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 July 1, 2007
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 of the Exchange Act). Yes ¨ No x
As of August 1, 2007, the registrant had 52,800,784.0470 of the registrants common units outstanding.
MagnaChip Semiconductor LLC and Subsidiaries
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Item 1. |
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1 | ||||
2 | ||||
Condensed Consolidated Statements of Changes in Unitholders Equity |
3 | |||
5 | ||||
6 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
25 | ||
Item 3. |
35 | |||
Item 4T. |
35 | |||
36 | ||||
Item 1A. |
36 | |||
Item 2. |
41 | |||
Item 6. |
41 | |||
42 |
Item 1. | Financial Statements |
MagnaChip Semiconductor LLC and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited; in thousands of US dollars, except unit data)
Three months ended | Six months ended | |||||||||||||||
July 1, 2007 | July 2, 2006 | July 1, 2007 | July 2, 2006 | |||||||||||||
Net sales |
$ | 194,053 | $ | 197,613 | $ | 345,836 | $ | 410,756 | ||||||||
Cost of sales |
166,299 | 177,342 | 303,159 | 350,157 | ||||||||||||
Gross profit |
27,754 | 20,271 | 42,677 | 60,599 | ||||||||||||
Selling, general and administrative expenses |
25,531 | 22,025 | 48,260 | 43,556 | ||||||||||||
Research and development expenses |
32,534 | 33,934 | 67,652 | 63,852 | ||||||||||||
Restructuring and impairment charges |
12,084 | 93,684 | 12,084 | 93,684 | ||||||||||||
Operating loss |
(42,395 | ) | (129,372 | ) | (85,319 | ) | (140,493 | ) | ||||||||
Other income (expenses) |
||||||||||||||||
Interest expense, net |
(14,952 | ) | (14,352 | ) | (29,368 | ) | (29,085 | ) | ||||||||
Foreign currency gain (loss), net |
13,868 | 14,520 | 6,477 | 38,757 | ||||||||||||
Loss before income taxes |
(43,479 | ) | (129,204 | ) | (108,210 | ) | (130,821 | ) | ||||||||
Income tax expenses (benefits) |
1,845 | 2,859 | 4,096 | 5,133 | ||||||||||||
Net loss |
$ | (45,324 | ) | $ | (132,063 | ) | $ | (112,306 | ) | $ | (135,954 | ) | ||||
Dividends accrued on preferred units |
2,983 | 2,706 | 5,853 | 5,339 | ||||||||||||
Net loss attributable to common units |
$ | (48,307 | ) | $ | (134,769 | ) | $ | (118,159 | ) | $ | (141,293 | ) | ||||
Net loss per common units |
||||||||||||||||
- Basic and diluted |
$ | (0.92 | ) | $ | (2.54 | ) | $ | (2.24 | ) | $ | (2.66 | ) | ||||
Weighted average number of units |
||||||||||||||||
- Basic and diluted |
52,772,652 | 53,098,537 | 52,746,718 | 53,101,546 |
The accompanying notes are an integral part of these financial statements
1
MagnaChip Semiconductor LLC and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited; in thousands of US dollars, except unit data)
July 1, 2007 | December 31, 2006 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 54,734 | $ | 89,173 | ||||
Accounts receivable, net |
117,212 | 76,665 | ||||||
Inventories, net |
71,723 | 57,846 | ||||||
Other receivables |
7,178 | 6,754 | ||||||
Other current assets |
19,646 | 13,626 | ||||||
Total current assets |
270,493 | 244,064 | ||||||
Property, plant and equipment, net |
278,529 | 336,279 | ||||||
Intangible assets, net |
123,495 | 139,729 | ||||||
Other non-current assets |
49,328 | 49,981 | ||||||
Total assets |
$ | 721,845 | $ | 770,053 | ||||
Liabilities and Unitholders Equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 80,629 | $ | 62,399 | ||||
Other accounts payable |
33,474 | 32,423 | ||||||
Accrued expenses |
24,167 | 23,647 | ||||||
Short-term borrowings |
40,000 | | ||||||
Other current liabilities |
3,259 | 2,980 | ||||||
Total current liabilities |
181,529 | 121,449 | ||||||
Long-term borrowings |
750,000 | 750,000 | ||||||
Accrued severance benefits, net |
68,453 | 62,836 | ||||||
Other non-current liabilities |
7,198 | 2,935 | ||||||
Total liabilities |
1,007,180 | 937,220 | ||||||
Commitments and contingencies |
||||||||
Series A redeemable convertible preferred units; 60,000 units authorized, 50,091 units issued and 0 unit outstanding at July 1, 2007 and December 31, 2006 |
| | ||||||
Series B redeemable convertible preferred units; 550,000 units authorized, 450,692 units issued and 93,997 units outstanding at July 1, 2007 and December 31, 2006 |
123,227 | 117,374 | ||||||
Total redeemable convertible preferred units |
123,227 | 117,374 | ||||||
Unitholders equity |
||||||||
Common units; 65,000,000 units authorized, 52,800,784 and 52,720,784 units issued and outstanding at July 1, 2007 and December 31, 2006, respectively |
52,801 | 52,721 | ||||||
Additional paid-in capital |
2,521 | 2,451 | ||||||
Accumulated deficit |
(490,027 | ) | (370,314 | ) | ||||
Accumulated other comprehensive income |
26,143 | 30,601 | ||||||
Total unitholders equity |
(408,562 | ) | (284,541 | ) | ||||
Total liabilities, redeemable convertible preferred units and unitholders equity |
$ | 721,845 | $ | 770,053 | ||||
The accompanying notes are an integral part of these financial statements
2
MagnaChip Semiconductor LLC and Subsidiaries
Condensed Consolidated Statements of Changes in Unitholders Equity
(In thousands of US dollars, except unit data)
Common Units | Additional Capital |
Accumulated deficit |
Accumulated Other Comprehensive Income |
Total | ||||||||||||||||||
Units | Amount | |||||||||||||||||||||
Three months ended July 2, 2006 |
||||||||||||||||||||||
Balance at April 2, 2006 |
53,130,445 | $ | 53,130 | $ | 2,279 | $ | (136,616 | ) | $ | 34,263 | $ | (46,944 | ) | |||||||||
Exercise of unit options |
2,812 | 3 | 5 | 8 | ||||||||||||||||||
Repurchase of units issued |
(412,473 | ) | (412 | ) | (1 | ) | (413 | ) | ||||||||||||||
Unit-based compensation |
28 | 28 | ||||||||||||||||||||
Dividends accrued on preferred units |
(2,706 | ) | (2,706 | ) | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||
Net loss |
(132,063 | ) | (132,063 | ) | ||||||||||||||||||
Fair valuation of derivatives |
1,140 | 1,140 | ||||||||||||||||||||
Foreign currency translation adjustments |
1,143 | 1,143 | ||||||||||||||||||||
Total comprehensive income |
(129,780 | ) | ||||||||||||||||||||
Balance at July 2, 2006 |
52,720,784 | $ | 52,721 | $ | 2,311 | $ | (271,385 | ) | $ | 36,546 | $ | (179,807 | ) | |||||||||
Six months ended July 2, 2006 |
||||||||||||||||||||||
Balance at January 1, 2006 |
53,091,570 | $ | 53,092 | $ | 2,169 | $ | (130,092 | ) | $ | 28,347 | $ | (46,484 | ) | |||||||||
Exercise of unit options |
41,687 | 41 | 41 | 82 | ||||||||||||||||||
Repurchase of units issued |
(412,473 | ) | (412 | ) | (1 | ) | (413 | ) | ||||||||||||||
Unit-based compensation |
102 | 102 | ||||||||||||||||||||
Dividends accrued on preferred units |
(5,339 | ) | (5,339 | ) | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||
Net loss |
(135,954 | ) | (135,954 | ) | ||||||||||||||||||
Fair valuation of derivatives |
3,309 | 3,309 | ||||||||||||||||||||
Foreign currency translation adjustments |
4,890 | 4,890 | ||||||||||||||||||||
Total comprehensive income |
(127,755 | ) | ||||||||||||||||||||
Balance at July 2, 2006 |
52,720,784 | $ | 52,721 | $ | 2,311 | $ | (271,385 | ) | $ | 36,546 | $ | (179,807 | ) | |||||||||
The accompanying notes are an integral part of these financial statements
3
MagnaChip Semiconductor LLC and Subsidiaries
Condensed Consolidated Statements of Changes in Unitholders Equity
(In thousands of US dollars, except unit data)
Common Units | Additional Capital |
Accumulated deficit |
Accumulated Other Comprehensive Income |
Total | ||||||||||||||||
Units | Amount | |||||||||||||||||||
Three months ended July 1, 2007 |
||||||||||||||||||||
Balance at April 1, 2007 |
52,720,784 | $ | 52,721 | $ | 2,476 | $ | (441,720 | ) | $ | 31,538 | $ | (354,985 | ) | |||||||
Exercise of unit options |
80,000 | 80 | | | | 80 | ||||||||||||||
Unit-based compensation |
| | 45 | | | 45 | ||||||||||||||
Dividends accrued on preferred units |
| | | (2,983 | ) | | (2,983 | ) | ||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||
Net loss |
| | | (45,324 | ) | | (45,324 | ) | ||||||||||||
Fair valuation of derivatives |
| | | | (17 | ) | (17 | ) | ||||||||||||
Foreign currency translation adjustments |
| | | | (5,378 | ) | (5,378 | ) | ||||||||||||
Total comprehensive loss |
(50,719 | ) | ||||||||||||||||||
Balance at July 1, 2007 |
52,800,784 | $ | 52,801 | $ | 2,521 | $ | (490,027 | ) | $ | 26,143 | $ | (408,562 | ) | |||||||
Six months ended July 1, 2007 |
||||||||||||||||||||
Balance at January 1, 2007 |
52,720,784 | $ | 52,721 | $ | 2,451 | $ | (370,314 | ) | $ | 30,601 | $ | (284,541 | ) | |||||||
