NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
MagnaChip Semiconductor Corporation (together with its subsidiaries, the Company) is a Korea-based designer and manufacturer
of analog and mixed-signal semiconductor products for consumer, computing, communication, industrial, automotive and Internet of Things (IoT) applications. The Company provides technology platforms for analog, mixed signal, power, high
voltage, non-volatile memory and Radio Frequency (RF) applications. The Companys business is comprised of two operating segments: Foundry Services Group and Standard Products Group. The Companys Foundry Services Group
provides specialty analog and mixed-signal foundry services mainly for fabless and Integrated Device Manufacturer (IDM) semiconductor companies that primarily serve the consumer, computing, communication, industrial, automotive and IoT
applications. The Companys Standard Products Group is comprised of two business lines: Display Solutions and Power Solutions. The Companys Display Solutions products provide flat panel display solutions to major suppliers of large and
small flat panel displays and include sensor products for mobile applications, and industrial applications and home appliances. The Companys Power Solutions products include discrete and integrated circuit solutions for power management in
consumer, communication and industrial applications.
Basis of Presentation
The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of
America (US GAAP).
Significant accounting policies followed by the Company in the preparation of the accompanying
consolidated financial statements are summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company including its wholly-owned subsidiaries. All intercompany
transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions about future
events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses. Such estimates include the valuation of
accounts receivable, inventories, stock based compensation, property plant and equipment, intangible assets, other long-lived assets, long-term employee benefits, contingencies liabilities, estimated future cash flows and other assumptions used in
long-lived asset impairment tests and calculation of income taxes and deferred tax valuation allowances, and assumptions used in the calculation of sales incentives, among others. Although these estimates and assumptions are based on
managements best knowledge of current events and actions that the Company may undertake in the future, actual results may be significantly different from the estimates. Changes in those estimates resulting from continuing changes in the
economic environment will be reflected in the financial statements in future periods.
Foreign Currency Translation
The Company has assessed in accordance with Accounting Standards Codification (ASC) 830, Foreign Currency Matters
(ASC 830), the functional currency of each of its subsidiaries in Luxembourg and the Netherlands and has designated the U.S. dollar to be their respective functional currencies. The Korean Won is
84
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
the functional currency for the Companys Korean subsidiary, which is the primary operating subsidiary of the Company. The Company and its other subsidiaries are utilizing their local
currencies as their functional currencies. The financial statements of the subsidiaries in functional currencies other than the U.S. dollar are translated into the U.S. dollar in accordance with ASC 830. All the assets and liabilities are
translated to the U.S. dollar at the end-of-period exchange rates. Capital accounts are determined to be of a permanent nature and are therefore translated using historical exchange rates. Revenues and expenses are translated using average
exchange rates for the respective periods. Foreign currency translation adjustments arising from differences in exchange rates from period to period are included in the foreign currency translation adjustment account in accumulated other
comprehensive income (loss) of stockholders equity. Gains and losses due to transactions in currencies other than the functional currency are included as a component of other income, net in the statement of operations.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with an original maturity date of three months or less when purchased.
Accounts Receivable Reserves
An allowance for doubtful accounts is
provided based on the aggregate estimated uncollectability of the Companys accounts receivable. The Company also records an estimate for sales returns, included within accounts receivable, net, based on the historical experience of the amount
of goods that will be returned and refunded or replaced. In addition, the Company also includes in accounts receivable, an allowance for additional products that may have to be provided, free of charge, to compensate customers for products that do
not meet previously agreed yield criteria, the low yield compensation reserve.
Sales of Accounts Receivable
The Company accounts for transfers of financial assets under ASC 860, Transfers and Servicing, as either sales or financings.
Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets
and no condition both constraints the transferees right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (3) the transferor does not maintain effective control over the transferred assets.
If the transfer does not meet these criteria, the transfer is accounted for as a financing. Financial assets that are treated as sales are removed from the Companys accounts with any realized gain or loss reflected in earning during the period
of sale.
Inventories
Inventories are stated at the lower of cost or market, using the average cost method, which approximates the first in, first out method (FIFO). 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 within cost of sales. Inventory reserves are established when conditions indicate that the net
realizable value is less than costs due to physical deterioration, obsolescence, changes in price levels, or other causes based on individual facts and circumstances. Reserves are also established for excess inventory based on inventory levels in
excess of six months of projected demand for each specific product.
85
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
In addition, as prescribed in ASC 330, Inventory, the cost of
inventories is determined based on the normal capacity of each fabrication facility. In case the capacity utilization is lower than a certain level that management believes to be normal, the fixed overhead costs per production unit which exceeds
those under normal capacity are charged to cost of sales rather than capitalized as inventories.
Vendor Rebates
The Company, from time to time, entered into arrangements whereby rebates are obtained from vendors when the Company achieves certain
levels of purchases. The vendor rebates are computed at an agreed upon amount or percentage of purchase levels. As these vendor rebates are impacted by actual and estimated purchases for the applicable agreed upon period, the Company periodically
assess the progress of its purchase levels and revise the estimates when necessary. The Company accounts for such rebates as a reduction of inventory until the Company sells the product, at which time such rebates are reflected as a reduction of
cost of sales in its consolidated statements of operations. Vendor rebates recorded as a reduction of inventory were $359 thousand as of December 31, 2016 and as a reduction of cost of sales were $4,044 thousand for the year ended
December 31, 2016.
