | $ | (183,672 | ) | $ | (188,584 | ) | $ | (181,138 | ) | $ | (190,463 | ) | $ | 560,185 | $ | (183,672 | ) | |||||||
Dividends accrued on preferred units | 8,070 | | | | | 8,070 | ||||||||||||||||||
Net loss attributable to common units | $ | (191,742 | ) | $ | (188,584 | ) | $ | (181,138 | ) | $ | (190,463 | ) | $ | 560,185 | $ | (191,742 | ) | |||||||
17
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
Condensed Consolidating Statement of Operations
For the three months ended October 2, 2005
MagnaChip Semiconductor LLC (Parent) |
Co-Issuers | Non-Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Net sales | $ | | $ | | $ | 239,454 | $ | 115,232 | $ | (111,597 | ) | $ | 243,089 | |||||||||||
Cost of sales | | | 182,430 | 105,692 | (106,945 | ) | 181,177 | |||||||||||||||||
Gross profit | | | 57,024 | 9,540 | (4,652 | ) | 61,912 | |||||||||||||||||
Selling, general and administrative expenses | 238 | 822 | 26,595 | 3,675 | (3,164 | ) | 28,166 | |||||||||||||||||
Research and development expenses | | | 24,123 | 3,723 | (803 | ) | 27,043 | |||||||||||||||||
Restructuring and impairment charges | | | | | | | ||||||||||||||||||
Operating income (loss) | (238 | ) | (822 | ) | 6,306 | 2,142 | (685 | ) | 6,703 | |||||||||||||||
Other income (expenses) | 1 | 5,764 | (18,495 | ) | (7,687 | ) | | (20,417 | ) | |||||||||||||||
Income (loss) before income taxes, equity in loss of related equity investment |
(237 | ) | 4,942 | (12,189 | ) | (5,545 | ) | (685 | ) | (13,714 | ) | |||||||||||||
Income tax expenses (benefits) | | 15 | | (487 | ) | | (472 | ) | ||||||||||||||||
Income (loss) before equity in loss of related Investment |
(237 | ) | 4,927 | (12,189 | ) | (5,058 | ) | (685 | ) | (13,242 | ) | |||||||||||||
Loss of related investment | (13,005 | ) | (17,464 | ) | | (8,752 | ) | 39,221 | | |||||||||||||||
Net loss | $ | (13,242 | ) | $ | (12,537 | ) | $ | (12,189 | ) | $ | (13,810 | ) | $ | 38,536 | $ | (13,242 | ) | |||||||
Dividends accrued on preferred units | 2,506 | | | | | 2,506 | ||||||||||||||||||
Net loss attributable to common units | $ | (15,748 | ) | $ | (12,537 | ) | $ | (12,189 | ) | $ | (13,810 | ) | $ | 38,536 | $ | (15,748 | ) | |||||||
18
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
Condensed Consolidating Statement of Operations
For the nine months ended October 2, 2005
MagnaChip Semiconductor LLC (Parent) |
Co-Issuers | Non-Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Net sales | $ | | $ | | $ | 673,969 | $ | 318,381 | $ | (299,848 | ) | $ | 692,502 | |||||||||||
Cost of sales | | | 540,155 | 299,970 | (295,891 | ) | 544,234 | |||||||||||||||||
Gross profit | | | 133,814 | 18,411 | (3,957 | ) | 148,268 | |||||||||||||||||
Selling, general and administrative expenses | 353 | 1,408 | 77,369 | 12,058 | (2,025 | ) | 89,163 | |||||||||||||||||
Research and development expenses | | | 75,731 | 6,841 | (1,942 | ) | 80,630 | |||||||||||||||||
Restructuring and impairment charges | | | 8,720 | | | 8,720 | ||||||||||||||||||
Operating loss | (353 | ) | (1,408 | ) | (28,006 | ) | (488 | ) | 10 | (30,245 | ) | |||||||||||||
Other income (expenses) | 6 | (11,065 | ) | (43,147 | ) | 6,703 | | (47,503 | ) | |||||||||||||||
Income (loss) before income taxes, equity in loss of related equity investment |
(347 | ) | (12,473 | ) | (71,153 | ) | 6,215 | 10 | (77,748 | ) | ||||||||||||||
Income tax expenses | | 123 | | 133 | | 256 | ||||||||||||||||||
Income (loss) before equity in loss of related Investment |
(347 | ) | (12,596 | ) | (71,153 | ) | 6,082 | 10 | (78,004 | ) | ||||||||||||||
Loss of related investment | (77,657 | ) | (60,600 | ) | | (68,916 | ) | 207,173 | | |||||||||||||||
Net loss | $ | (78,004 | ) | $ | (73,196 | ) | $ | (71,153 | ) | $ | (62,834 | ) | $ | 207,183 | $ | (78,004 | ) | |||||||
Dividends accrued on preferred units | 7,379 | | | | | 7,379 | ||||||||||||||||||
Net loss attributable to common units | $ | (85,383 | ) | $ | (73,196 | ) | $ | (71,153 | ) | $ | (62,834 | ) | $ | 207,183 | $ | (85,383 | ) | |||||||
19
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
Condensed Consolidating Balance Sheet
October 1, 2006
MagnaChip Semiconductor LLC (Parent) |
Co-Issuers | Non-Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 413 | $ | 1,489 | $ | 88,220 | $ | 17,367 | $ | | $ | 107,489 | ||||||||||||
Restricted cash |
| | | | | | ||||||||||||||||||
Accounts receivable, net |
| | 95,847 | 40,648 | (54,308 | ) | 82,187 | |||||||||||||||||
Inventories, net |
| | 55,294 | 4,205 | (210 | ) | 59,289 | |||||||||||||||||
Other receivables |
| 718 | 4,188 | 36,205 | (34,402 | ) | 6,709 | |||||||||||||||||
Other current assets |
| 26,160 | 12,714 | 11,178 | (37,324 | ) | 12,728 | |||||||||||||||||
Total current assets |
413 | 28,367 | 256,263 | 109,603 | (126,244 | ) | 268,402 | |||||||||||||||||
Property, plant and equipment, net |
| | 354,084 | 1,347 | | 355,431 | ||||||||||||||||||
Intangible assets, net |
| | 122,279 | 23,505 | | 145,784 | ||||||||||||||||||
Investments in subsidiaries |
(120,923 | ) | (195,731 | ) | | (33,468 | ) | 350,122 | | |||||||||||||||
Long-term inter-company loans |
| 785,080 | | 634,101 | (1,419,181 | ) | | |||||||||||||||||
Other non-current assets |
| 22,341 | 43,171 | 10,249 | (23,844 | ) | 51,917 | |||||||||||||||||
Total assets |
$ | (120,510 | ) | $ | 640,057 | $ | 775,797 | $ | 745,337 | $ | (1,219,147 | ) | $ | 821,534 | ||||||||||
Liabilities and Unitholders equity |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | | $ | 63,263 | $ | 50,196 | $ | (54,308 | ) | $ | 59,151 | |||||||||||
Other accounts payable |
| 6 | 54,462 | 7,964 | (34,402 | ) | 28,030 | |||||||||||||||||
Accrued expenses |
18 | 11,596 | 28,023 | 27,608 | (33,656 | ) | 33,589 | |||||||||||||||||
Other current liabilities |
| 285 | 2,229 | 6,262 | (3,668 | ) | 5,108 | |||||||||||||||||
Total current liabilities |
18 | 11,887 | 147,977 | 92,030 | (126,034 | ) | 125,878 | |||||||||||||||||
Long-term borrowings |
| 750,000 | 621,000 | 798,181 | (1,419,181 | ) | 750,000 | |||||||||||||||||
Accrued severance benefits, net |
| | 61,506 | 272 | | 61,778 | ||||||||||||||||||
Other non-current liabilities |
| | 2,621 | 25,629 | (23,844 | ) | 4,406 | |||||||||||||||||
Total liabilities |
18 | 761,887 | 833,104 | 916,112 | (1,569,059 | ) | 942,062 | |||||||||||||||||
Commitments and contingencies |