Exercise of unit options |
80,000 | 80 | | | | 80 | ||||||||||||||
Unit-based compensation |
| | 70 | | | 70 | ||||||||||||||
Dividends accrued on preferred units |
| | | (5,853 | ) | | (5,853 | ) | ||||||||||||
Retained earnings carried over from prior year (FIN 48) |
| | | (1,554 | ) | | (1,554 | ) | ||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||
Net loss |
| | | (112,306 | ) | | (112,306 | ) | ||||||||||||
Fair valuation of derivatives |
| | | | (934 | ) | (934 | ) | ||||||||||||
Foreign currency translation adjustments |
| | | | (3,524 | ) | (3,524 | ) | ||||||||||||
Total comprehensive loss |
(116,764 | ) | ||||||||||||||||||
Balance at July 1, 2007 |
52,800,784 | $ | 52,801 | $ | 2,521 | $ | (490,027 | ) | $ | 26,143 | $ | (408,562 | ) | |||||||
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)
Six months ended | ||||||||
July 1, 2007 | July 2, 2006 | |||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (112,306 | ) | $ | (135,954 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities |
||||||||
Depreciation and amortization |
89,974 | 102,509 | ||||||
Provision for severance benefits |
9,379 | 5,357 | ||||||
Amortization of debt issuance costs |
1,929 | 1,833 | ||||||
(Gain) loss on foreign currency translation, net |
(6,326 | ) | (42,367 | ) | ||||
Impairment charges |
10,106 | 92,540 | ||||||
Other |
110 | 465 | ||||||
Changes in operating assets and liabilities |
||||||||
Accounts receivable |
(40,442 | ) | 25,007 | |||||
Inventories |
(13,237 | ) | 31,539 | |||||
Other receivables |
(411 | ) | 3,114 | |||||
Accounts payable |
18,857 | (47,177 | ) | |||||
Other accounts payable |
(8,135 | ) | (15,996 | ) | ||||
Accrued expenses |
392 | (2,088 | ) | |||||
Other current assets |
3,430 | (821 | ) | |||||
Other current liabilities |
347 | (5,570 | ) | |||||
Payment of severance benefits |
(4,402 | ) | (4,559 | ) | ||||
Other |
768 | 2,637 | ||||||
Net cash provided by (used in) operating activities |
(49,967 | ) | 10,469 | |||||
Cash flows from investing activities |
||||||||
Purchase of plant, property and equipment |
(24,399 | ) | (19,332 | ) | ||||
Purchase of intangible assets |
(561 | ) | (1,178 | ) | ||||
Proceeds from disposal of plant, property and equipment |
322 | 2,202 | ||||||
Proceeds from disposal of intangible assets |
| 2,794 | ||||||
Decrease in restricted cash |
| 1,876 | ||||||
Other |
512 | (927 | ) | |||||
Net cash used in investing activities |
(24,126 | ) | (14,565 | ) | ||||
Cash flows from financing activities |
||||||||
Exercise of unit options |
80 | 82 | ||||||
Repurchase of common units |
| (414 | ) | |||||
Proceeds from short-term borrowings |
40,000 | | ||||||
Net cash provided by financing activities |
40,080 | (332 | ) | |||||
Effect of exchange rates on cash and cash equivalents |
(426 | ) | 4,342 | |||||
Net increase (decrease) in cash and cash equivalents |
(34,439 | ) | (86 | ) | ||||
Cash and cash equivalents |
||||||||
Beginning of the period |
89,173 | 86,574 | ||||||
End of the period |
$ | 54,734 | $ | 86,488 | ||||
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, 2006, which was filed with the SEC on March 30, 2007. The results of operations for the six-month period ended July 1, 2007 are not necessarily indicative of the results to be expected for a full year or for any other periods.
Recent accounting pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value in an attempt to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. This Statement is effective as of the beginning of an entitys first fiscal year 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 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.
6
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
2. Inventories
Inventories as of July 1, 2007 and December 31, 2006 consist of the following:
July 1, 2007 | December 31, 2006 | |||||||
Finished goods |
$ | 9,160 | $ | 16,169 | ||||
Semi-finished goods and work-in-process |
60,327 | 39,492 | ||||||
Raw materials |
11,127 | 11,774 | ||||||
Materials in-transit |
810 | 2,063 | ||||||
Less: valuation allowances |
(9,701 | ) | (11,652 | ) | ||||
Inventories, net |
$ | 71,723 | $ | 57,846 | ||||
3. Property, Plant and Equipment
Property, plant and equipment as of July 1, 2007 and December 31, 2006 comprise the following:
July 1, 2007 | December 31, 2006 | |||||||
Buildings and related structures |
$ | 153,110 | $ | 162,383 | ||||
Machinery and equipment |
383,696 | 369,683 | ||||||
Vehicles and others |
50,263 | 42,772 | ||||||
587,069 | 574,838 | |||||||
Less: accumulated depreciation |
(321,121 | ) | (252,814 | ) | ||||
Land |
12,581 | 12,481 | ||||||
Construction in-progress |
| 1,774 | ||||||
Property, plant and equipment, net |
$ | 278,529 | $ | 336,279 | ||||
7
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
4. Intangible Assets
Intangible assets as of July 1, 2007 and December 31, 2006 are as follows:
July 1, 2007 | December 31, 2006 | |||||||
Technology |
$ | 21,460 | $ | 21,289 | ||||
Customer relationships |
171,286 | 170,209 | ||||||
Goodwill |
15,095 | 15,095 | ||||||
Intellectual property assets |
9,553 | 9,742 | ||||||
Less: accumulated amortization |
(93,899 | ) | (76,606 | ) | ||||
Intangible assets, net |
$ | 123,495 | $ | 139,729 | ||||
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 | Six months ended | |||||||||||||||
July 1, 2007 | July 2, 2006 | July 1, 2007 | July 2, 2006 | |||||||||||||
Beginning balance |
$ | 87 | $ | 1,027 | $ | 112 | $ | 1,036 | ||||||||
Addition to (reversal of) warranty reserve |
251 | (693 | ) | 306 | (575 | ) | ||||||||||
Payments made |
(162 | ) | (140 | ) | (241 | ) | (308 | ) | ||||||||
Translation adjustments |
4 | 13 | 3 | 54 | ||||||||||||
Ending balance |
$ | 180 | $ | 207 | $ | 180 | $ | 207 | ||||||||
6. Short-term borrowings
On December 23, 2004, the Company and its subsidiaries, including MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, as borrowers, 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. Interest is charged at current rates when drawn upon.
Under the senior secured revolving credit facility, among other things, on the last day of each fiscal month, the Company is required to maintain the sum of (A) the unutilized and available revolving commitments and (B) the qualified and unrestricted cash and cash equivalents held by the borrowers and the guarantors to be not less than $ 75,000,000 (Liquidity Requirement). Presently, borrowings under the credit agreement bear interest equal to the 3-month LIBOR plus 4.75% or Alternate Base Rate (ABR) plus 3.75%. Additionally, the Company is required to pay the administrative agent for the account of each lender a commitment fee equal to 0.5% on the average daily unused amount of the commitment of each Lender during the period from December 23, 2004 to but excluding the date on which such commitments terminate. At July 1, 2007, the Company had borrowed $40.0 million under this credit agreement.
Borrowings under the senior secured credit facility are subject to significant conditions, including compliance with financial ratios and other covenants and obligations.
8
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
On June 28, 2007, the Company entered into the Seventh Amendment to Credit Agreement, dated as of June 28, 2007 (the Seventh Amendment), with MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, as borrowers, the Subsidiary Guarantors party thereto, the Lenders party thereto, and UBS AG, Stamford Branch, as administrative agent and collateral agent. Under the Seventh Amendment, among other things, the use of proceeds provision under Section 3.12 of the Credit Agreement was revised to provide increased flexibility for MagnaChip Semiconductor S.A. to use proceeds of any borrowing under the Credit Agreement.
Details of short-term borrowings as of July 1, 2007 are presented as below:
Maturity | Annual interest rate (%) | Amount of principal | |||||
Euro dollar Revolving Loan |
2007-09-21 | 3 month LIBOR + 4.75 | $ | 7,000 | |||
Euro dollar Revolving Loan |
2007-09-24 | 3 month LIBOR + 4.75 | 13,000 | ||||
ABR Revolving Loan |
2007-07-03 | ABR + 3.75 | 20,000 | ||||
$ | 40,000 | ||||||
Subsequent to quarter end, on July 3, 2007, we repaid the ABR Revolving Loan in the amount of $20 million from cash on hand.
9
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
7. 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.
Details of long-term borrowings as of July 1, 2007 and December 31, 2006 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.