Property, Plant and Equipment
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 as set forth below.
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Buildings
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30 - 40 years
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Building related structures
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10 - 20 years
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Machinery and equipment
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10 - 12 years
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Others
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3 - 10 years
|
Routine maintenance and repairs are charged to expense as incurred. Expenditures that enhance the value
or significantly extend the useful lives of the related assets are capitalized.
Impairment of Long-Lived Assets
The Company reviews property, plant and equipment and other long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable in accordance with ASC 360, Property, Plant and Equipment. Recoverability is measured by comparing its carrying amount with the future net undiscounted cash flows the assets
are expected to generate. If such assets are considered to be impaired, the impairment is measured as the difference between the carrying amount of the assets and the fair value of assets using the present value of the future net cash flows
generated by the respective long-lived assets.
Restructuring Charges
The Company recognizes restructuring charges in accordance with ASC 420, Exit or Disposal Cost Obligations. Certain costs
and expenses related to exit or disposal activities are recorded as restructuring charges when liabilities for those costs and expenses are incurred.
Lease Transactions
The Company accounts for lease transactions as
either operating leases or capital leases, depending on the terms of the underlying lease agreements. Machinery and equipment acquired under capital lease agreements are
86
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
recorded at the lower of the present value of future minimum lease payments and estimated fair value of leased property and depreciated using the straight-line method over their estimated useful
lives. In addition, the aggregate lease payments are recorded as capital lease obligations, net of unaccrued interest. Interest is amortized over the lease period using the effective interest rate method. Leases that do not qualify as capital leases
are classified as operating leases, and the related rental payments are expensed on a straight-line basis over the shorter of the estimated useful lives of the leased property and the lease term.
Intangible Assets
Intangible assets other than intellectual property include technology and customer relationships which are amortized on a straight-line
basis over periods ranging from one to five years. Intellectual property assets acquired represent rights under patents, trademarks and property use rights and are amortized over their respective periods of benefit, ranging up to ten years, on
a straight-line basis.
Fair Value Disclosures of Financial Instruments
The Company follows ASC 820, Fair Value Measurements and Disclosures (ASC 820) for measurement and
disclosures about fair value of its financial instruments. ASC 820 establishes a framework for measuring fair value in US GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value
measurements and related disclosures, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to
quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by ASC 820 are:
Level 1Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the
measurement date.
Level 2Inputs (other than quoted market prices included in Level 1) are
either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instruments anticipated life.
Level 3Inputs reflect managements best estimate of what market participants would use in pricing the
asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Valuation of instruments includes unobservable inputs to the valuation methodology
that are significant to the measurement of fair value of assets or liabilities.
As defined by ASC 820, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale, which was further clarified as the price that would be received to sell an
asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The carrying amounts of the Companys financial assets and liabilities, such as cash and cash
equivalents, accounts receivable, other receivables, accounts payable and other accounts payable approximate their fair values because of the short maturity of these instruments.
Accrued Severance Benefits
The majority of accrued severance
benefits is for employees in the Companys Korean subsidiary, MagnaChip Semiconductor Ltd. Pursuant to the Employee Retirement Benefit Security Act of Korea, eligible
87
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 December 31, 2016, 98% of all employees of the Company were eligible for severance benefits.
Accrued severance
benefits are funded through a group severance insurance plan. The amounts funded under this insurance plan are classified as a reduction of the accrued severance benefits. Subsequent accruals are to be funded at the discretion of the Company.
In accordance with the National Pension Act of the Republic of Korea, a certain portion of accrued severance benefits is
deposited with the National Pension Fund and deducted from the accrued severance benefits. The contributed amount is paid to employees from the National Pension Fund upon their retirement.
Revenue Recognition
Revenue is recognized when there is persuasive
evidence of an arrangement, the price to the buyer is fixed or determinable, delivery has occurred and collectability of the sales price is reasonably assured. Revenue from the sale of products is recognized when title and risk of loss transfers to
the customer, which is generally when the product is shipped to or accepted by the customer depending on the terms of the arrangement.
A portion of the Companys sales are made through distributors for which revenue recognition criteria are usually met when the product is shipped to or accepted by the distributors, consistent with
the principles described above. However, the risk of loss may not pass upon shipment of products to the distributor due to a variety of reasons, including the nature of the business arrangement with the distributor. For example, the financial
condition of a distributor may indicate that payments by the distributor to the Company are contingent on resale of products to an end customer. In this situation, the Company defers recognition of revenue and cost of revenue on transactions with
such distributor until the product has been resold to the end customer.
The Company recorded deferred revenue in the amount
of $11,092 thousand as of December 31, 2016 and $10,060 thousand as of December 31, 2015 as the Company received cash from certain customers and distributors for the sale of products prior to risk of loss being transferred based on the
terms of the arrangement.
In accordance with revenue recognition guidance, any tax assessed by a governmental authority that
is directly imposed on a revenue-producing transaction between a seller and a customer is presented in the statements of operations on a net basis (excluded from revenues).