||||||||||||||||||||||||
Series A redeemable convertible preferred units |
| | | | | | ||||||||||||||||||
Series B redeemable convertible preferred unites |
114,532 | | | | | 114,532 | ||||||||||||||||||
Total redeemable convertible preferred units |
114,532 | | | | | 114,532 | ||||||||||||||||||
Unitholders equity |
||||||||||||||||||||||||
Common units |
52,721 | 136,229 | 39,005 | 55,773 | (231,007 | ) | 52,721 | |||||||||||||||||
Additional paid-in capital |
2,378 | 1,338 | 155,352 | 108,165 | (264,855 | ) | 2,378 | |||||||||||||||||
Accumulated deficit |
(321,834 | ) | (291,514 | ) | (280,804 | ) | (362,501 | ) | 934,819 | (321,834 | ) | |||||||||||||
Accumulated other comprehensive income |
31,675 | 32,117 | 29,140 | 27,788 | (89,045 | ) | 31,675 | |||||||||||||||||
Total unitholders equity |
(235,060 | ) | (121,830 | ) | (57,307 | ) | (170,775 | ) | 349,912 | (235,060 | ) | |||||||||||||
Total liabilities, redeemable convertible preferred units and unitholders equity |
$ | (120,510 | ) | $ | 640,057 | $ | 775,797 | $ | 745,337 | $ | (1,219,147 | ) | $ | 821,534 | ||||||||||
20
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
Condensed Consolidating Balance Sheet
December 31, 2005
MagnaChip Semiconductor LLC (Parent) |
Co-Issuers | Non-Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Cash and cash equivalents |
$ | 209 | $ | 841 | $ | 63,435 | $ | 22,089 | $ | | $ | 86,574 | ||||||||||||
Restricted cash |
| | 2,837 | | | 2,837 | ||||||||||||||||||
Accounts receivable, net |
| | 131,669 | 55,057 | (74,673 | ) | 112,053 | |||||||||||||||||
Inventories, net |
| | 82,348 | 7,638 | (1,309 | ) | 88,677 | |||||||||||||||||
Other receivables |
35,013 | 718 | 7,792 | 20,097 | (54,119 | ) | 9,501 | |||||||||||||||||
Other current assets |
| 22,382 | 9,987 | 6,063 | (28,284 | ) | 10,148 | |||||||||||||||||
Total current assets |
35,222 | 23,941 | 298,068 | 110,944 | (158,385 | ) | 309,790 | |||||||||||||||||
Property, plant and equipment, net | | | 484,019 | 1,058 | | 485,077 | ||||||||||||||||||
Intangible assets, net | | | 165,369 | 26,020 | | 191,389 | ||||||||||||||||||
Investments in subsidiaries | 25,756 | (38,942 | ) | | 144,131 | (130,945 | ) | | ||||||||||||||||
Long-term inter-company loans | | 774,199 | | 621,311 | (1,395,510 | ) | | |||||||||||||||||
Other non-current assets | | 24,153 | 45,370 | 11,131 | (26,263 | ) | 54,391 | |||||||||||||||||
Total assets |
$ | 60,978 | $ | 783,351 | $ | 992,826 | $ | 914,595 | $ | (1,711,103 | ) | $ | 1,040,647 | |||||||||||
Liabilities and Unitholders equity | ||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Accounts payable |
$ | | $ | | $ | 94,581 | $ | 74,003 | $ | (74,673 | ) | $ | 93,911 | |||||||||||
Other accounts payable |
1,000 | 440 | 68,703 | 19,344 | (54,119 | ) | 35,368 | |||||||||||||||||
Accrued expenses |
| 3,139 | 24,560 | 26,331 | (25,062 | ) | 28,968 | |||||||||||||||||
Other current liabilities |
| 162 | 3,746 | 9,416 | (3,222 | ) | 10,102 | |||||||||||||||||
Total current liabilities |
1,000 | 3,741 | 191,590 | 129,094 | (157,076 | ) | 168,349 | |||||||||||||||||
Long-term borrowings | | 750,000 | 621,311 | 774,199 | (1,395,510 | ) | 750,000 | |||||||||||||||||
Accrued severance benefits, net | | | 54,854 | 270 | | 55,124 | ||||||||||||||||||
Other non-current liabilities | | | 5,272 | 28,187 | (26,263 | ) | 7,196 | |||||||||||||||||
Total liabilities |
1,000 | 753,741 | 873,027 | 931,750 | (1,578,849 | ) | 980,669 | |||||||||||||||||
Commitments and contingencies | ||||||||||||||||||||||||
Series A redeemable convertible preferred units |
| | | | | | ||||||||||||||||||
Series B redeemable convertible preferred unites |
106,462 | | | | | 106,462 | ||||||||||||||||||
Total redeemable convertible preferred units |
106,462 | | | | | 106,462 | ||||||||||||||||||
Unitholders equity | ||||||||||||||||||||||||
Common units |
53,092 | 102,986 | 39,005 | 58,364 | (200,355 | ) | 53,092 | |||||||||||||||||
Additional paid-in capital |
2,169 | 1,027 | 155,212 | 71,989 | (228,228 | ) | 2,169 | |||||||||||||||||
Accumulated deficit |
(130,092 | ) | (102,930 | ) | (99,666 | ) | (172,038 | ) | 374,634 | (130,092 | ) | |||||||||||||
Accumulated other comprehensive income |
28,347 | 28,527 | 25,248 | 24,530 | (78,305 | ) | 28,347 | |||||||||||||||||
Total unitholders equity |
(46,484 | ) | 29,610 | 119,799 | (17,155 | ) | (132,254 | ) | (46,484 | ) | ||||||||||||||
Total liabilities, redeemable convertible preferred units and unitholders equity |
$ | 60,978 | $ | 783,351 | $ | 992,826 | $ | 914,595 | $ | (1,711,103 | ) | $ | 1,040,647 | |||||||||||
21
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
Condensed Consolidating Statement of Cash Flows
For the nine months ended October 1, 2006
MagnaChip Semiconductor LLC (Parent) |
Co-Issuers | Non-Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Cash flow from operating activities | ||||||||||||||||||||||||
Net loss | $ | (183,672 | ) | $ | (188,584 | ) | $ | (181,138 | ) | $ | (190,463 | ) | $ | 560,185 | $ | (183,672 | ) | |||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities |
||||||||||||||||||||||||
Depreciation and amortization |
| | 142,376 | 3,105 | | 145,481 | ||||||||||||||||||
Provision for severance benefits |
| | 10,029 | 2 | | 10,031 | ||||||||||||||||||
Amortization of debt issuance costs |
| 2,084 | 676 | | | 2,760 | ||||||||||||||||||
Loss (gain) on foreign currency translation, net |
| (10,882 | ) | (43,674 | ) | 11,259 | | (43,297 | ) | |||||||||||||||
Impairment of long-lived assets |
| | 92,540 | | | 92,540 | ||||||||||||||||||
Loss of related investment |
183,588 | 193,848 | | 181,611 | (559,047 | ) | | |||||||||||||||||
Other |
| | 1,687 | (2,663 | ) | 2,419 | 1,443 | |||||||||||||||||
Changes in operating assets and liabilities | ||||||||||||||||||||||||
Accounts receivable |
| | 42,450 | 14,719 | (20,365 | ) | 36,804 | |||||||||||||||||
Inventories |
| | 32,150 | 3,444 | (1,099 | ) | 34,495 | |||||||||||||||||
Other receivables |
1,603 | | 4,070 | 4,173 | (6,616 | ) | 3,230 | |||||||||||||||||
Deferred tax assets |
| | | 1,405 | | 1,405 | ||||||||||||||||||
Accounts payable |
| | (36,691 | ) | (23,629 | ) | 20,365 | (39,955 | ) | |||||||||||||||
Other accounts payable |
(1,000 | ) | (435 | ) | (23,807 | ) | 1,756 | 6,616 | (16,870 | ) | ||||||||||||||
Accrued expenses |