As of July 1, 2007, 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 July 1, 2007, 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 the Second Priority Senior Secured Notes and Senior Subordinated Notes.
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 June 15, 2008.
10
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
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 six-month period ended July 1, 2007, the Company recorded changes in the fair value of the Swap amounting to $934 thousand, under other comprehensive income in the accompanying condensed consolidated financial statements. In addition, during the same period, the Company recognized interest income of $1,901 thousand, which represents the differences between fixed and variable rates.
8. 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 July 1, 2007, 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 | Six months ended | |||||||||||||||
July 1, 2007 | July 2, 2006 | July 1, 2007 | July 2, 2006 | |||||||||||||
Beginning balance |
$ | 65,101 | $ | 59,249 | $ | 64,642 | $ | 56,967 | ||||||||
Provisions |
5,198 | 2,320 | 9,379 | 5,357 | ||||||||||||
Severance payments |
(1,438 | ) | (1,701 | ) | (4,402 | ) | (4,559 | ) | ||||||||
Effect of foreign currency translation and other |
1,321 | 925 | 563 | 3,028 | ||||||||||||
Ending balance |
70,182 | 60,793 | 70,182 | 60,793 | ||||||||||||
Less: Cumulative contributions to the National Pension Fund |
(816 | ) | (888 | ) | (816 | ) | (888 | ) | ||||||||
Group Severance insurance plan |
(913 | ) | (947 | ) | (913 | ) | (947 | ) | ||||||||
$ | 68,453 | $ | 58,958 | $ | 68,453 | $ | 58,958 | |||||||||
The severance benefits are funded approximately 2.46% and 3.02% as of July 1, 2007 and July 2, 2006, 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 | |||
2008 |
$ | | |
2009 |
71 | ||
2010 |
217 | ||
2011 |
76 | ||
2012 |
152 | ||
2013 2017 |
5,110 |
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.
11
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
9. Redeemable Convertible Preferred Units
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 some of the Series B were redeemed by cash on December 15, 2004 and December 27, 2004.
Changes in Series B for the three and six months ended July 1, 2007 are as follows:
Three months ended | ||||||||||
July 1, 2007 | July 2, 2006 | |||||||||
Units | Amount | Units | Amount | |||||||
Beginning of period |
93,997 | $ | 120,244 | 93,997 | $ | 109,095 | ||||
Accrual of preferred dividends |
| 2,983 | | 2,706 | ||||||
End of period |
93,997 | $ | 123,227 | 93,997 | $ | 111,801 | ||||
Six months ended | ||||||||||
July 1, 2007 | July 2, 2006 | |||||||||
Units | Amount | Units | Amount | |||||||
Beginning of period |
93,997 | $ | 117,374 | 93,997 | $ | 106,462 | ||||
Accrual of preferred dividends |
| 5,853 | | 5,339 | ||||||
End of period |
93,997 | $ | 123,227 | 93,997 | $ | 111,801 | ||||
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.
10. Earnings per Unit
The following table illustrates the computation of basic and diluted loss per common unit for the three-month and six-month periods ended July 1, 2007 and July 2, 2006:
Three months ended | Six months ended | |||||||||||||||
July 1, 2007 | July 2, 2006 | July 1, 2007 | July 2, 2006 | |||||||||||||
Net loss |
$ | (45,324 | ) | $ | (132,063 | ) | $ | (112,306 | ) | $ | (135,954 | ) | ||||
Dividends to preferred unitholders |
2,983 | 2,706 | 5,853 | 5,339 | ||||||||||||
Net loss attributable to common units |
$ | (48,307 | ) | $ | (134,769 | ) | $ | (118,159 | ) | $ | (141,293 | ) | ||||
Weighted-average common units outstanding |
52,772,652 | 53,098,537 | 52,746,718 | 53,101,546 | ||||||||||||
Basic and diluted loss per unit |
$ | (0.92 | ) | $ | (2.54 | ) | $ | (2.24 | ) | $ | (2.66 | ) | ||||
12
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
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:
Six months ended | ||||
July 1, 2007 | July 2, 2006 | |||
Redeemable convertible preferred units |
93,997 | 93,997 | ||
Options |
4,725,871 | 5,107,886 | ||
Warrant |
| 5,079,254 |
In connection with the acquisition of the Companys business from Hynix Semiconductor Inc. on October 6, 2004, the Company issued a warrant to Hynix which enabled 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.
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
Assets impairment
During the three months ended July 1, 2007, the Company recognized impairment charges of $10,106 thousand under SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets (SFAS No. 144). The impairment charges were recorded related to the closure of one of the Companys 5-inch wafer fabrication facilities that has generated losses and no longer supported the Companys strategic technology roadmap. During the six months ended July 2, 2006, the Company recorded impairment charges of $92,540 thousand under SFAS No. 144. The impairment charges were recorded against one of our fabrication facilities and certain related technology and customer-based intangible assets (the asset group).
SFAS No. 144 requires the Company to evaluate the recoverability of certain long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The net book value of the asset group before the impairment charges as of July 1, 2007 and July 2, 2006 were approximately $10,228 and $185,985 thousand, respectively.
The impairment charge was measured as an excess of the carrying value of the asset group over its fair value. The fair value of the asset group was estimated using a present value technique, where expected future cash flows from the use and eventual disposal of the asset group were discounted by an interest rate commensurate with the risk of the cash flows.
Restructuring
During the three months ended July 1, 2007, the Company recognized $1,978 thousand of restructuring under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). The restructuring charges were related to the closure of the Companys 5-inch wafer fabrication facilities to be completed by the end of 2007. These charges consist of one-time termination benefits, transfer of machinery and other associated costs.
During the three months ended July 2, 2006, the Company recorded restructuring charges of $1,144 thousand in accordance with SFAS No. 146. These charges were incurred in association with changes in the Companys management judgment.
12. Uncertainty in Income Taxes
The Company, including its subsidiaries files income tax returns in Korea, Japan, Taiwan, U.S. and various other jurisdictions. The Company is subject to income tax examinations by tax authorities of these jurisdictions for all years since the beginning of its operation in October 2004.
The Company adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income Taxesan interpretation of SFAS No. 109, on January 1, 2007. As a result of the implementation of FIN No. 48, the Company recognized a $ 1,554 thousand increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007, balance of retained earnings. Total amount of unrecognized tax benefits as of the date of adoption was $6,908 thousand and it related to temporary difference arising from timing of expensing certain inventories. There was no change in total amount of unrecognized tax benefits during the three months ended July 1, 2007.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expenses. The Company recognized $40 thousand and $80 thousand of interest and penalties, respectively, for the three and six months ended July 1, 2007. Total interest and penalties accrued as of July 1, 2007 and as of the adoption date were $622 thousand and $581 thousand respectively.
14
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
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 operating expense, interest income or expense, other income or expense, or income tax to the segments. Management does not evaluate segments based on these criteria.
The following sets forth information relating to the reportable segments:
Three months ended | |||||||
July 1, 2007 | July 2, 2006 | ||||||
Net Sales |
|||||||
Display Solutions |
$ | 85,113 | $ | 73,292 | |||
Imaging Solutions |
17,371 | 15,596 | |||||
Semiconductor Manufacturing Services |
75,086 | 97,023 | |||||
All other |
16,483 | 11,702 | |||||
Total segment net sales |
$ | 194,053 | $ | 197,613 | |||
Gross Profit (Loss) |
|||||||
Display Solutions |
$ | 8,136 | $ | 8,089 | |||
Imaging Solutions |
1,272 | (3,642 | ) | ||||
Semiconductor Manufacturing Services |
11,716 | 16,635 | |||||
All other |
6,630 | (811 | ) | ||||
Total segment gross profit |
$ | 27,754 | $ | 20,271 | |||
Six months ended | ||||||||
July 1, 2007 | July 2, 2006 | |||||||
Net Sales |
||||||||
Display Solutions |
$ | 143,983 | $ | 159,060 | ||||
Imaging Solutions |
29,143 | 35,000 | ||||||
Semiconductor Manufacturing Services |
132,841 | 196,398 | ||||||
All other |
39,869 | 20,298 | ||||||
Total segment net sales |
$ | 345,836 | $ | 410,756 | ||||
Gross Profit (Loss) |
||||||||
Display Solutions |
$ | 15,225 | $ | 26,069 | ||||
Imaging Solutions |
(148 | ) | (8,010 | ) | ||||
Semiconductor Manufacturing Services |
14,563 | 41,222 | ||||||
All other |
13,037 | 1,318 | ||||||
Total segment gross profit |
$ | 42,677 | $ | 60,599 | ||||
15
MagnaChip Semiconductor LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited; tabular dollars in thousands, except unit data)
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 July 1, 2007 and December 31, 2006, condensed consolidating statements of operations for the three months and six months ended July 1, 2007 and July 2, 2006 and condensed consolidating statement of cash flows for the six months ended July 1, 2007 and July 2, 2006 of those entities that guarantee the Senior Subordinated Notes, those that do not, MagnaChip Semiconductor LLC, and the co-issuers.