The Company provides a warranty, under which customers can return defective products. The Company estimates the costs related to those defective product returns and records them as a component of cost of
sales.
In addition, the Company offers sales returns (other than those that relate to defective products under warranty),
yield provisions, cash discounts for early payments and certain allowances to its customers, including distributors. The Company records reserves for those returns, discounts and allowances as a deduction from sales, based on historical experience
and other quantitative and qualitative factors.
All amounts billed to a customer related to shipping and handling are
classified as sales while all costs incurred by the Company for shipping and handling are classified as selling, general and administrative expenses. The amounts charged to selling, general and administrative expenses were $1,631 thousand, $2,394
thousand, and $3,386 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.
88
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Derivative Financial Instruments
The Company applies the provisions of ASC 815, Derivatives and Hedging (ASC 815). This Statement
requires the recognition of all derivative instruments as either assets or liabilities measured at fair value.
Under the
provisions of ASC 815, the Company may designate a derivative instrument as hedging the exposure to variability in expected future cash flows that are attributable to a particular risk (a cash flow hedge) or hedging the exposure to
changes in the fair value of an asset or a liability (a fair value hedge). Special accounting for qualifying hedges allows the effective portion of a derivative instruments gains and losses to offset related results on the hedged
item in the consolidated statements of operations and requires that a company formally document, designate and assess the effectiveness of the transactions that receive hedge accounting treatment. Both at the inception of a hedge and on an ongoing
basis, a hedge must be expected to be highly effective in achieving offsetting changes in cash flows or fair value attributable to the underlying risk being hedged. If the Company determines that a derivative instrument is no longer highly effective
as a hedge, it discontinues hedge accounting prospectively and future changes in the fair value of the derivative are recognized in current earnings. The Company assesses hedge effectiveness at the end of each quarter.
In accordance with ASC 815, changes in the fair value of derivative instruments that are cash flow hedges are recognized in
accumulated other comprehensive income (loss) and reclassified into earnings in the period in which the hedged item affects earnings. Ineffective portions of a derivative instruments change in fair value are immediately recognized in earnings.
Derivative instruments that do not qualify, or cease to qualify, as hedges must be adjusted to fair value and the adjustments are recorded through net income (loss).
The cash flows from derivative instruments receiving hedge accounting treatment are classified in the same categories as the hedged items in the consolidated statements of cash flows.
Advertising
The
Company expenses advertising costs as incurred. Advertising expense was approximately $149 thousand, $144 thousand and $155 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.
Product Warranties
The Company records, in other current liabilities, warranty liabilities for the estimated costs that may be incurred under its basic
limited warranty. The standard limited warranty period is one to two years for the majority of products. 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 or replacement 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.
Research and Development
Research and development costs are expensed as incurred and include wafers, masks, employee expenses, contractor fees, building costs, utilities and administrative expenses.
Licensed Patents and Technologies
The Company has entered into a number of royalty agreements to license patents and technology used in the design of its products. The Company carries two types of royalties: lump-sum and running basis.
Lump-sum
89
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
royalties which require initial payments, usually paid in installments, represent a non-refundable commitment, such that the total present value of these payments is recorded as a prepaid expense
and a liability upon execution of the agreements and the costs are amortized over the contract period using the straight-line method and charged to research and development expenses in the consolidated statements of operations.
Running royalties are paid based on the revenue of related products sold by the Company.
Stock-Based Compensation
The Company follows the provisions of ASC 718, Compensation-Stock Compensation (ASC 718). Under ASC 718, stock-based compensation cost is measured at the grant date, based on
the fair value of the award, and is recognized as expense over the requisite service period. As permitted under ASC 718, the Company elected to recognize compensation expense for all options with graded vesting based on the graded attribution
method.
The Company uses the Black-Scholes option-pricing model to measure the grant-date-fair-value of options. The
Black-Scholes model requires certain assumptions to determine an options fair value, including expected term, risk free interest rate, expected volatility and fair value of underlying common share. 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 with 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.
Earnings per Share
In accordance with ASC 260, Earnings
Per Share, the Company computes basic earnings per share by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the
dilution of potential common stock outstanding during the period. In determining the hypothetical shares repurchased, the Company uses the average share price for the period. In the case that earnings are negative, any potential common stock
equivalents would have the effect of being anti-dilutive in the computation of net loss per share.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (ASC 740). ASC 740
requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in a companys financial statements or tax returns. Under this method, deferred tax assets and liabilities
are determined based upon the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation
allowances are established when it is necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities.
The Company recognizes and measures uncertain tax positions taken or expected to be taken in a tax return utilizing a
two-step process. In the first step, recognition, the Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the
technical merits of the position. The second step addresses measurement of a
90
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
tax position that meets the more-likely-than-not criteria. The tax position is measured at the largest amount of benefit that has a likelihood of greater than 50 percent of being realized
upon ultimate settlement.
Concentration of Credit Risk
The Company performs periodic credit evaluations of its customers financial condition and generally does not require collateral for customers on accounts receivable. The Company maintains reserves
for potential credit losses, which are periodically reviewed.