17 | 8,457 | 1,721 | 1,278 | (8,594 | ) | 2,879 | |||||||||||||||||
Other current assets |
| (3,778 | ) | (320 | ) | (6,197 | ) | 9,040 | (1,255 | ) | ||||||||||||||
Other current liabilities |
| 122 | (1,794 | ) | (2,982 | ) | (446 | ) | (5,100 | ) | ||||||||||||||
Payment of severance benefits |
| | (7,116 | ) | | | (7,116 | ) | ||||||||||||||||
Other |
| (184 | ) | 5,533 | (162 | ) | (2,419 | ) | 2,768 | |||||||||||||||
Net cash provided by (used in) operating activities |
536 | 648 | 38,692 | (3,344 | ) | 39 | 36,571 | |||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||
Purchase of plant, property and equipment |
| | (25,574 | ) | (700 | ) | | (26,274 | ) | |||||||||||||||
Payments for intellectual property registration |
| | (1,687 | ) | (59 | ) | | (1,746 | ) | |||||||||||||||
Proceeds from disposal of plant, property and equipment |
| | 2,748 | | | 2,748 | ||||||||||||||||||
Proceeds from disposal of intangible assets |
| | 2,801 | | | 2,801 | ||||||||||||||||||
Decrease in restricted cash |
| | 2,985 | | | 2,985 | ||||||||||||||||||
Other |
| | (704 | ) | 4 | | (700 | ) | ||||||||||||||||
Net cash used in investing activities | | | (19,431 | ) | (755 | ) | | (20,186 | ) | |||||||||||||||
Cash flows from financing activities | ||||||||||||||||||||||||
Exercise of unit options |
88 | | | | | 88 | ||||||||||||||||||
Repurchase of common units |
(420 | ) | | | | | (420 | ) | ||||||||||||||||
Net cash used in financing activities | (332 | ) | | | | | (332 | ) | ||||||||||||||||
Effect of exchange rate on cash and cash equivalents |
| | 5,524 | (623 | ) | (39 | ) | 4,862 | ||||||||||||||||
Net increase (decrease) in cash and cash equivalents |
204 | 648 | 24,785 | (4,722 | ) | | 20,915 | |||||||||||||||||
Cash and cash equivalents | ||||||||||||||||||||||||
Beginning of the period | 209 | 841 | 63,435 | 22,089 | | 86,574 | ||||||||||||||||||
End of the period | $ | 413 | $ | 1,489 | $ | 88,220 | $ | 17,367 | $ | | $ | 107,489 | ||||||||||||
22
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
Condensed Consolidating Statement of Cash Flows
For the nine months ended October 2, 2005
MagnaChip Semiconductor LLC (Parent) |
Co-Issuers | Non-Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Cash flow from operating activities | ||||||||||||||||||||||||
Net loss | $ | (78,004 | ) | $ | (73,196 | ) | $ | (71,153 | ) | $ | (62,834 | ) | $ | 207,183 | $ | (78,004 | ) | |||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities |
||||||||||||||||||||||||
Depreciation and amortization |
| | 149,561 | 5,187 | | 154,748 | ||||||||||||||||||
Provision for severance benefits |
| | 12,117 | 72 | | 12,189 | ||||||||||||||||||
Amortization of debt issuance costs |
| 1,955 | 606 | | | 2,561 | ||||||||||||||||||
Loss (gain) on foreign currency translation, net |
| 19,059 | 4,181 | (17,789 | ) | | 5,451 | |||||||||||||||||
Impairment of long-lived assets |
| | 7,996 | | | 7,996 | ||||||||||||||||||
Loss of related investment |
77,657 | 60,600 | | 68,916 | (207,173 | ) | | |||||||||||||||||
Other |
| | (2,589 | ) | 67 | | (2,522 | ) | ||||||||||||||||
Changes in operating assets and liabilities | ||||||||||||||||||||||||
Accounts receivable |
| | (30,556 | ) | (11,105 | ) | 10,404 | (31,257 | ) | |||||||||||||||
Inventories |
| | 87 | 2,029 | 521 | 2,637 | ||||||||||||||||||
Other receivables |
(241 | ) | 826 | 65,289 | (33,970 | ) | 33,419 | 65,323 | ||||||||||||||||
Deferred tax assets |
| | | (12,853 | ) | | (12,853 | ) | ||||||||||||||||
Accounts payable |
| | 16,567 | 6,070 | (10,404 | ) | 12,233 | |||||||||||||||||
Other accounts payable |
(160 | ) | 183 | (72,206 | ) | 29,225 | (33,419 | ) | (76,377 | ) | ||||||||||||||
Accrued expenses |
| 10,403 | 3,644 | 19,777 | (29,260 | ) | 4,564 | |||||||||||||||||
Other current assets |
| (21,100 | ) | 2,285 | (7,761 | ) | 29,260 | 2,684 | ||||||||||||||||
Other current liabilities |
| 123 | (5,455 | ) | 4,894 | | (438 | ) | ||||||||||||||||
Payment of severance benefits |
| | (10,653 | ) | (11 | ) | | (10,664 | ) | |||||||||||||||
Other |
| | (31,611 | ) | 32,458 | (1,912 | ) | (1,065 | ) | |||||||||||||||
Net cash provided by (used in) operating activities |
(748 | ) | (1,147 | ) | 38,110 | 22,372 | (1,381 | ) | 57,206 | |||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||
Purchase of plant, property and equipment |
| | (39,729 | ) | (511 | ) | 401 | (39,839 | ) | |||||||||||||||
Payments for intellectual property registration |
| | (1,614 | ) | | | (1,614 | ) | ||||||||||||||||
Acquisition of business |
(1,870 | ) | | | (9,961 | ) | | (11,831 | ) | |||||||||||||||
Proceeds from disposal of plant, property and equipment |
| | 425 | 513 | (401 | ) | 537 | |||||||||||||||||
Increase in short-term inter-company loans |
| | | (14,000 | ) | 14,000 | | |||||||||||||||||
Increase in long-term inter-company loans |
| (1,009 | ) | | (1,009 | ) | 2,018 | | ||||||||||||||||
Decrease in restricted cash |
| | 7,876 | | | 7,876 | ||||||||||||||||||
Other |
| | 2,572 | 11 | | 2,583 | ||||||||||||||||||
Net cash used in investing activities | (1,870 | ) | (1,009 | ) | (30,470 | ) | (24,957 | ) | 16,018 | (42,288 | ) | |||||||||||||
Cash flows from financing activities | ||||||||||||||||||||||||
Proceeds from short-term inter-company borrowings |
| | | 14,000 | (14,000 | ) | | |||||||||||||||||
Proceeds from short-term borrowings |
| | 10,578 | | | 10,578 | ||||||||||||||||||
Proceeds from long-term inter-company borrowings |
| | 1,009 | 1,009 | (2,018 | ) | | |||||||||||||||||
Repayment of short-term borrowings |
| | | (12,400 | ) | | (12,400 | ) | ||||||||||||||||
Other |
513 | (378 | ) | (215 | ) | | | (80 | ) | |||||||||||||||
Net cash provided by (used in) financing activities |
513 | (378 | ) | 11,372 | 2,609 | (16,018 | ) | (1,902 | ) | |||||||||||||||
Effect of exchange rate on cash and cash equivalents |
| | 68 | (1,834 | ) | 1,381 | (385 | ) | ||||||||||||||||
Net increase (decrease) in cash and cash equivalents |
(2,105 | ) | (2,534 | ) | 19,080 | (1,810 | ) | | 12,631 | |||||||||||||||
Cash and cash equivalents | ||||||||||||||||||||||||
Beginning of the period | 2,386 | 3,201 | 29,671 | 23,138 | | 58,396 | ||||||||||||||||||
End of the period | $ | 281 | $ | 667 | $ | 48,751 | $ | 21,328 | $ | | $ | 71,027 | ||||||||||||
23
PART I. Financial Information (continued)