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 three months ended July 1, 2007
MagnaChip (Parent) |
Co-Issuers | Non- Guarantors |
Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | | $ | | $ | 188,651 | $ | 80,257 | $ | (74,855 | ) | $ | 194,053 | |||||||||||
Cost of sales |
| | 165,326 | 69,832 | (68,859 | ) | 166,299 | |||||||||||||||||
Gross profit |
| | 23,325 | 10,425 | (5,996 | ) | 27,754 | |||||||||||||||||
Selling, general and administrative expenses |
189 | 229 | 21,905 | 3,271 | (63 | ) | 25,531 | |||||||||||||||||
Research and development expenses |
| | 32,778 | 5,641 | (5,885 | ) | 32,534 | |||||||||||||||||
Restructuring and impairment charge |
| | 12,084 | | | 12,084 | ||||||||||||||||||
Operating income (loss) |
(189 | ) | (229 | ) | (43,442 | ) | 1,513 | (48 | ) | (42,395 | ) | |||||||||||||
Other income (expenses) |
| (1,524 | ) | (27 | ) | 467 | | (1,084 | ) | |||||||||||||||
Income (loss) before income taxes, equity in earnings (loss) of related equity investment |
(189 | ) | (1,753 | ) | (43,469 | ) | 1,980 | (48 | ) | (43,479 | ) | |||||||||||||
Income tax expenses |
| 42 | 1 | 1,802 | | 1,845 | ||||||||||||||||||
Loss before equity in loss of related investment |
(189 | ) | (1,795 | ) | (43,470 | ) | 178 | (48 | ) | (45,324 | ) | |||||||||||||
Loss of related investment |
(45,135 | ) | (43,557 | ) | | (43,079 | ) | 131,771 | | |||||||||||||||
Net loss |
$ | (45,324 | ) | $ | (45,352 | ) | $ | (43,470 | ) | $ | (42,901 | ) | $ | 131,723 | $ | (45,324 | ) | |||||||
Dividends accrued on preferred units |
2,983 | | | | | 2,983 | ||||||||||||||||||
Net loss attributable to common units |
$ | (48,307 | ) | $ | (45,352 | ) | $ | (43,470 | ) | $ | (42,901 | ) | $ | 131,723 | $ | (48,307 | ) | |||||||
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 six months ended July 1, 2007
MagnaChip (Parent) |
Co-Issuers | Non- Guarantors |
Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | | $ | | $ | 335,257 | $ | 137,099 | $ | (126,520 | ) | $ | 345,836 | |||||||||||
Cost of sales |
| | 301,040 | 117,832 | (115,713 | ) | 303,159 | |||||||||||||||||
Gross profit |
| | 34,217 | 19,267 | (10,807 | ) | 42,677 | |||||||||||||||||
Selling, general and administrative expenses |
245 | 561 | 40,707 | 6,683 | 64 | 48,260 | ||||||||||||||||||
Research and development expenses |
| | 68,076 | 10,225 | (10,649 | ) | 67,652 | |||||||||||||||||
Restructuring and impairment charge |
| | 12,084 | | | 12,084 | ||||||||||||||||||
Operating income (loss) |
(245 | ) | (561 | ) | (86,650 | ) | 2,359 | (222 | ) | (85,319 | ) | |||||||||||||
Other expenses |
| (2,630 | ) | (20,015 | ) | (246 | ) | | (22,891 | ) | ||||||||||||||
Income (loss) before income taxes, equity in earnings (loss) of related equity investment |
(245 | ) | (3,191 | ) | (106,665 | ) | 2,113 | (222 | ) | (108,210 | ) | |||||||||||||
Income tax expenses |
| 85 | 34 | 3,977 | | 4,096 | ||||||||||||||||||
Loss before equity in loss of related investment |
(245 | ) | (3,276 | ) | (106,699 | ) | (1,864 | ) | (222 | ) | (112,306 | ) | ||||||||||||
Loss of related investment |
(112,061 | ) | (109,002 | ) | | (106,669 | ) | 327,732 | | |||||||||||||||
Net loss |
$ | (112,306 | ) | $ | (112,278 | ) | $ | (106,699 | ) | $ | (108,533 | ) | $ | 327,510 | $ | (112,306 | ) | |||||||
Dividends accrued on preferred units |
5,853 | | | | | 5,853 | ||||||||||||||||||
Net loss attributable to common units |
$ | (118,159 | ) | $ | (112,278 | ) | $ | (106,699 | ) | $ | (108,533 | ) | $ | 327,510 | $ | (118,159 | ) | |||||||
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 three months ended July 2, 2006
MagnaChip (Parent) |
Co-Issuers | Non-Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | | $ | | $ | 189,395 | $ | 101,591 | $ | (93,373 | ) | $ | 197,613 | |||||||||||
Cost of sales |
| | 174,434 | 93,489 | (90,581 | ) | 177,342 | |||||||||||||||||
Gross profit |
| | 14,961 | 8,102 | (2,792 | ) | 20,271 | |||||||||||||||||
Selling, general and administrative expenses |
35 | 269 | 19,115 | 2,606 | | 22,025 | ||||||||||||||||||
Research and development expenses |
| | 34,003 | 3,573 | (3,642 | ) | 33,934 | |||||||||||||||||
Restructuring and Impairment charges |
| | 93,459 | 225 | | 93,684 | ||||||||||||||||||
Operating income (loss) |
(35 | ) | (269 | ) | (131,616 | ) | 1,698 | 850 | (129,372 | ) | ||||||||||||||
Other income (expenses) |
| 6,106 | 2,058 | (7,996 | ) | | 168 | |||||||||||||||||
Income (loss) before income taxes, equity in loss of related equity investment |
(35 | ) | 5,837 | (129,558 | ) | (6,298 | ) | 850 | (129,204 | ) | ||||||||||||||
Income tax expenses |
| 41 | | 2,818 | | 2,859 | ||||||||||||||||||
Income (loss) before equity in loss of related Investment |
(35 | ) | 5,796 | (129,558 | ) | (9,116 | ) | 850 | (132,063 | ) | ||||||||||||||
Loss of related investment |
(132,028 | ) | (138,126 | ) | | (129,642 | ) | 399,796 | | |||||||||||||||
Net loss |
$ | (132,063 | ) | $ | (132,330 | ) | $ | (129,558 | ) | $ | (138,758 | ) | $ | 400,646 | $ | (132,063 | ) | |||||||
Dividends accrued on preferred units |
2,706 | | | | | 2,706 | ||||||||||||||||||
Net loss attributable to common units |
$ | (134,769 | ) | $ | (132,330 | ) | $ | (129,558 | ) | $ | (138,758 | ) | $ | 400,646 | $ | (134,769 | ) | |||||||
19
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 six months ended July 2, 2006
MagnaChip (Parent) |
Co-Issuers | Non-Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | | $ | | $ | 397,823 | $ | 200,385 | $ | (187,452 | ) | $ | 410,756 | |||||||||||
Cost of sales |
| | 346,877 | 185,853 | (182,573 | ) | 350,157 | |||||||||||||||||
Gross profit |
| | 50,946 | 14,532 | (4,879 | ) | 60,599 | |||||||||||||||||
Selling, general and administrative expenses |
68 | 517 | 37,772 | 5,199 | | 43,556 | ||||||||||||||||||
Research and development expenses |
| | 62,745 | 6,985 | (5,878 | ) | 63,852 | |||||||||||||||||
Restructuring and Impairment charges |
| | 93,459 | 225 | | 93,684 | ||||||||||||||||||
Operating income (loss) |
(68 | ) | (517 | ) | (143,030 | ) | 2,123 | 999 | (140,493 | ) | ||||||||||||||
Other income (expenses) |
| 10,421 | 13,268 | (14,017 | ) | | 9,672 | |||||||||||||||||
Income (loss) before income taxes, equity in loss of related equity investment |
(68 | ) | 9,904 | (129,762 | ) | (11,894 | ) | 999 | (130,821 | ) | ||||||||||||||
Income tax expenses |
| 82 | | 5,051 | | 5,133 | ||||||||||||||||||
Income (loss) before equity in loss of related Investment |
(68 | ) | 9,822 | (129,762 | ) | (16,945 | ) | 999 | (135,954 | ) | ||||||||||||||
Loss of related investment |
(135,886 | ) | (144,867 | ) | | (130,138 | ) | 410,891 | | |||||||||||||||
Net loss |
$ | (135,954 | ) | $ | (135,045 | ) | $ | (129,762 | ) | $ | (147,083 | ) | $ | 411,890 | $ | (135,954 | ) | |||||||
Dividends accrued on preferred units |
5,339 | | | | | 5,339 | ||||||||||||||||||
Net loss attributable to common units |
$ | (141,293 | ) | $ | (135,045 | ) | $ | (129,762 | ) | $ | (147,083 | ) | $ | 411,890 | $ | (141,293 | ) | |||||||
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
July 1, 2007
MagnaChip Semiconductor LLC (Parent) |
Co-Issuers | Non- Guarantors |
Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 267 | $ | 21,044 | $ | 31,496 | $ | 1,927 | $ | | $ | 54,734 | ||||||||||||
Accounts receivable, net |