Recent Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-15, Statement of Cash Flows (Topic 230),
Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles in ASC 230, Statement
of Cash Flows, (ASC 230) including providing additional guidance on how and what an entity should consider in determining the classification of certain cash flows. In addition, in November 2016, the FASB issued ASU 2016-18, Statement of
Cash Flows (Topic 230), Restricted Cash (ASU 2016-18). ASU 2016-18 clarifies certain existing principles in ASC 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present,
in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. These ASUs are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
Early adoption is permitted. The Company does not expect the adoption of ASU 2016-15 to have a material effect on the Companys consolidated financial statements. The adoption of ASU 2016-18 will modify the Companys current disclosures by
reclassifying certain balances within the consolidated statement of cash flows, but this is not expected to have a material effect on the Companys consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment
Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and
classification on the statement of cash flows. ASU 2016-09 can be applied either on a retrospective or prospective basis and is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. The Company
will adopt ASU 2016-09 in the first quarter of 2017. The primary impact of adoption will be the recognition of excess tax benefits within income tax provision rather than within shareholders equity, which the Company will adopt on a
prospective basis. As the Company does not have a significant amount of excess tax benefits from share-based payment transactions, it does not expect the adoption of ASU 2016-09 to have a material effect on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU
2016-02) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under US GAAP. ASU 2016-02 requires that a
lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after
December 15, 2018, including interim periods within those reporting periods using a modified retrospective approach and early adoption is permitted. The Company is performing a preliminary review of its contracts that are expected to be applied
under the new guidance.
In November 2015, the Financial Accounting Standard Board (FASB) issued Accounting
Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-
91
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
17). The amendments in ASU 2015-17 require an entity to classify all deferred tax assets and liabilities as noncurrent. ASU 2015-17 is effective for fiscal years beginning after
December 15, 2016 and interim periods within those years. The Company will adopt ASU 2015-17 in the first quarter of 2017. As the Company does not have a significant balance of current deferred tax assets and liabilities, it believes that the
implementation of this guidance will have no material impact on its consolidated financial statements.
In July 2015, the FASB
issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11). Under this ASU, inventory will be measured at the lower of cost and net realizable value, and options that currently
exist for market value will be eliminated. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. No other changes were made
to the current guidance on inventory measurement. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. The Company will adopt ASU 2015-11 in the first quarter of 2017 and believes
that the implementation of this guidance will have no material impact on its consolidated financial statements.
In May 2014,
the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic
605), and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU
2014-09 is effective for annual reporting periods beginning after December 15, 2016 (the Original Effective Date), including interim periods within that reporting period, and can be adopted either retrospectively to each prior
period presented or as a cumulative-effect adjustment as of the date of adoption, with early application permitted as of the Original Effective Date. In August 2015, the FASB issued ASU 2015-14 Deferral of the Effective Date, which
defers the required adoption date of ASU 2014-09 by one year. As a result of the deferred effective date, ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that
reporting period. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU
2016-08) clarifying the implementation guidance on principal versus agent considerations. Specifically, an entity is required to determine whether the nature of a promise is to provide the specified good or service itself (that is, the entity
is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The determination influences the timing and amount of revenue recognition. In May 2016, the FASB issued
Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (ASU 2016-12) clarifying how to assess collectibility, present sales tax,
treat noncash consideration, and account for completed and modified contracts at the time of transition. In addition, ASU 2016-12 clarifies that an entity retrospectively applying the guidance in Topic 606 is not required to disclose the effect of
the accounting change in the period of adoption. The effective date and transition requirements for ASU 2016-12, ASU 2016-08 and ASU 2014-09 are the same. Finally, ASU 2016-20 makes minor corrections or minor improvements to the Codification that
are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The Company started analyzing the potential impact of applying the new guidance by reviewing its current
accounting policies, customer arrangements and practices. The Company has not selected a transition method nor have we determined the effect of the standard to the Companys consolidated financial statements.
Recently Adopted Accounting Pronouncements
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, InterestImputation of Interest (ASU 2015-03). ASU 2015-03 requires that debt issuance costs be
presented in the balance sheet as a
92
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs would not be affected.
Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as an asset in the balance sheet. The Company adopted ASU 2015-03 in the first quarter of fiscal 2016 and recorded $3,203 thousand of debt issuance costs as a
reduction of long-term borrowings as of December 31, 2016. Pursuant to ASU 2015-03, the Company reclassified all prior periods presented in its consolidated balance sheets to conform to the current period presentation, resulting in the
reclassification of debt issuance costs of $3,781 thousand from other non-current assets to a reduction of long-term borrowings as of December 31, 2015. The adoption of ASU 2015-03 did not impact the Companys consolidated statements of
operations and cash flows.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation
of Financial Statements Going Concern (ASU 2014-15), which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. ASU 2014-15 requires management to perform
interim and annual assessments of an entitys ability to continue as a going concern within one year of the date the financial statements are issued. An entity will be required to provide certain disclosures if conditions of events raise
substantial doubt about the entitys ability to continue as a going concern. ASU 2014-15 was effective for the Company in the fourth quarter of 2016. The adoption of ASU 2014-15 did not impact the Companys consolidated financial
statements.
2. Fair Value Measurements
ASC 820 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820 requires, among other things, the
Companys valuation techniques used to measure fair value to maximize the use of observable inputs and minimize the use of unobservable inputs.