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors set forth elsewhere in this Form 10-Q and in prior Company public filings with the SEC. In addition, other factors have been or may be discussed from time to time in the Companys SEC filings. These forwardlooking statements are made based on managements expectations and beliefs concerning future events impacting the Company and, therefore, involve a number of risks and uncertainties. The Companys management cautions that forwardlooking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forwardlooking statements. The following discussion should be read in conjunction with the unaudited condensed consolidated interim financial statements and related notes included elsewhere in this Form 10-Q. While the Company periodically reassesses material trends and uncertainties affecting the Companys results of operations and financial condition in connection with the preparation of Managements Discussion and Analysis of Financial Condition and Results of Operations and certain other sections contained in the Companys quarterly, annual or other reports filed with the SEC, the Company does not intend to review or revise any particular forwardlooking statement in light of future events.
Overview
We are a leading designer, developer and manufacturer of mixed-signal and digital multimedia semiconductors addressing the convergence of consumer electronics and communication devices. We focus our core business on CMOS image sensors and flat panel display drivers, which are complex, high-performance mixed-signal semiconductors that capture images and enable and enhance the features and capabilities of both small and large flat panel displays. We also provide wafer foundry services whereby we leverage our specialized process technologies and low cost manufacturing facilities to produce semiconductors for third parties using their product designs. Our solutions are used in a wide variety of consumer and commercial mass market applications, such as mobile handsets, including camera-equipped mobile handsets, flat panel monitors and televisions, mobile displays, portable computer displays, handheld gaming devices, PDAs and audio-visual equipment such as DVD players.
Our business was named MagnaChip Semiconductor when it was acquired from Hynix Semiconductor Inc. on October 6, 2004, by CVC, Francisco Partners, CVC Asia Pacific, certain members of management and other investors.
We have three separate business segments: Display Solutions, Imaging Solutions and Semiconductor Manufacturing Services.
| Display Solutions: Our Display Solutions segment offers flat panel display drivers for the entire product range of small to large panel displays, including mobile phones, digital still cameras, photo printers, games, monitors, and LCD TVs. Our products also cover a broad range of technologies and interfaces including LTPS, TFT, CSTN, OLED technologies, RSDS and mini-LVDS interfaces. |
| Imaging Solutions: Our Imaging Solutions segment is focused on the high growth camera phone market, offering video graphics adapter (VGA), 1.3, 2.1 and 3.1 megapixel CMOS image sensors. Our highly integrated image sensors are designed to be more cost effective and to provide brighter, sharper and more colorful image quality. |
| Semiconductor Manufacturing Services: Our Semiconductor Manufacturing Services segment uses our process technology and manufacturing facilities to manufacture semiconductor wafers for third parties based on their designs. We provide our services to niche markets such as high-voltage, embedded memory and power processes. We offer customized services for clients globally at our state-of-the-art fabrication facilities located in Cheongju and Gumi, Korea. Our fabs provide us with large scale, cost-effective and flexible capacity enabling us to rapidly scale to high volume to meet shifts in demand by our end customers. |
24
Results of OperationsComparison of Three-Month Periods Ended October 1, 2006 and October 2, 2005
The following table sets forth consolidated result of operations for the three months ended October 1, 2006 and October 2, 2005:
Three months ended October 1, 2006 |
Three months ended October 2, 2005 |
Change | |||||||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||||||
(in millions of US dollars; %) | |||||||||||||||||||||
Net sales |
$ | 171.3 | 100.0 | $ | 243.1 | 100.0 | $ | (71.8 | ) | (29.5 | ) | ||||||||||
Cost of sales |
150.4 | 87.8 | 181.2 | 74.5 | (30.8 | ) | (17.0 | ) | |||||||||||||
Gross profit |
20.9 | 12.2 | 61.9 | 25.5 | (41.0 | ) | (66.2 | ) | |||||||||||||
Selling, general and administrative expenses |
22.8 | 13.3 | 28.2 | 11.6 | (5.4 | ) | (19.1 | ) | |||||||||||||
Research and development expenses |
32.0 | 18.7 | 27.0 | 11.1 | 5.0 | 18.5 | |||||||||||||||
Restructuring and impairment charges |
0.3 | 0.2 | | | 0.3 | 100 | |||||||||||||||
Operating income (loss) |
(34.2 | ) | (20.0 | ) | 6.7 | 2.8 | (40.9 | ) | (610.4 | ) | |||||||||||
Interest expense, net |
(13.9 | ) | (8.1 | ) | (14.9 | ) | (6.1 | ) | 1.0 | (6.7 | ) | ||||||||||
Foreign currency gain (loss), net |
2.1 | 1.2 | (5.5 | ) | (2.3 | ) | 7.6 | (138.2 | ) | ||||||||||||
Loss before income taxes |
(46.0 | ) | (26.9 | ) | (13.7 | ) | (5.6 | ) | (32.3 | ) | 235.8 | ||||||||||
Income tax expenses (benefits) |
1.7 | 1.0 | (0.5 | ) | (0.2 | ) | 2.2 | (440.0 | ) | ||||||||||||
Net loss |
$ | (47.7 | ) | (27.9 | ) | $ | (13.2 | ) | (5.4 | ) | $ | (34.5 | ) | 261.4 | |||||||
Net Sales and Gross Profit for Display Solutions
Three months ended October 1, 2006 |
Three months ended October 2, 2005 |
Change | |||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||
(in millions of US dollars; %) | |||||||||||||||||
Net sales |
$ | 56.1 | 100.0 | $ | 92.6 | 100.0 | $ | (36.5 | ) | (39.4 | ) | ||||||
Cost of sales |
50.8 | 90.6 | 69.4 | 74.9 | (18.6 | ) | (26.8 | ) | |||||||||
Gross profit |
$ | 5.3 | 9.4 | $ | 23.2 | 25.1 | $ | (17.9 | ) | (77.2 | ) | ||||||
Display Solutions net sales for the three months ended October 1, 2006 were $56.1 million, a $36.5 million or 39.4% decrease from $92.6 million for the three months ended October 2, 2005. The year-over-year decrease in net sales is primarily due to a lower market demand resulting mainly from inventory adjustments and product transition in our major customers. Declines in average selling price also had a negative impact on net sales.