| | 120,070 | 54,161 | (57,019 | ) | 117,212 | |||||||||||||||||
Inventories, net |
| | 69,796 | 2,005 | (78 | ) | 71,723 | |||||||||||||||||
Other receivables |
| 717 | 6,166 | 21,389 | (21,094 | ) | 7,178 | |||||||||||||||||
Short-term inter-company loans |
| 20,000 | | 20,000 | (40,000 | ) | | |||||||||||||||||
Other current assets |
21 | 9,901 | 19,901 | 5,950 | (16,127 | ) | 19,646 | |||||||||||||||||
Total current assets |
288 | 51,662 | 247,429 | 105,432 | (134,318 | ) | 270,493 | |||||||||||||||||
Property, plant and equipment, net |
| | 276,217 | 2,312 | | 278,529 | ||||||||||||||||||
Intangible assets, net |
| | 102,759 | 20,922 | (186 | ) | 123,495 | |||||||||||||||||
Investments in subsidiaries |
(285,549 | ) | (360,143 | ) | | (189,009 | ) | 834,701 | | |||||||||||||||
Long-term inter-company loans |
| 795,808 | | 633,527 | (1,429,335 | ) | | |||||||||||||||||
Other non-current assets |
| 18,972 | 42,372 | 9,419 | (21,435 | ) | 49,328 | |||||||||||||||||
Total assets |
(285,261 | ) | 506,299 | 668,777 | 582,603 | (750,573 | ) | 721,845 | ||||||||||||||||
Liabilities and Unitholders equity |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | | $ | 91,119 | $ | 46,529 | $ | (57,019 | ) | $ | 80,629 | |||||||||||
Other accounts payable |
| 6 | 50,293 | 4,269 | (21,094 | ) | 33,474 | |||||||||||||||||
Accrued expenses |
74 | 3,234 | 22,502 | 11,262 | (12,905 | ) | 24,167 | |||||||||||||||||
S/T Borrowings |
| 40,000 | 20,000 | 20,000 | (40,000 | ) | 40,000 | |||||||||||||||||
Other current liabilities |
| 418 | 1,369 | 4,694 | (3,222 | ) | 3,259 | |||||||||||||||||
Total current liabilities |
74 | 43,658 | 185,283 | 86,754 | (134,240 | ) | 181,529 | |||||||||||||||||
Long-term borrowings |
| 750,000 | 621,000 | 808,335 | (1,429,335 | ) | 750,000 | |||||||||||||||||
Accrued severance benefits, net |
| | 68,112 | 341 | | 68,453 | ||||||||||||||||||
Other non-current liabilities |
| | 5,557 | 23,076 | (21,435 | ) | 7,198 | |||||||||||||||||
Total liabilities |
74 | 793,658 | 879,952 | 918,506 | (1,585,010 | ) | 1,007,180 | |||||||||||||||||
Commitments and contingencies |
||||||||||||||||||||||||
Series A redeemable convertible preferred units |
| | | | | | ||||||||||||||||||
Series B redeemable convertible preferred units |
123,227 | | | | | 123,227 | ||||||||||||||||||
Total redeemable convertible preferred units |
123,227 | | | | | 123,227 | ||||||||||||||||||
Unitholders equity |
||||||||||||||||||||||||
Common units |
52,801 | 136,229 | 39,005 | 55,778 | (231,012 | ) | 52,801 | |||||||||||||||||
Additional paid-in capital |
2,521 | 1,464 | 155,478 | 108,310 | (265,252 | ) | 2,521 | |||||||||||||||||
Accumulated deficit |
(490,027 | ) | (451,944 | ) | (431,611 | ) | (522,575 | ) | 1,406,130 | (490,027 | ) | |||||||||||||
Accumulated other comprehensive income |
26,143 | 26,892 | 25,953 | 22,584 | (75,429 | ) | 26,143 | |||||||||||||||||
Total unitholders equity |
(408,562 | ) | (287,359 | ) | (211,175 | ) | (335,903 | ) | 834,437 | (408,562 | ) | |||||||||||||
Total liabilities, redeemable convertible preferred units and unitholders equity |
$ | (285,261 | ) | $ | 506,299 | $ | 668,777 | $ | 582,603 | $ | (750,573 | ) | $ | 721,845 | ||||||||||
21
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, 2006
MagnaChip (Parent) |
Co-Issuers | Non- Guarantors |
Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 321 | $ | 892 | $ | 72,608 | $ | 15,352 | $ | | $ | 89,173 | ||||||||||||
Accounts receivable, net |
| | 86,488 | 34,971 | (44,794 | ) | 76,665 | |||||||||||||||||
Inventories, net |
| | 55,676 | 2,208 | (38 | ) | 57,846 | |||||||||||||||||
Other receivables |
| 718 | 5,244 | 28,133 | (27,341 | ) | 6,754 | |||||||||||||||||
Other current assets |
58 | 15,862 | 12,843 | 6,692 | (21,829 | ) | 13,626 | |||||||||||||||||
Total current assets |
379 | 17,472 | 232,859 | 87,356 | (94,002 | ) | 244,064 | |||||||||||||||||
Property, plant and equipment, net |
| | 334,809 | 1,470 | | 336,279 | ||||||||||||||||||
Intangible assets, net |
| | 117,101 | 22,628 | | 139,729 | ||||||||||||||||||
Investments in subsidiaries |
(167,545 | ) | (246,126 | ) | | (77,489 | ) | 491,160 | | |||||||||||||||
Long-term inter-company loans |
| 791,648 | | 633,987 | (1,425,635 | ) | | |||||||||||||||||
Other non-current assets |
| 21,349 | 41,972 | 9,702 | (23,042 | ) | 49,981 | |||||||||||||||||
Total assets |
$ | (167,166 | ) | $ | 584,343 | $ | 726,741 | $ | 677,654 | $ | (1,051,519 | ) | $ | 770,053 | ||||||||||
Liabilities and Unitholders equity |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | | $ | 67,002 | $ | 40,191 | $ | (44,794 | ) | $ | 62,399 | |||||||||||
Other accounts payable |
| 6 | 51,803 | 7,955 | (27,341 | ) | 32,423 | |||||||||||||||||
Accrued expenses |
1 | 3,135 | 22,040 | 17,078 | (18,607 | ) | 23,647 | |||||||||||||||||
Other current liabilities |
| 333 | 1,844 | 4,025 | (3,222 | ) | 2,980 | |||||||||||||||||
Total current liabilities |
1 | 3,474 | 142,689 | 69,249 | (93,964 | ) | 121,449 | |||||||||||||||||
Long-term borrowings |
| 750,000 | 621,000 | 804,635 | (1,425,635 | ) | 750,000 | |||||||||||||||||
Accrued severance benefits, net |
| | 62,550 | 286 | | 62,836 | ||||||||||||||||||
Other non-current liabilities |
| | 1,191 | 24,786 | (23,042 | ) | 2,935 | |||||||||||||||||
Total liabilities |
1 | 753,474 | 827,430 | 898,956 | (1,542,641 | ) | 937,220 | |||||||||||||||||
Commitments and contingencies |
||||||||||||||||||||||||
Series A redeemable convertible preferred units |
| | | | | | ||||||||||||||||||
Series B redeemable convertible preferred unites |
117,374 | | | | | 117,374 | ||||||||||||||||||
Total redeemable convertible preferred units |
117,374 | | | | | 117,374 | ||||||||||||||||||
Unitholders equity |
||||||||||||||||||||||||
Common units |
52,721 | 136,229 | 39,005 | 55,778 | (231,012 | ) | 52,721 | |||||||||||||||||
Additional paid-in capital |
2,451 | 1,401 | 155,415 | 108,239 | (265,055 | ) | 2,451 | |||||||||||||||||
Accumulated deficit |
(370,314 | ) | (338,112 | ) | (323,358 | ) | (412,488 | ) | 1,073,958 | (370,314 | ) | |||||||||||||
Accumulated other comprehensive income |
30,601 | 31,351 | 28,249 | 27,169 | (86,769 | ) | 30,601 | |||||||||||||||||
Total unitholders equity |
(284,541 | ) | (169,131 | ) | (100,689 | ) | (221,302 | ) | 491,122 | (284,541 | ) | |||||||||||||
Total liabilities, redeemable convertible preferred units and unitholders equity |
$ | (167,166 | ) | $ | 584,343 | $ | 726,741 | $ | 677,654 | $ | (1,051,519 | ) | $ | 770,053 | ||||||||||
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 six months ended July 1, 2007
MagnaChip (Parent) |
Co-Issuers | Non- Guarantors |
Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Cash flow from operating activities: |
||||||||||||||||||||||||
Net loss |
$ | (112,306 | ) | $ | (112,278 | ) | $ | (106,699 | ) | $ | (108,533 | ) | $ | 327,510 | $ | (112,306 | ) | |||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities |
||||||||||||||||||||||||
Depreciation and amortization |
| | 87,890 | 2,084 | | 89,974 | ||||||||||||||||||
Provision for severance benefits |
| | 9,312 | 67 | | 9,379 | ||||||||||||||||||
Amortization of debt issuance costs |
| 1,443 | 486 | | | 1,929 | ||||||||||||||||||
(Gain) loss on foreign currency translation, net |
| (4,160 | ) | (5,495 | ) | 3,329 | | (6,326 | ) | |||||||||||||||