Fair Value of Financial Instruments
As of December 31, 2016, the
following table represents the Companys liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):
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Carrying Value
December 31, 2016
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Fair Value
Measurement
December 31, 2016
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Quoted Prices in
Active Markets
for Identical
Asset (Level 1)
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Significant
Other
Observable
Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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Liabilities:
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Derivative liabilities (other current liabilities)
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$
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453
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$
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453
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$
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453
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|
93
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
As of December 31, 2015, the following table represents the Companys
liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
December 31, 2015
|
|
|
Fair Value
Measurement
December 31, 2015
|
|
|
Quoted Prices in
Active Markets
for Identical
Asset (Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities (other current liabilities)
|
|
$
|
40
|
|
|
$
|
40
|
|
|
|
|
|
|
$
|
40
|
|
|
|
|
|
Items not reflected in the table above include cash and cash equivalents, restricted cash, accounts
receivable, other receivables, accounts payable, and other accounts payable, fair value of which approximate carrying values due to the short-term nature of these instruments. The fair value of assets and liabilities whose carrying value
approximates fair value is determined using Level 2 inputs, with the exception of cash (Level 1).
Fair Value of Long-term Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
|
(In thousands of US dollars)
|
|
Long-term Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.625% senior notes due July 2021 (Level 2)
|
|
$
|
221,082
|
|
|
$
|
193,500
|
|
|
$
|
220,375
|
|
|
$
|
157,500
|
|
On July 18, 2013, the Company issued 6.625% senior notes due July 15, 2021 (the 2021
Notes) of $225.0 million, which represents the principal amount, excluding $1.1 million of original issue discount and $5.1 million of debt issuance costs. The Company estimates the fair value of the 2021 Notes using the market approach,
which utilizes quoted market prices that fall under Level 2. For further description of the 2021 Notes, see Note 10, Long-term Borrowings.
Fair Values Measured on a Non-recurring Basis
The Companys
non-financial assets, such as property, plant and equipment, and intangible assets are recorded at fair value upon acquisition and are remeasured at fair value only if an impairment charge is recognized. As of December 31, 2016 and 2015, the
Company did not have any assets or liabilities measured at fair value on a non-recurring basis.
94
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
3. Accounts Receivable
Accounts receivable as of December 31, 2016 and 2015 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accounts receivable
|
|
$
|
63,116
|
|
|
$
|
60,892
|
|
Notes receivable
|
|
|
281
|
|
|
|
4,803
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowances for doubtful accounts
|
|
|
(83
|
)
|
|
|
(236
|
)
|
Sales return reserves
|
|
|
(1,107
|
)
|
|
|
(1,481
|
)
|
Low yield compensation reserve
|
|
|
(432
|
)
|
|
|
(480
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
61,775
|
|
|
$
|
63,498
|
|
|
|
|
|
|
|
|
|
|
Changes in allowance for doubtful accounts for the years ended December 31, 2016, 2015 and 2014 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
(236
|
)
|
|
$
|
(263
|
)
|
|
$
|
(268
|
)
|
Reversal (Provision)
|
|
|
148
|
|
|
|
3
|
|
|
|
(3,718
|
)
|
Write off
|
|
|
|
|
|
|
|
|
|
|
3,508
|
|
Translation adjustments
|
|
|
5
|
|
|
|
24
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(83
|
)
|
|
$
|
(236
|
)
|
|
$
|
(263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in sales return reserves for the years ended December 31, 2016, 2015 and 2014 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
(1,481
|
)
|
|
$
|
(787
|
)
|
|
$
|
(1,205
|
)
|
Provision
|
|
|
(26
|
)
|
|
|
(1,586
|
)
|
|
|
(3,224
|
)
|
Usage
|
|
|
361
|
|
|
|
851
|
|
|
|
3,598
|
|
Translation adjustments
|
|
|
39
|
|
|
|
41
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(1,107
|
)
|
|
$
|
(1,481
|
)
|
|
$
|
(787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in low yield compensation reserve for the years ended December 31, 2016, 2015 and 2014 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
(480
|
)
|
|
$
|
(1,100
|
)
|
|
$
|
(1,951
|
)
|
Reversal (Provision)
|
|
|
(29
|
)
|
|
|
69
|
|
|
|
(766
|
)
|
Usage
|
|
|
63
|
|
|
|
512
|
|
|
|
1,563
|
|
Translation adjustments
|
|
|
14
|
|
|
|
39
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(432
|
)
|
|
$
|
(480
|
)
|
|
$
|
(1,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The Company has entered into an agreement to sell selected trade accounts receivable to
a financial institution from time to time since March 2012. After the sale, the Company does not retain any interest in the receivables and the applicable financial institution collects these accounts receivable directly from the customer. The
proceeds from the sales of these accounts receivable totaled $25,146 thousand, $57,185 thousand and $22,256 for the years ended December 31, 2016, 2015 and 2014, respectively, and these sales resulted in pre-tax losses of $78 thousand, $114
thousand and $64 thousand for the years ended December 31, 2016, 2015 and 2014, respectively, which are included in selling, general and administrative expenses in the consolidated statements of operations. Net proceeds of the accounts
receivable sale program are recognized in the consolidated statements of cash flows as part of operating cash flows.