Gross profit in the third quarter of 2006 was $5.3 million or 9.4% of net sales, compared to $23.2 million or 25.1% of net sales in the prior-year quarter. Decrease in gross profit both on an absolute dollar basis and on a percentage basis was primarily attributable to average selling price erosion year over year and an increase in overhead costs per unit driven by a volume decline during the current quarter.
25
Net Sales and Gross Profit for Imaging Solutions
Three months ended October 1, 2006 |
Three months ended October 2, 2005 |
Change | |||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||
(in millions of US dollars; %) | |||||||||||||||||
Net sales |
$ | 12.7 | 100.0 | $ | 37.0 | 100.0 | $ | (24.3 | ) | (65.7 | ) | ||||||
Cost of sales |
10.0 | 78.7 | 29.7 | 80.3 | (19.7 | ) | (66.3 | ) | |||||||||
Gross profit |
$ | 2.7 | 21.3 | $ | 7.3 | 19.7 | $ | (4.6 | ) | (63.0 | ) | ||||||
Imaging Solutions net sales for the three months ended October 1, 2006 were $12.7 million, a $24.3 million or 65.7% decrease from $37.0 million for the three months ended October 2, 2005. Continued average selling price pressure for VGA products, which accounts for 77% of total Imaging Solutions revenue, coupled with the timing of new design wins in megapixel products ramping into volume production, resulted in the revenue decrease in this segment.
Gross profit for the three months ended October 1, 2006 was $2.7 million or 21.3% of net sales, compared to $7.3 million or 19.7% of net sales for the three months ended October 2, 2005. The improvement in gross profit, on a percentage basis, was mainly attributable to reduced depreciation expenses that resulted from impairment charges taken against one of our fabrication facilities during the second quarter of 2006.
Net Sales and Gross Profit for Semiconductor Manufacturing Services
Three months ended October 1, 2006 |
Three months ended October 2, 2005 |
Change | |||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||
(in millions of US dollars; %) | |||||||||||||||||
Net sales |
$ | 84.4 | 100.0 | $ | 92.1 | 100.0 | $ | (7.7 | ) | (8.4 | ) | ||||||
Cost of sales |
79.4 | 94.1 | 62.0 | 67.3 | 17.4 | 28.1 | |||||||||||
Gross profit |
$ | 5.0 | 5.9 | $ | 30.1 | 32.7 | $ | (25.1 | ) | (83.4 | ) | ||||||
Semiconductor Manufacturing Services net sales in the third quarter of 2006 were $84.4 million, a $7.7 million or 8.4% decline from net sales of $92.1 million in the prior year period. This decline in quarterly net sales was primarily attributable to lower demand in the analog and display driver portion of our foundry business as well as a shift in mix to older generation services.
Gross profit for the three months ended October 1, 2006 was $5.0 million or 5.9% of net sales, compared to $30.1 million or 32.7% of net sales for the three months ended October 2, 2005. Decrease in average selling price and lower margin mix compared to the prior years third quarter resulted in a decline of gross profit for the segment.
Net Sales and Gross Profit for All Other
Three months ended October 1, 2006 |
Three months ended October 2, 2005 |
Change | |||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||
(in millions of US dollars; %) | |||||||||||||||||
Net sales |
$ | 18.1 | 100.0 | $ | 21.4 | 100.0 | $ | (3.3 | ) | (15.4 | ) | ||||||
Cost of sales |
10.2 | 56.4 | 20.1 | 94.0 | (9.9 | ) | (49.3 | ) | |||||||||
Gross profit |
$ | 7.9 | 43.6 | $ | 1.3 | 6.0 | $ | 6.6 | (507.7 | ) | |||||||
The All other category represents certain business activities other than business segments, such as rental fees and unit processing fees. All other in the third quarter of 2005 also included certain business activities discontinued in late 2005 or early 2006. Net sales were $18.1 million and $21.4 million in the third quarter of 2006 and 2005, respectively. The decline of $3.3 million represents the revenue from the discontinued application processor and DRAM foundry business, partially offset by increase in revenue from unit processing.
26
Gross profit in the third quarter of 2006 was $7.9 million, an increase of $6.6 million from the gross profit of $1.3 million during the prior year quarter. The improvement in gross profit is mainly attributable to the discontinuation of the less profitable application processor and DRAM foundry business.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general, and administrative expenses were $22.8 million or 13.3% of net sales for the three months ended October 1, 2006 compared to $28.2 million or 11.6% for the three months ended October 2, 2005. The decrease of $5.4 million or 19.1% from the prior-year quarter was primarily attributable to reduced professional fees related to consulting and infrastructure build-out as well as decreased warranty expenses related to customer claims. In addition, lower amortization costs of intangible assets due to impairment charges in the prior quarter resulted in a decrease in selling, general, and administrative expenses for the current period.
Research and Development Expenses. Research and development expenses for the current quarter were $32.0 million, an increase of $5.0 million or 18.5% from $27.0 million for the prior year quarter. This increase in research and development expenses was mainly attributable to higher manufacturing cost for products used in our R&D activities, coupled with higher professional fees. As a percentage of net sales, research and development expense in the third quarter of 2006 increased to 18.7% from 11.1% of net sales in the third quarter of 2005.
Restructuring and Impairment Charges. During the three months ended October 1, 2006, we recorded restructuring charges of $0.3 million in accordance with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. The restructuring charges relate to termination benefits provided for certain employees under an early retirement program.