Loss of related investment |
112,061 | 109,002 | | 106,669 | (327,732 | ) | | |||||||||||||||||
Impairment charges |
| | 10,106 | | | 10,106 | ||||||||||||||||||
Other |
| | 55 | 55 | | 110 | ||||||||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||||||
Accounts receivable |
| | (33,036 | ) | (19,630 | ) | 12,224 | (40,442 | ) | |||||||||||||||
Inventories |
| | (13,509 | ) | 233 | 39 | (13,237 | ) | ||||||||||||||||
Other receivables |
| | (871 | ) | 6,707 | (6,247 | ) | (411 | ) | |||||||||||||||
Accounts payable |
| | 24,099 | 6,982 | (12,224 | ) | 18,857 | |||||||||||||||||
Other accounts payable |
| | (10,740 | ) | (3,642 | ) | 6,247 | (8,135 | ) | |||||||||||||||
Accrued expenses |
74 | 99 | 331 | (5,814 | ) | 5,702 | 392 | |||||||||||||||||
Other current assets |
39 | 5,961 | 3,915 | 886 | (7,371 | ) | 3,430 | |||||||||||||||||
Other current liabilities |
| 85 | (480 | ) | (660 | ) | 1,402 | 347 | ||||||||||||||||
Payment of severance benefits |
| | (4,402 | ) | | | (4,402 | ) | ||||||||||||||||
Other |
| | 640 | 829 | (701 | ) | 768 | |||||||||||||||||
Net cash provided by (used in) operating activities |
(132 | ) | 152 | (38,398 | ) | (10,438 | ) | (1,151 | ) | (49,967 | ) | |||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Purchase of plant, property and equipment |
| | (23,176 | ) | (1,223 | ) | | (24,399 | ) | |||||||||||||||
Payment for intellectual property registration |
| | (721 | ) | (34 | ) | 194 | (561 | ) | |||||||||||||||
Proceeds from disposal of plant, property and equipment |
| | 314 | 8 | | 322 | ||||||||||||||||||
Other |
| (20,000 | ) | 1,081 | (20,569 | ) | 40,000 | 512 | ||||||||||||||||
Net cash used in investing activities |
(20,000 | ) | (22,502 | ) | (21,818 | ) | 40,194 | (24,126 | ) | |||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Exercise of unit options |
80 | | | | | 80 | ||||||||||||||||||
Proceeds of short-term borrowings |
| 40,000 | 20,000 | 20,000 | (40,000 | ) | 40,000 | |||||||||||||||||
Net cash provided by financing activities |
80 | 40,000 | 20,000 | 20,000 | (40,000 | ) | 40,080 | |||||||||||||||||
Effect of exchange rate on cash and cash equivalents |
(2 | ) | | (212 | ) | (1,169 | ) | 957 | (426 | ) | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
(54 | ) | 20,152 | (41,112 | ) | (13,425 | ) | | (34,439 | ) | ||||||||||||||
Cash and cash equivalents: |
||||||||||||||||||||||||
Beginning of the period |
321 | 892 | 72,608 | 15,352 | | 89,173 | ||||||||||||||||||
End of the period |
$ | 267 | $ | 21,044 | $ | 31,496 | $ | 1,927 | $ | | $ | 54,734 | ||||||||||||
23
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 six months ended July 2, 2006
MagnaChip (Parent) |
Co-Issuers | Non- Guarantors |
Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Cash flow from operating activities: |
||||||||||||||||||||||||
Net loss |
$ | (135,954 | ) | $ | (135,045 | ) | $ | (129,762 | ) | $ | (147,083 | ) | $ | 411,890 | $ | (135,954 | ) | |||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities |
||||||||||||||||||||||||
Depreciation and amortization |
| | 100,410 | 2,099 | | 102,509 | ||||||||||||||||||
Provision for severance benefits |
| | 5,315 | 42 | | 5,357 | ||||||||||||||||||
Amortization of debt issuance costs |
| 1,384 | 449 | | | 1,833 | ||||||||||||||||||
Gain on foreign currency translation, net |
| (12,067 | ) | (42,554 | ) | 12,254 | | (42,367 | ) | |||||||||||||||
Impairment charges |
| | 92,540 | | | 92,540 | ||||||||||||||||||
Loss of related investment |
135,886 | 144,867 | | 130,138 | (410,891 | ) | | |||||||||||||||||
Other |
| | 651 | (1,802 | ) | 1,616 | 465 | |||||||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||||||
Accounts receivable |
| | 14,306 | 5,275 | 5,426 | 25,007 | ||||||||||||||||||
Inventories |
| | 30,250 | 2,247 | (958 | ) | 31,539 | |||||||||||||||||
Other receivables |
434 | | 2,689 | (1,739 | ) | 1,730 | 3,114 | |||||||||||||||||
Accounts payable |
| | (43,676 | ) | 1,925 | (5,426 | ) | (47,177 | ) | |||||||||||||||
Other accounts payable |
35 | (435 | ) | (14,954 | ) | 1,088 | (1,730 | ) | (15,996 | ) | ||||||||||||||
Accrued expenses |
| 193 | (412 | ) | (2,596 | ) | 727 | (2,088 | ) | |||||||||||||||
Other current assets |
| 807 | (676 | ) | (225 | ) | (727 | ) | (821 | ) | ||||||||||||||
Other current liabilities |
| 82 | (1,852 | ) | (3,800 | ) | | (5,570 | ) | |||||||||||||||
Payment of severance benefits |
| | (4,559 | ) | | | (4,559 | ) | ||||||||||||||||
Other |
| (186 | ) | 5,462 | (1,023 | ) | (1,616 | ) | 2,637 | |||||||||||||||
Net cash provided by (used in) operating activities |
401 | (400 | ) | 13,627 | (3,200 | ) | 41 | 10,469 | ||||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Purchase of plant, property and equipment |
| | (18,890 | ) | (442 | ) | | (19,332 | ) | |||||||||||||||
Purchase of intangible assets |
| | (1,178 | ) | | | (1,178 | ) | ||||||||||||||||
Proceeds from disposal of plant, property and equipment |
| | 2,201 | 1 | | 2,202 | ||||||||||||||||||
Proceeds from disposal of intangible assets |
| | 2,794 | | | 2,794 | ||||||||||||||||||
Decrease in restricted cash |
| | 1,876 | | | 1,876 | ||||||||||||||||||
Increase in short-term inter-company loans |
| | | (5,500 | ) | 5,500 | | |||||||||||||||||
Other |
| | (946 | ) | 19 | | (927 | ) | ||||||||||||||||
Net cash used in investing activities |
| | (14,143 | ) | (5,922 | ) | 5,500 | (14,565 | ) | |||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Proceeds from short-term inter-company borrowings |
| | | 5,500 | (5,500 | ) | | |||||||||||||||||
Exercise of unit options |
82 | | | | | 82 | ||||||||||||||||||
Repurchase of common units |
(414 | ) | | | | | (414 | ) | ||||||||||||||||
Net cash provided by (used in) financing activities |
(332 | ) | | | 5,500 | (5,500 | ) | (332 | ) | |||||||||||||||
Effect of exchange rate on cash and cash equivalents |
| | 2,893 | 1,490 | (41 | ) | 4,342 | |||||||||||||||||
Net increase (decrease) in cash and cash equivalents |
69 | (400 | ) | 2,377 | (2,132 | ) | | (86 | ) | |||||||||||||||
Cash and cash equivalents: |
||||||||||||||||||||||||
Beginning of the period |
209 | 841 | 63,435 | 22,089 | | 86,574 | ||||||||||||||||||
End of the period |
$ | 278 | $ | 441 | $ | 65,812 | $ | 19,957 | $ | | $ | 86,488 | ||||||||||||
24
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.
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 handsets, handheld gaming devices, PDAs, displays for desktop and mobile computer monitors and flat panel televisions. 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 address a broad spectrum of consumer electronics products ranging from camera-equipped mobile handsets to personal computer webcams, offering VGA, 1.3, 2.1 and 3.2 mega pixel CMOS image sensors. Our highly integrated image sensors are designed to be cost effective and to provide brighter, sharper and more colorful image quality for use primarily in applications that require small form factors, low power consumption, effective heat dissipation and high reliability. |
| 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 specialty markets that utilize high-voltage, embedded memory, analog 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. |
25
Results of Operations Comparison of Three-Month Periods Ended July 1, 2007 and July 2, 2006.