The
Company uses receivable discount programs with certain customers. These discount arrangements allow the Company to accelerate collection of customers receivables.
4. Inventories
Inventories as of December 31, 2016 and 2015 consist
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Finished goods
|
|
|
7,867
|
|
|
|
18,427
|
|
Semi-finished goods and work-in-process
|
|
|
46,653
|
|
|
|
47,131
|
|
Raw materials
|
|
|
7,846
|
|
|
|
5,987
|
|
Materials in-transit
|
|
|
1,859
|
|
|
|
2,107
|
|
Less: inventory reserve
|
|
|
(7,177
|
)
|
|
|
(16,033
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
57,048
|
|
|
$
|
57,619
|
|
|
|
|
|
|
|
|
|
|
Changes in inventory reserve for the years ended December 31, 2016, 2015 and 2014 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
(16,033
|
)
|
|
$
|
(47,488
|
)
|
|
$
|
(72,400
|
)
|
Change in reserve
|
|
|
(2,661
|
)
|
|
|
297
|
|
|
|
(883
|
)
|
Write off
|
|
|
11,384
|
|
|
|
29,146
|
|
|
|
23,765
|
|
Translation adjustments
|
|
|
133
|
|
|
|
2,012
|
|
|
|
2,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(7,177
|
)
|
|
$
|
(16,033
|
)
|
|
$
|
(47,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserve represents the Companys best estimate in value lost due to excessive inventory
level, physical deterioration, obsolescence, changes in price levels, or other causes based on individual facts and circumstances. Inventory reserve relates to inventory items including finished goods, semi-finished goods and work-in-process. Write
off of this reserve is recognized only when the related inventory has been disposed or scrapped.
96
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
5. Property, Plant and Equipment
Property, plant and equipment as of December 31, 2016 and 2015 are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Buildings and related structures
|
|
$
|
64,939
|
|
|
$
|
66,487
|
|
Machinery and equipment
|
|
|
255,618
|
|
|
|
256,259
|
|
Others
|
|
|
29,492
|
|
|
|
27,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,049
|
|
|
|
349,821
|
|
Less: accumulated depreciation
|
|
|
(184,521
|
)
|
|
|
(172,546
|
)
|
Land
|
|
|
14,265
|
|
|
|
14,710
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
179,793
|
|
|
$
|
191,985
|
|
|
|
|
|
|
|
|
|
|
Aggregate depreciation expenses totaled $24,941 thousand and $26,130 thousand for the years ended
December 31, 2016 and 2015, respectively.
As of December 21, 2016, The Company entered into a purchase and sale
agreement to sell a building located in Cheongju, South Korea. The building has historically been used to house the 6-inch fab and became vacant upon the closure of the fabrication facility. As of December 31, 2015, the building was fully
impaired. The Company received proceeds of $18,204 thousand, including a $1,655 thousand value-added tax, for the sale of the building on December 26, 2016. The Company is obligated to perform certain removal construction work that is expected
to be completed by the end of March 2017. Accordingly, the Company recorded the $18,204 thousand proceeds as restricted cash and $16,549 thousand as deposits received in its consolidated balance sheets as of December 31, 2016.
6. Intangible Assets
Intangible assets as of December 31, 2016 and 2015 are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Gross
amount
|
|
|
Accumulated
amortization
|
|
|
Net
amount
|
|
Technology
|
|
$
|
17,903
|
|
|
$
|
(17,903
|
)
|
|
$
|
|
|
Customer relationships
|
|
|
25,712
|
|
|
|
(25,712
|
)
|
|
|
|
|
Intellectual property assets
|
|
|
9,026
|
|
|
|
(5,941
|
)
|
|
|
3,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
52,641
|
|
|
$
|
(49,556
|
)
|
|
$
|
3,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Gross
amount
|
|
|
Accumulated
amortization
|
|
|
Net
amount
|
|
Technology
|
|
$
|
18,460
|
|
|
$
|
(18,460
|
)
|
|
$
|
|
|
Customer relationships
|
|
|
26,513
|
|
|
|
(26,513
|
)
|
|
|
|
|
Intellectual property assets
|
|
|
8,357
|
|
|
|
(5,728
|
)
|
|
|
2,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
53,330
|
|
|
$
|
(50,701
|
)
|
|
$
|
2,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Aggregate amortization expense for intangible assets totaled $475 thousand and $360
thousand for the years ended December 31, 2016 and 2015, respectively. The aggregate amortization expense of intangible assets for the next five years are estimated to be $525 thousand, $525 thousand, $524 thousand, $504 thousand and $470
thousand, for the years ended December 31, 2017, 2018, 2019, 2020 and 2021, respectively.