Net Interest Expense and Income Tax Expenses
Net Interest Expense. Net interest expense was $13.9 million during the three-month period ended October 1, 2006, a decline of $1.0 million from $14.9 million for the three-month period ended October 2, 2005. The decline in net interest expense was mainly due to an increase in interest income from financial assets including cash and cash equivalents. Our interest expense is mostly to serve the long-term borrowings of $750.0 million, which include $300 million of Floating Rate Second Priority Senior Secured Notes. As a result of an interest rate swap entered into in the second quarter of 2005, the variable interest rate of such Notes was effectively converted to a fixed rate and we are not exposed to changes in interest rates until the interest rate swap is unwound on June 15, 2008. Refer to Note 6. Long-term Borrowings for details.
Income Tax Expenses. Income tax expenses for the current quarter were $1.7 million compared to income tax benefits of $0.5 million for the same quarter of 2005. The income tax benefits in the third quarter of 2005 were primarily attributable to the effect of deferred tax accounting, where we recognized deferred tax assets for certain temporary differences between taxable and accounting income. Excluding this deferred tax effect, our income tax expenses are mostly composed of withholding taxes on inter-company interest payments and, therefore, consistent among periods.
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Results of Operations - Comparison of Nine-Month Periods Ended October 1, 2006 and October 2, 2005
The following table sets forth consolidated result of operations for the nine months ended October 1, 2006 and October 2, 2005:
Nine months ended October 1, 2006 |
Nine months ended October 2, 2005 |
Change | |||||||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||||||
(in millions of US dollars; %) | |||||||||||||||||||||
Net sales |
$ | 582.0 | 100.0 | $ | 692.5 | 100.0 | $ | (110.5 | ) | (16.0 | ) | ||||||||||
Cost of sales |
500.6 | 86.0 | 544.2 | 78.6 | (43.6 | ) | (8.0 | ) | |||||||||||||
Gross profit |
81.4 | 14.0 | 148.3 | 21.4 | (66.9 | ) | (45.1 | ) | |||||||||||||
Selling, general and administrative expenses |
66.4 | 11.4 | 89.2 | 12.9 | (22.8 | ) | (25.6 | ) | |||||||||||||
Research and development expenses |
95.9 | 16.5 | 80.6 | 11.6 | 15.3 | 19.0 | |||||||||||||||
Restructuring and impairment charges |
93.9 | 16.1 | 8.7 | 1.3 | 85.2 | 979.3 | |||||||||||||||
Operating loss |
(174.8 | ) | (30.0 | ) | (30.2 | ) | (4.4 | ) | (144.6 | ) | 478.8 | ||||||||||
Interest expense, net |
(43.0 | ) | (7.4 | ) | (42.8 | ) | (6.2 | ) | (0.2 | ) | 0.5 | ||||||||||
Foreign currency gain (loss), net |
40.9 | 7.0 | (4.7 | ) | (0.7 | ) | 45.6 | (970.2 | ) | ||||||||||||
Loss before income taxes |
(176.9 | ) | (30.4 | ) | (77.7 | ) | (11.3 | ) | (99.2 | ) | 127.7 | ||||||||||
Income tax expenses |
6.8 | 1.2 | 0.3 | 0.0 | 6.5 | 2,166.7 | |||||||||||||||
Net loss |
$ | (183.7 | ) | (31.6 | ) | $ | (78.0 | ) | (11.3 | ) | $ | (105.7 | ) | 135.5 | |||||||
Net Sales and Gross Profit for Display Solutions
Nine months ended October 1, 2006 |
Nine months ended October 2, 2005 |
Change | |||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||
(in millions of US dollars; %) | |||||||||||||||||
Net sales |
$ | 215.1 | 100.0 | $ | 223.7 | 100.0 | $ | (8.6 | ) | (3.8 | ) | ||||||
Cost of sales |
183.8 | 85.4 | 178.5 | 79.8 | 5.3 | 3.0 | |||||||||||
Gross profit |
$ | 31.3 | 14.6 | $ | 45.2 | 20.2 | $ | (13.9 | ) | (30.8 | ) | ||||||
Display Solutions net sales for the nine months ended October 1, 2006 were $215.1 million, a $8.6 million or 3.8% decrease from $223.7 million for the nine months ended October 2, 2005. The decrease in year-to-date net sales for Display Solutions resulted from a relatively steep sales decrease during the third quarter of 2006, which is primarily attributable to a reduction in market demand. A decrease in average selling price also had an impact on the net sales decrease.
Gross profit for the nine-month period ended October 1, 2006 was $31.3 million or 14.6% of net sales, compared to $45.2 million or 20.2% of net sales for the nine-month period ended October 2, 2005. A decrease in gross profit both on an absolute dollar and a percentage basis was primarily attributable to average selling price erosion and an increase in per-unit overhead costs driven by a volume decrease.
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Net Sales and Gross Profit for Imaging Solutions
Nine months ended October 1, 2006 |
Nine months ended October 2, 2005 |
Change | |||||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||||
(in millions of US dollars; %) | |||||||||||||||||||
Net sales |
$ | 47.7 | 100.0 | $ | 130.4 | 100.0 | $ | (82.7 | ) | (63.4 | ) | ||||||||
Cost of sales |
53.0 | 111.1 | 107.4 | 82.4 | (54.4 | ) | (50.7 | ) | |||||||||||
Gross profit (loss) |
$ | (5.3 | ) | (11.1 | ) | $ | 23.0 | 17.6 | $ | (28.3 | ) | (123.0 | ) | ||||||
Imaging Solutions net sales for the nine months ended October 1, 2006 were $47.7 million, an $82.7 million or 63.4% decrease from $130.4 million for the nine months ended October 2, 2005. Continued average selling price pressure for VGA products and delayed transition to new megapixel products resulted in the revenue decrease in this segment.
Gross loss for the nine months ended October 1, 2006 was $5.3 million, compared to gross profit of $23.0 million for the nine months ended October 2, 2005. This decline in gross profit was mainly attributable to average selling price erosion as well as charges under SFAS No. 151, Inventory Costs. In accordance with SFAS No. 151, certain manufacturing overhead costs were expensed rather than being capitalized as inventory due to under-utilization of certain fabrication facilities.
Net Sales and Gross Profit for Semiconductor Manufacturing Services
Nine months ended October 1, 2006 |
Nine months ended October 2, 2005 |
Change | |||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||
(in millions of US dollars; %) | |||||||||||||||||
Net sales |
$ | 280.8 | 100.0 | $ | 250.7 | 100.0 | $ | 30.1 | 12.0 | ||||||||
Cost of sales |
234.6 | 83.5 | 174.3 | 69.5 | 60.3 | 34.6 | |||||||||||
Gross profit |
$ | 46.2 | 16.5 | $ | 76.4 | 30.5 | $ | (30.2 | ) | (39.5 | ) | ||||||
Net sales for Semiconductor Manufacturing Services, during the nine-month period ended October 1, 2006, were $280.8 million, a $30.1 million or 12.0% increase compared to net sales of $250.7 million in the year ago period. The decrease in average selling price was more than offset by an increase in sales volume driven by expanded market demand.