The following table sets forth consolidated result of operations for the three months ended July 1, 2007 and July 2, 2006:
Three months ended July 1, 2007 |
Three months ended July 2, 2006 |
Change | |||||||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||||||
(in millions of US dollars; %) | |||||||||||||||||||||
Net sales |
$ | 194.1 | 100.0 | $ | 197.6 | 100.0 | $ | (3.5 | ) | (1.8 | ) | ||||||||||
Cost of sales |
166.3 | 85.7 | 177.3 | 89.7 | (11.0 | ) | (6.2 | ) | |||||||||||||
Gross profit |
27.8 | 14.3 | 20.3 | 10.3 | 7.5 | 36.9 | |||||||||||||||
Selling, general and administrative expenses |
25.6 | 13.2 | 22.0 | 11.1 | 3.6 | 16.4 | |||||||||||||||
Research and development expenses |
32.5 | 16.7 | 33.9 | 17.2 | (1.4 | ) | (4.1 | ) | |||||||||||||
Restructuring and impairment charges |
12.1 | 6.2 | 93.7 | 47.4 | (81.6 | ) | (87.1 | ) | |||||||||||||
Operating loss |
(42.4 | ) | (21.8 | ) | (129.3 | ) | (65.4 | ) | 86.9 | (67.2 | ) | ||||||||||
Interest expense, net |
(15.0 | ) | (7.7 | ) | (14.4 | ) | (7.3 | ) | (0.6 | ) | 4.2 | ||||||||||
Foreign currency gain, net |
13.9 | 7.2 | 14.5 | 7.3 | (0.6 | ) | (4.1 | ) | |||||||||||||
Loss before income taxes |
(43.5 | ) | (22.3 | ) | (129.2 | ) | (65.4 | ) | 85.7 | (66.3 | ) | ||||||||||
Income tax expenses |
1.8 | 0.9 | 2.9 | 1.5 | (1.1 | ) | (37.9 | ) | |||||||||||||
Net loss |
$ | (45.3 | ) | (23.2 | ) | $ | (132.1 | ) | (66.9 | ) | $ | 86.8 | (65.7 | ) | |||||||
Net Sales
Three months ended July 1, 2007 |
Three months ended July 2, 2006 |
Change | |||||||||||||||
Amount | % of Total |
Amount | % of total |
Amount | % | ||||||||||||
(in millions of US dollars; %) | |||||||||||||||||
Display solutions |
$ | 85.1 | 43.8 | $ | 73.3 | 37.1 | $ | 11.8 | 16.1 | ||||||||
Imaging solutions |
17.4 | 9.0 | 15.6 | 7.9 | 1.8 | 11.5 | |||||||||||
Semiconductor Manufacturing Services |
75.1 | 38.7 | 97.0 | 49.1 | (21.9 | ) | (22.6 | ) | |||||||||
All other |
16.5 | 8.5 | 11.7 | 5.9 | 4.8 | 41.0 | |||||||||||
$ | 194.1 | 100.0 | $ | 197.6 | 100.0 | $ | (3.5 | ) | (1.8 | ) | |||||||
We derive a majority of our net sales from three operating segments: Display Solutions, Imaging Solutions and Semiconductor Manufacturing Services. The All other category represents certain business activities other than these business segments, principally composed of rental and unit processing.
Total net sales for the three months ended July 1, 2007 decreased $3.5 million, or 1.8% compared to the three months ended July 2, 2006. Net sales generated in the three operating segments during the most recently completed quarter were $177.6 million, a decrease of $8.3 million or 4.5% from the net sales of three operating segments for the prior-year quarter.
Display Solutions. Net sales from Display Solutions for the three months ended July 1, 2007 were $85.1 million, a $11.8 million or 16.1% increase from $73.3 million for the three months ended July 2, 2006. This sales increase in our display driver business was primarily attributable to higher volume driven from both current and the new products.
Imaging Solutions. Imaging Solutions net sales increased $1.8 million in the most recently completed quarter, or 11.5% compared to net sales generated in the prior-year quarter. This sales increase in our imaging solution business was primarily attributable to an increase in small form factor VGA product sales and 1.3 mega pixel designs wins.
Semiconductor Manufacturing Services. Net sales from Semiconductor Manufacturing Services for the second quarter of 2007 were $75.1 million, a $21.9 million or 22.6% decrease compared to net sales of $97.0 million for the prior-year quarter. This decrease was mainly due to decrease in end-market demand, coupled with continued average selling price erosion.
All other. Net sales from All other for the three months ended July 1, 2007 were $16.5 million compared to $11.7 million for the three months ended July 2, 2006.
26
Gross Profit
Three months ended July 1, 2007 |
Three months ended July 2, 2006 |
Change | |||||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||||
(in millions of US dollars; %) | |||||||||||||||||||
Display solutions |
$ | 8.2 | 9.6 | $ | 8.1 | 11.1 | $ | 0.1 | 1.2 | ||||||||||
Imaging solutions |
1.3 | 7.5 | (3.6 | ) | (23.1 | ) | 4.9 | | |||||||||||
Semiconductor Manufacturing Services |
11.7 | 15.6 | 16.6 | 17.1 | (4.9 | ) | (29.5 | ) | |||||||||||
All other |
6.6 | 40.0 | (0.8 | ) | (6.8 | ) | 7.4 | | |||||||||||
$ | 27.8 | 14.3 | $ | 20.3 | 10.3 | $ | 7.5 | 36.9 | |||||||||||
Total gross profit increased $7.5 million in the second quarter of 2007, or 36.9%, compared to the gross profit generated in the second quarter of 2006. Gross margin percentage for the most recently completed quarter was 14.3% of net sales, an increase of 4.0% from 10.3% for the prior-year quarter. This increase in gross margin percentage was mainly attributable to a volume increase in both unit processing and imaging solutions.
Display Solutions. Gross margin percentage for Display Solutions for the three months ended July 1, 2007 declined to 9.6% compared to 11.1% for the three months ended July 2, 2006. This decline in gross margin percentage was primarily attributable to average selling price erosion.
Imaging Solutions. Gross margin percentage for the most recently completed quarter was improved compared to the prior-year quarter mainly due to a decrease in depreciation cost resulting from impairment charges taken in the second quarter of 2006.
Semiconductor Manufacturing Services. Gross margin for Semiconductor Manufacturing Services declined to 15.6% in the second quarter of 2007 from 17.1% in the second quarter of 2006. A decrease in average selling price compared to the previous years second quarter resulted in a decline of gross margin for the segment.
All other. Gross margin percentage for All other for current period increased to 40.0% from (6.8)% in the second quarter of 2006. This improvement in gross margin percentage is mainly due to the volume increase from unit processing, which resulted in lower fixed cost per unit.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general, and administrative expenses were $25.6 million or 13.2% of net sales for the three months ended July 1, 2007, compared to $22.0 million or 11.1% for the three months ended July 2, 2006. The increase of $3.6 million or 16.4% from the prior-year quarter was mainly attributable to employee related expenses such as salaries and benefits, and other expenses that included a special charge for a settlement with former subcontractors.
Research and Development Expenses. Research and development expenses for the most recently completed quarter were $32.5 million, a decrease of $1.4 million or 4.1% from $33.9 million for the prior year quarter. As a percentage of net sales, research and development expenses for the most recently completed quarter decreased to 16.7% compared to 17.2% for the prior-year quarter.
Restructuring and Impairment Charges. During the second quarter ended July 1, 2007, we recognized restructuring and impairment charges of $12.1 million which consisted of $10.1 million of impairment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144) and $2.0 million of restructuring under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). The impairment charges were recorded related to the closure of our 5-inch wafer fabrication facilities that has generated losses and no longer supported to our strategic technology roadmap.
During the three months ended July 2, 2006, we recorded restructuring and impairment charges totaling $93.7 million, which included $92.5 million of impairment under SFAS No. 144 and $1.2 million of restructuring under SFAS No. 146. 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 incurred in association with changes in certain of our management.
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Net Interest Expense and Net Foreign Currency Gain or Loss
Net Interest Expense. Net interest expense was $15.0 million during the three-month period ended July 1, 2007, relatively consistent with $14.4 million for the three-month period ended July 2, 2006. Substantially all of our interest expense is to service our long-term borrowings of $750.0 million at a weighted-average interest rate of 7.4%. The increase in net interest expense was mainly due to a decrease in interest income from financial assets including cash and cash equivalents.
Net Foreign Currency Gain or Loss. Net foreign currency gain for the three months ended July 1, 2007 was $13.9 million, compared to net foreign exchange gain of $14.5 million for the three months ended July 2, 2006. A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss recorded for intercompany borrowings at our Korea subsidiary and is affected by changes in the exchange rate between Korea won and U.S. dollar.
Income Tax Expenses
Income Tax Expenses. Income tax expenses for the most recently completed quarter were $1.8 million, compared to income tax expenses of $2.9 million for the same quarter of 2006. Our income tax expenses are mostly composed of withholding taxes on inter-company interest payments and changes in deferred tax assets. Due to the uncertainty of utilization of foreign tax credits, we treated this withholding tax as a current tax expense.
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Results of Operations Comparison of Six-Month Periods Ended July 1, 2007 and July 2, 2006.