7. Accrued Expenses
Accrued expenses as of December 31, 2016 and 2015 are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Payroll, benefits and related taxes, excluding severance benefits
|
|
$
|
24,982
|
|
|
$
|
18,831
|
|
Withholding tax attributable to intercompany interest income
|
|
|
15,573
|
|
|
|
13,130
|
|
Interest on senior notes
|
|
|
6,831
|
|
|
|
6,831
|
|
Settlement obligations
|
|
|
243
|
|
|
|
1,012
|
|
Accrued claim settlement
|
|
|
|
|
|
|
23,500
|
|
Outside service fees
|
|
|
4,423
|
|
|
|
4,327
|
|
Others
|
|
|
8,313
|
|
|
|
9,090
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
60,365
|
|
|
$
|
76,721
|
|
|
|
|
|
|
|
|
|
|
Accrued claim settlement included in the table above relates to the Companys securities class
action complaints. On December 10, 2015, it was determined that the Company was obligated to make an aggregate settlement payment of $23,500 thousand, which includes all attorneys fees, costs of administration and plaintiffs
out-of-pocket expenses, lead plaintiff compensatory awards and disbursements. In connection with the securities class action complaints, the Company also settled with its insurers and obtained proceeds of $29,571 thousand in the first quarter of
2016, and disbursed the $23,500 thousand from the escrow account, recorded as restricted cash, in the third quarter of 2016. For more information on the accrued claim settlement, see Note 18. Commitments and Contingencies.
Payroll, benefits and related taxes payable as of December 31, 2016 in the table above includes unpaid other termination benefits
under the voluntary resignation program of $1,392 thousand, the remaining balance of the $4,241 thousand total aggregate expense for such benefits accrued during the second quarter of 2016 and being paid out in equal monthly installments over the
twelve month period which began in May 2016.
8. Derivative Financial Instruments
The Companys Korean subsidiary from time to time has entered into zero cost collar contracts to hedge the risk of changes in the
functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues.
Details
of derivative contracts as of December 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Date of transaction
|
|
Type of derivative
|
|
|
Total notional amount
|
|
|
Month of settlement
|
November 11, 2016
|
|
|
Zero cost collar
|
|
|
$
|
18,000
|
|
|
March to August 2017
|
98
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Details of derivative contracts as of December 31, 2015 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Date of transaction
|
|
Type of derivative
|
|
|
Total notional amount
|
|
|
Month of settlement
|
September 30, 2015
|
|
|
Zero cost collar
|
|
|
$
|
30,000
|
|
|
January to March 2016
|
September 30, 2015
|
|
|
Zero cost collar
|
|
|
$
|
30,000
|
|
|
April to June 2016
|
The zero cost collar contracts qualify as cash flow hedges under ASC 815, Derivatives and
Hedging, since at both the inception of the contracts and on an ongoing basis, the hedging relationship was and is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the
contracts. The 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.
The fair values of the Companys outstanding zero cost collar contracts recorded as liabilities as of December 31,
2016 and 2015 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
December 31,
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Zero cost collars
|
|
|
Other current liabilities
|
|
|
$
|
453
|
|
|
$
|
40
|
|
Offsetting of derivative liabilities as of December 31, 2016 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Gross amounts of
recognized
liabilities
|
|
|
Gross amounts
offset in the
balance sheets
|
|
|
Net amounts of
liabilities
presented in the
balance
sheets
|
|
|
Gross amounts not offset
in the balance sheets
|
|
|
Net amount
|
|
|
|
|
|
Financial
instruments
|
|
|
Cash collateral
pledged
|
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zero cost collars
|
|
$
|
453
|
|
|
$
|
|
|
|
$
|
453
|
|
|
$
|
|
|
|
$
|
(650
|
)
|
|
$
|
(197
|
)
|
Offsetting of derivative liabilities as of December 31, 2015 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
Gross amounts of
recognized
liabilities
|
|
|
Gross amounts
offset in the
balance sheets
|
|
|
Net amounts of
liabilities
presented in the
balance
sheets
|
|
|
Gross amounts not offset
in the balance sheets
|
|
|
Net amount
|
|
|
|
|
|
Financial
instruments
|
|
|
Cash collateral
received/pledged
|
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zero cost collars
|
|
$
|
40
|
|
|
$
|
|
|
|
$
|
40
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
40
|
|
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of
the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (AOCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and
losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.
99
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The following table summarizes the impact of derivative instruments on the consolidated
statement of operations for the years ended December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in
ASC 815
Cash Flow
Hedging
Relationships
|
|
Amount of
Loss
Recognized in
AOCI
on
Derivatives
(Effective Portion)
|
|
|
Location of
Loss
Reclassified from
AOCI into
Statement
of
Operations
(Effective Portion)
|
|
Amount of
Loss
Reclassified from
AOCI
into
Statement of
Operations
(Effective Portion)
|
|
|
Location of
Loss
Recognized in
Statement of
Operations
on
Derivative
(Ineffective
Portion)
|
|
Amount of
Loss
Recognized in
Statement of
Operations
on
Derivatives
(Ineffective Portion)
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
2016
|
|
|
2015
|
|
Zero cost collars
|
|
$
|
(1,032
|
)
|
|
$
|
(3,748
|
)
|
|
Net sales
|
|
$
|
(637
|
)
|
|
$
|
(3,222
|
)
|
|
Other income,
net
|
|
$
|
(272
|
)
|
|
$
|
(516
|
)
|
As of December 31, 2016, the amount expected to be reclassified from accumulated other comprehensive
income into loss within the next twelve months is $436 thousand.