Gross profit for the nine months ended October 1, 2006 was $46.2 million or 16.5% of net sales, compared to $76.4 million or 30.5% of net sales for the nine months ended October 2, 2005. The year-over-year decrease of $30.2 or 39.5% was primarily attributable to average selling price erosion, coupled with lower margin mix within the business segment.
Net Sales and Gross Profit for All other
Nine months ended October 1, 2006 |
Nine months ended October 2, 2005 |
Change | |||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||
(in millions of US dollars; %) | |||||||||||||||||
Net sales |
$ | 38.4 | 100.0 | $ | 87.7 | 100.0 | $ | (49.3 | ) | (56.2 | ) | ||||||
Cost of sales |
29.2 | 76.0 | 84.0 | 95.8 | (54.8 | ) | (65.2 | ) | |||||||||
Gross profit |
$ | 9.2 | 24.0 | $ | 3.7 | 4.2 | $ | 5.5 | 148.6 | ||||||||
The All other category represents certain business activities other than business segments, such as rental fees and unit processing fees. All other in the prior-year period also included certain business activities discontinued in late 2005 or early 2006. Net sales for the current period were $38.4 million compared to net sales of $87.7 million in the prior-year period. The decline of $49.3 million represents the revenue from the discontinued application processor and DRAM foundry business, partially offset by an increase in revenue from unit processing.
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Gross profit for the nine-month period ended October 1, 2006 was $9.2 million, an increase of $5.5 million from the gross profit of $3.7 million during the prior-year period. The improvement in gross profit is mainly attributable to the discontinuation of the less profitable application processor and DRAM foundry business.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general, and administrative expenses were $66.4 million or 11.4% of net sales for the nine months ended October 1, 2006 compared to $89.2 million or 12.9% for the nine months ended October 2, 2005. This decrease of $22.8 million or 25.6% from the prior-year period was primarily attributable to lower amortization of intangible assets resulting from impairment charges taken during prior quarters, coupled with a decrease in professional service fees and reserve provisions for customer claims and returns.
Research and Development Expenses. Research and development expenses for the current period were $95.9 million, a $15.3 million or 19.0% increase from $80.6 million for the prior-year period. This increase in research and development expenses represents increased technology license fees and additional research and development staffing and activity from the acquisition of ISRON Corporation and IC Media Corporation. As a percentage of net sales, research and development expense increased 16.5% in the current period compared to 11.6% in the prior-year period.
Restructuring and Impairment Charges. During the nine months ended October 1, 2006, we recorded a one-time charge of $93.9 million as restructuring and impairment charges. The amount included $92.5 million of impairment charges under SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived assets and $1.4 million of restructuring charges under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The impairment charges were recorded against one of our fabrication facilities and certain related technology and customer-based intangible assets, and the restructuring charges were taken in association with changes in certain of our management and employee early retirements. In the prior-year period, $8.7 million of restructuring and impairment charges were recorded in connection with an impairment of certain tangible assets and an early retirement program.
Net Interest Expenses and Income Tax Expenses
Net Interest Expense. Net interest expense was $43.0 million during the nine-month period ended October 1, 2006, consistent with $42.8 million for the nine-month period ended October 2, 2005. Our interest expense is mostly to serve the Companys long-term borrowings of $750.0 million, which includes $300 million of Floating Rate Second Priority Senior Secured Notes. As a result of an interest rate swap entered into in the second quarter of 2005, the variable interest rate of such Notes was effectively converted to a fixed rate and we are not exposed to changes in interest rates until the interest rate swap is unwound on June 15, 2008. Refer to Note 6. Long-term Borrowings for details.
Income Tax Expenses. Income tax expenses for the nine months ended October 1, 2006 were $6.8 million while income tax expenses were $0.3 million for the prior year period. The lower income tax expenses in the prior-year period were primarily attributable to the effect of deferred tax accounting, where we recognized deferred tax assets for certain temporary differences between taxable and accounting income. Excluding the impact from deferred tax accounting, our income tax expenses are mostly composed of withholding taxes on the interest paid by one of our subsidiaries to its parent company and consistent over the periods.
Liquidity and Capital Resources
Our principal capital requirements are to fund working capital needs, meet required debt payments, including debt service payments on our notes and, if drawn upon, the senior credit facility, to invest in research and development and capital equipment expenditures. We anticipate that operating cash flow, together with available borrowing capacity under our senior credit facility, will be sufficient to meet our working capital needs, and fund our research and development expenses, capital expenditures and service requirements on our debt obligations for the foreseeable future. As of October 1, 2006, we had total long-term debt outstanding of $750.0 million.
During the nine-month period ended October 1, 2006, we generated cash from operating activities of $36.6 million, an $20.6 million or 36.0% decrease from operating cash inflow of $57.2 million during the third quarter of 2005. The operating cash inflows for the nine-month period reflected our net loss of $183.7 million adjusted by non-cash items of $209.0 million which consisted mostly of impairment charges, depreciation costs and amortization costs. On top of these cash inflows on an adjusted basis, we had a cash increase of $11.3 million resulting primarily from a decrease in working capital requirements during the nine months ended October 1, 2006.
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Our working capital balance was $142.5 million as of October 1, 2006, relatively consistent with $141.4 million as of December 31, 2005. Excluding cash and cash equivalents, the working capital balance was decreased by $19.8 million, from $54.9 million to $35.1 million. The decrease was driven mainly by reductions in accounts receivable and inventories totaling $59.3 million, partially offset by a decrease of $42.1 million in accounts and other payable.
For investing activities, we used cash of approximately $20.2 million for the nine months ended October 1, 2006. This cash outlay principally represented $28.0 million of capital expenditures on tangible and intangible assets, partially offset by a cash inflow from the sale of our application processor business and other tangible assets. During the prior-year quarter, the net cash outlay for investing activities was $42.3 million.
For the nine months ended October 1, 2006, there were no significant financing activities. During the first nine months of 2005, we used approximately $1.9 million in financing activities.
Capital Expenditures. For the nine months ended October 1, 2006, capital expenditures were $28.0 million, a $13.5 million or 32.5% decrease from $41.5 million for the nine months ended October 2, 2005 as a result of the management of the timing of capital expenditures. We will continue to manage the timing of our capital expenditures to support the growth of business from new customers and to optimize return on our investment.
Future Financing Activities. Our primary future capital requirements include funding of our working capital needs, meeting our required debt payments, and funding of research and development as well as capital equipment expenditures. We plan to add design resources in low cost locations in Asia. We anticipate that our operating cash flows, together with available borrowings under our senior credit facility, will be sufficient to meet these capital requirements for the foreseeable future.
From time to time, we may need to incur additional debt or issue equity to make strategic acquisitions and investments. However, we cannot assure you that such financing will be available to us on acceptable terms or that such financing will be available at all.
Contractual Obligations
Summarized in the table below are our obligations and commitments to make future payments under debt obligations and minimum lease payment obligations as of October 1, 2006.