The following table sets forth consolidated result of operations for the six months ended July 1, 2007 and July 2, 2006:
Six months ended July 1, 2007 |
Six months ended July 2, 2006 |
Change | |||||||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||||||
(in millions of US dollars; %) | |||||||||||||||||||||
Net sales |
$ | 345.8 | 100.0 | $ | 410.8 | 100.0 | $ | (65.0 | ) | (15.8 | ) | ||||||||||
Cost of sales |
303.1 | 87.7 | 350.2 | 85.2 | (47.1 | ) | (13.4 | ) | |||||||||||||
Gross profit |
42.7 | 12.3 | 60.6 | 14.8 | (17.9 | ) | (29.5 | ) | |||||||||||||
Selling, general and administrative expenses |
48.2 | 13.9 | 43.6 | 10.6 | 4.6 | 10.6 | |||||||||||||||
Research and development expenses |
67.7 | 19.6 | 63.9 | 15.6 | 3.8 | 5.9 | |||||||||||||||
Restructuring and impairment charges |
12.1 | 3.5 | 93.7 | 22.8 | (81.6 | ) | (87.1 | ) | |||||||||||||
Operating loss |
(85.3 | ) | (24.7 | ) | (140.6 | ) | (34.2 | ) | 55.3 | (39.3 | ) | ||||||||||
Interest expense, net |
(29.4 | ) | (8.5 | ) | (29.1 | ) | (7.1 | ) | (0.3 | ) | 1.0 | ||||||||||
Foreign currency gain, net |
6.5 | 1.9 | 38.8 | 9.4 | (32.3 | ) | (83.2 | ) | |||||||||||||
Loss before income taxes |
(108.2 | ) | (31.3 | ) | (130.9 | ) | (31.9 | ) | 22.7 | (17.3 | ) | ||||||||||
Income tax expenses |
4.1 | 1.2 | 5.1 | 1.2 | (1.0 | ) | (19.6 | ) | |||||||||||||
Net loss |
$ | (112.3 | ) | (32.5 | ) | $ | (136.0 | ) | (33.1 | ) | $ | 23.7 | (17.4 | ) | |||||||
Net Sales | |||||||||||||||||||||
Six months ended July 1, 2007 |
Six months ended July 2, 2006 |
Change | |||||||||||||||||||
Amount | % of Total |
Amount | % of total |
Amount | % | ||||||||||||||||
(in millions of US dollars; %) | |||||||||||||||||||||
Display solutions |
$ | 144.0 | 41.6 | $ | 159.1 | 38.7 | $ | (15.1 | ) | (9.5 | ) | ||||||||||
Imaging solutions |
29.1 | 8.4 | 35.0 | 8.5 | (5.9 | ) | (16.9 | ) | |||||||||||||
Semiconductor Manufacturing Services |
132.8 | 38.4 | 196.4 | 47.8 | (63.6 | ) | (32.4 | ) | |||||||||||||
All other |
39.9 | 11.6 | 20.3 | 5.0 | 19.6 | 96.6 | |||||||||||||||
$ | 345.8 | 100.0 | $ | 410.8 | 100.0 | $ | (65.0 | ) | (15.8 | ) | |||||||||||
We derive a majority of our net sales from three operating segments: Display Solutions, Imaging Solutions and Semiconductor Manufacturing Services. The All other category represents certain business activities other than these business segments, principally composed of rental and unit processing.
Total net sales for the six months ended July 1, 2007 decreased $65.0 million, or 15.8% compared to the six months ended July 2, 2006. Net sales generated in the three operating segments during the current period were $305.9 million, a decrease of $84.6 million or 21.7% from the net sales of our three operating segments for the prior-year period.
Display Solutions. Net sales from Display Solutions for the six months ended July 1, 2007 were $144.0 million, a $15.1 million or 9.5% decrease from $159.1 million for the six months ended July 2, 2006. This sales decrease was primarily attributable to a decline in average selling price.
Imaging Solutions. Imaging Solutions net sales decreased $5.9 million in the current period, or 16.9% compared to net sales generated in the prior-year period. This decrease was primarily attributable to the delays in transition to new mega-pixel products, which was expected to substitute our VGA products.
Semiconductor Manufacturing Services. Net sales from Semiconductor Manufacturing Services for the six months ended July 1, 2007, were $132.8 million, a $63.6 million or 32.4% decrease compared to net sales of $196.4 million for the six months ended July 2, 2006. This decrease was mainly due to a decrease in end-market demand, coupled with continued average selling price erosion.
All other. Net sales from All other for the six months ended July 1, 2007 were $39.9 million compared to $20.3 million for the six months ended July 2, 2006. This increase of $19.6 million substantially represents the revenue increase from our unit processing service.
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Gross Profit
Six months ended July 1, 2007 |
Six months ended July 2, 2006 |
Change | |||||||||||||||||||
Amount | % of net sales |
Amount | % of net sales |
Amount | % | ||||||||||||||||
(in millions of US dollars; %) | |||||||||||||||||||||
Display solutions |
$ | 15.3 | 10.6 | $ | 26.1 | 16.4 | $ | (10.8 | ) | (41.4 | ) | ||||||||||
Imaging solutions |
(0.2 | ) | (0.7 | ) | (8.0 | ) | (22.9 | ) | 7.8 | (97.5 | ) | ||||||||||
Semiconductor Manufacturing Services |
14.5 | 10.9 | 41.2 | 21.0 | (26.7 | ) | (64.8 | ) | |||||||||||||
All other |
13.1 | 32.8 | 1.3 | 6.4 | 11.8 | 907.7 | |||||||||||||||
$ | 42.7 | 12.3 | $ | 60.6 | 14.8 | $ | (17.9 | ) | (29.5 | ) | |||||||||||
Total gross profit decreased $17.9 million in the six months ended July 1, 2007, or 29.5%, compared to the gross profit generated in the six months ended July 2, 2006. Gross margin percentage for the six months ended July 1, 2007 was 12.3% of net sales, a decrease of 2.5% from 14.8% for the six months ended July 2, 2006. This decline in gross margin percentage was primarily attributable to an overall decrease in average selling prices.
Display Solutions. Gross margin percentage for Display Solutions for the six months ended July 1, 2007 declined to 10.6% compared to 16.4% for the six months ended July 2, 2006. This decline in gross margin percentage was primarily attributable to lower average selling price.
Imaging Solutions. Gross margin percentage for the current period was improved compared to the prior period mainly due to a decrease in depreciation costs resulting from impairment charges taken in the second quarter of 2006.
Semiconductor Manufacturing Services. Gross margin for Semiconductor Manufacturing Services declined to 10.9% in the six months ended July 1, 2007 from 21.0% in the six months ended July 2, 2006. The year-over-year decrease was mainly due to a decrease in end-user market demand and a decline in average selling price.
All other. Gross margin percentage for All other for current period increased to 32.8% from 6.4% for the prior period. This improvement in gross margin percentage is mainly attributable to sales volume increase for unit processing.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general, and administrative expenses were $48.2 million or 13.9% of net sales for the six months ended July 1, 2007 compared to $43.6 million or 10.6% for the six months ended July 2, 2006. The increase of $4.6 million or 10.6% from the prior-year period was mainly attributable to employee related expenses, including other expenses such as the special charge for a settlement with former subcontractors, that was partially offset by decreases in depreciation and amortization expenses resulting from impairment charges taken during the second quarter of 2006.
Research and Development Expenses. Research and development expenses for the current period were $67.7 million, an increase of $3.8 million or 5.9% from $63.9 million for the prior year period. This increase in research and development expenses essentially represented our focus on the introduction of new products, especially for the Imaging Solutions and Semiconductor Manufacturing Services segments. As a percentage of net sales, research and development expenses for the current period increased to 19.6% compared to 15.6% for the prior-year period.
Restructuring and Impairment Charges. During the second quarter ended July 1, 2007, we recognized restructuring and impairment charges of $12.1 million which consisted of $10.1 million of impairment under SFAS No. 144 and $2.0 million of restructuring under SFAS No. 146. The impairment charges were recorded related to the closure of our 5-inch wafer fabrication facilities that has generated losses and no longer supported to our strategic technology roadmap.
During the six months ended July 2, 2006, we recorded restructuring and impairment charges totaling $93.7 million, which included $92.5 million of impairment under SFAS No. 144 and $1.2 million of restructuring under SFAS No. 146. 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 incurred in association with changes in certain of our management.
Net Interest Expense and Net Foreign Currency Gain or Loss
Net Interest Expense. Net interest expense was $29.4 million during the six months period ended July 1, 2007, relatively consistent with $29.1 million for the six months ended July 2, 2006. Substantially all of our interest expense is to
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service our long-term borrowings of $750.0 million at a weighted-average interest rate of 7.4%. The increase in net interest expense was mainly due to a decrease in interest income from financial assets including cash and cash equivalents.
Net Foreign Currency Gain or Loss. Net foreign currency gain for the six months ended July 1, 2007 was $6.5 million, compared to net foreign exchange gain of $38.8 million for the six months ended July 2, 2006. A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss recorded for intercompany borrowings at our Korea subsidiary and is affected by changes in the exchange rate between the Korea won and U.S. dollar.
Income Tax Expenses
Income Tax Expenses. Income tax expenses for the current period were $4.1 million, compared to income tax expenses of $5.1 million for the same period of 2006. Our income tax expenses are mostly composed of withholding taxes on inter-company interest payments and changes in deferred tax assets. Due to the uncertainty of the utilization of foreign tax credits, we treated this withholding tax as a current tax expense.
Liquidity and Capital Resources
Our principal capital requirements are to fund working capital needs, to meet required debt payments, including debt service payments on the notes and the senior credit facility, and to invest in research and development and capital equipment. 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, our research and development and capital expenditures needs and service requirements on our debt obligations for the foreseeable future. As of July 1, 2007, we had total outstanding long-term debt of $750.0 million.
Our principal sources of liquidity are our cash, cash equivalents and available borrowings under our senior credit facility of $100 million. As of July 1, 2007, our cash and cash equivalents balance was $54.7 million or 7.6% of our total assets, a $34.5 million decrease from $89.2 million or 11.6% of total assets as of December 31, 2006. The decrease in cash and cash equivalents during the first half of 2007 was primarily attributable to cash outflow of $50.0 million in operating activities, coupled with cash outflow related to six months capital expenditures of $25.0 million.
During the six-month period ended July 1, 2007, net cash used in operating activities was $50.0 million, compared to $10.5 million of net cash generated by operating activities during the year-ago period. This decrease in cash from operating activities between the two periods was primarily attributable to a reduction in gross profit of $17.9 million resulting mainly from lower revenue. The net operating cash outflow for the current period principally reflects our net loss of $112.3 million adjusted by $105.2 million which mostly consisted of costs related to depreciation, impairment and amortization charges and an increase in working capital of $42.9 million.