Payments Due by Period | |||||||||||||||||
Total | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Interest expense |
||||||||||
(in millions of US dollars) | |||||||||||||||||
Revolving credit facility |
| | | | | | | ||||||||||
Secured notes and subordinated notes(*) |
750.0 | | | | | | 750.0 | ||||||||||
Operating lease |
58.8 | 2.8 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | ||||||||||
Others |
12.7 | 4.8 | 7.3 | 0.9 | | | 0.1 | (0.4 | ) |
(*) | Excludes interest obligations on notes. |
The Floating Rate Second Priority Senior Secured Notes of $300 million and Second Priority Senior Secured Notes of $200 million mature in 2011, while the Senior Subordinated Notes of $250 million mature in 2014. Interest rates are 3 month LIBOR + 3.25%, 6 7/8% and 8%, respectively. These notes will be paid in full upon maturity.
Each indenture governing the notes contains covenants that limit the ability of the Company and its subsidiaries to (i) incur additional indebtedness, (ii) pay dividends or make other distributions on its capital stock or repurchase, repay or redeem its capital stock, (iii) make certain investments, (iv) incur liens, (v) enter into certain types of transactions with affiliates, (vi) create restrictions on the payment of dividends or other amounts to the Company by its subsidiaries, and (vii) sell all or substantially all of its assets or merge with or into other companies.
On July 26, 2006, we entered into the Amendment with MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, as borrowers, the Subsidiary Guarantors party thereto, the Lenders , the Agent and US Bank.
Under the Amendment, among other things, (i) we agreed to furnish to the Agent and the Lenders monthly financial statements along with an officers certificate with respect to the occurrence of any events of default under the Credit
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Agreement, (ii) certain restrictions were imposed on our ability to make acquisitions and capital expenditures, (iii) the financial covenants set forth in Section 6.10 of the Credit Agreement were revised, (iv) the schedule of applicable margins under the Credit Agreement was revised, (v) the Lenders, the Agent and US Bank waived certain defaults and obligations, and (vi) the Agent consented to our voting in favor of increasing the share capital of one of our subsidiaries.
OffBalance Sheet Arrangements
On December 23, 2004, two of our subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company entered into a senior credit agreement with a syndicate of banks, financial institutions and other entities providing for a $100 million senior secured revolving credit facility. The undrawn portion of such senior secured credit line as of October 1, 2006 and December 31, 2005 were $90.9 million and $83.0 million, respectively. The utilized portions of the credit line are related to the issuance of letters of credit rather than cash drawdowns.
Other than the senior credit facility, there are no material off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Recent accounting pronouncements
In September 2006, FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plan an amendment of SFAS No.87, 88, 106 and 132(R). This Statement requires an employer to recognize the over funded or under funded status of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 is effective for fiscal year ending after December 15, 2008. We do not expect that the implementation of SFAS No. 158 will have a material impact on our financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy, as defined and may be required to provide additional disclosures based on that hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact that the adoption may have on our consolidated financial statements.
In September 2006, the SEC issued SAB No. 108 which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The guidance is applicable for fiscal years ending after November 15, 2006. We do not expect that adoption of SAB 108 will have a material impact on our consolidated financial statements.
In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxesan interpretation of SFAS No. 109. FIN 48 clarifies the accounting for uncertain income tax positions accounted for in accordance with SFAS No. 109. The Interpretation stipulates recognition and measurement criteria in addition to classification, interim period accounting and significantly expanded disclosure provisions for uncertain tax positions that are expected to be taken in a companys tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this Interpretation is not expected to have a material impact on our consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB Statement No. 140. This Statement addresses the accounting for recognized servicing assets and liabilities related to certain transfers of the servicers financial assets and for acquisitions or assumptions of obligations to service financial assets that do not relate to the financial assets of the servicer and its related parties. SFAS 156 requires that all recognized servicing assets and liabilities are initially measured at fair value, and subsequently measured at either fair value or by applying an amortization method for each class of recognized servicing assets and liabilities. SFAS 156 is effective in fiscal years beginning after September 15, 2006. The adoption of SFAS 156 is not expected to have a material impact on our consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140. This Statement amends SFAS No. 133 and SFAS No. 140, and improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting. Specifically, this Statement allows fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This Statement is effective for all financial instruments acquired or issued after the
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beginning of an entitys first fiscal year that begins after September 15, 2006. The adoption of this Statement is not expected to have a material impact on our consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires our management to make significant judgments and estimates that affect our financial position and results of operations.
Revenue Recognition
Our revenue is derived from the sale of semiconductor products we design and the manufacture of semiconductor wafers for third parties. We recognize revenue when persuasive evidence of an arrangement exists, the product has been delivered and title and risk of loss have transferred, the price is fixed and determinable, and collection of resulting receivables is reasonably assured. For certain distributors, standard products are sold without rights to return products or stock rotation or price protection rights. Our policy is to recognize revenue upon shipment of products to customers, where shipment represents the point when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable and collection of the resulting receivable is reasonably assured. Specialty foundry services are performed pursuant to manufacturing agreements and purchase orders. Standard products are shipped and sold based upon purchase orders from customers. All amounts billed to a customer related to shipping and handling are classified as sales, while all costs incurred by us for shipping and handling are classified as expenses.
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payment. If the financial condition of our customers were to deteriorate, additional allowances may be required. The establishment of reserves for sales discounts is based on judgment that requires significant estimates of a variety of factors, including forecasted demand, returns and industry pricing assumptions. We record warranty liabilities for the estimated costs that may be incurred under our limited warranty. This warranty covers product defects based on compliance to our specifications and is normally applicable for twelve months from the date of purchase. These liabilities are recorded when related revenue is recognized. Warranty costs include the costs to replace the defective product. Factors that affect our warranty liability include the historical and anticipated rate of warranty claims on those repairs and the cost per claim to satisfy our warranty obligations. As these factors are impacted by actual experience and future expectations, we periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.
Inventory Valuation
Inventories are stated at the lower of cost or market, using the average cost method, which approximates the first in, first out method. If net realizable value is less than cost at the balance sheet date, the carrying amount is reduced to the realizable value, and the difference is recognized as a loss on valuation of inventories under cost of sales. We estimate the net realizable value for such finished goods and work-in-progress based on current invoice prices. Inventory reserves are established when conditions indicate that the net realizable value is less than cost due to physical deterioration, obsolescence, changes in price levels, or other causes. Reserves are also established for excess inventory based on inventory levels in excess of six months of projected demand, as judged by management, for each specific product.
Useful Lives of Tangible and Intangible Assets
Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Buildings and related structures are depreciated over the 10 to 40 year periods. Machinery, equipment and other assets including vehicles are depreciated over the estimated useful lives ranging 5 to 10 years.
Our intellectual property assets represent rights under patents, trademarks and property use rights and are amortized over the periods of benefit, ranging up to 10 years, on a straight-line basis.
Impairment of Long-Lived Assets
We review the carrying value of fixed assets for impairment when events and circumstances indicate that the carrying value of an asset or group of assets may not be recoverable from the estimated future cash flows expected to result from its use and/or disposition. Factors which could trigger an impairment review include the following: (i) significant negative industry or economic trends, (ii) exiting an activity in conjunction with a restructuring of operations, (iii) current, historical or projected losses that demonstrated continuing losses associated with an asset, and (iv) managements assessment of future manufacturing capacity requirements. In cases where undiscounted expected future cash flows are less than the carrying
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