The Company set aside $2,500 thousand and $6,000 thousand of
cash deposits to the counterparty, Nomura Financial Investment (Korea) Co., Ltd. (NFIK) as required for the zero cost collar contracts outstanding as of December 31, 2016 and 2015, respectively. These cash deposits are recorded as
hedge collateral on the consolidated balance sheets.
The Company is required to deposit additional cash collateral with NFIK
for any exposure in excess of $500 thousand, and $650 thousand was required as of December 31, 2016 and recorded as hedge collateral on the consolidated balance sheets. There was no such cash collateral required as of December 31,
2015. These outstanding zero cost collar contracts are subject to termination if the sum of qualified and unrestricted cash and cash equivalents held by the Company is less than $30,000 thousand on the last day of a fiscal quarter.
9. Product Warranties
Changes in accrued warranty liabilities for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
1,425
|
|
|
$
|
2,973
|
|
|
$
|
877
|
|
Change in provision
|
|
|
(426
|
)
|
|
|
(648
|
)
|
|
|
7,194
|
|
Usage
|
|
|
(527
|
)
|
|
|
(758
|
)
|
|
|
(4,923
|
)
|
Translation adjustments
|
|
|
(6
|
)
|
|
|
(142
|
)
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
466
|
|
|
$
|
1,425
|
|
|
$
|
2,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
10. Long-term Borrowings
Long-term borrowings as of December 31, 2016 and 2015 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
6.625% senior notes due July 2021
|
|
$
|
225,000
|
|
|
$
|
225,000
|
|
Less: unamortized discount and debt issuance costs
|
|
|
(3,918
|
)
|
|
|
(4,625
|
)
|
|
|
|
|
|
|
|
|
|
Long-term borrowings, net of unamortized discount and debt issuance costs
|
|
$
|
221,082
|
|
|
$
|
220,375
|
|
|
|
|
|
|
|
|
|
|
On July 18, 2013, the Company issued a $225,000,000 aggregate principal amount of the 2021 Notes at
a price of 99.5%. Interest on the 2021 Notes accrues at a rate of 6.625% per annum, payable semi-annually on January 15 and July 15 of each year, beginning on January 15, 2014.
The Company can optionally redeem all or a part of the 2021 Notes according to the following schedule: (i) at any time prior to
July 15, 2017, the Company may on any one or more occasions redeem all or a part of the 2021 Notes issued under that certain Indenture, dated as of July 18, 2013, by and between the Company and Wilmington Trust, National Association,
as trustee (the Trustee), as supplemented by that certain First Supplemental Indenture, dated as of March 27, 2014 (collectively, the Indenture), related to the 2021 Notes at a redemption price equal to 100% of the
principal amount of the notes redeemed, plus the applicable premium as of, and accrued and unpaid interest and special interest, if any, to the date of redemption and (ii) on or after July 15, 2017, the Company may on any one or more
occasions redeem all or a part of the 2021 Notes, at a redemption price equal to 103.313%, 101.656% and 100% of the principal amount of the notes redeemed on or after July 15, 2017, 2018 and 2019, respectively, plus accrued and unpaid interest
and special interest, if any, on the notes redeemed, to the applicable date of redemption.
The Indenture relating to the 2021
Notes contains covenants that limit the ability of the Company and its restricted subsidiaries to: (i) declare or pay any dividend or make any payment or distribution on account of or purchase or redeem the Companys capital stock or
equity interests of the restricted subsidiaries; (ii) make any principal payment on, or redeem or repurchase, prior to any scheduled repayment or maturity, any subordinated indebtedness; (iii) make certain investments; (iv) incur
additional indebtedness and issue certain types of capital stock; (v) create or incur any lien (except for permitted liens) that secures obligations under any indebtedness; (vi) merge with or into or sell all or substantially all of the
Companys assets to other companies; (vii) enter into certain types of transactions with affiliates; (viii) guarantee the payment of any indebtedness; (ix) enter into sale-leaseback transactions; (x) enter into agreements
that would restrict the ability of the restricted subsidiaries to make distributions with respect to their equity to the Company or other restricted subsidiaries, to make loans to the Company or other restricted subsidiaries or to transfer assets to
the Company or other restricted subsidiaries; and (xi) designate unrestricted subsidiaries.
These covenants are subject
to a number of exceptions and qualifications. Certain of these restrictive covenants will terminate if the 2021 Notes are rated investment grade at any time.
11. Accrued Severance Benefits
The majority of accrued severance benefits
are for employees in the Companys Korean subsidiary. Pursuant to the Employee Retirement Benefit Security Act of Korea, eligible employees and executive officers
101
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 December 31, 2016, 98%
of all employees of the Company were eligible for severance benefits.
Changes in accrued severance benefits are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
135,160
|
|
|
$
|
140,405
|
|
Provisions
|
|
|
14,432
|
|
|
|
15,289
|
|
Severance payments
|
|
|
(15,352
|
)
|
|
|
(11,394
|
)
|
Translation adjustments
|
|
|
(4,096
|
)
|
|
|
(9,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
130,144
|
|
|
|
135,160
|
|
Less: Cumulative contributions to the National Pension Fund
|
|
|
(276
|
)
|
|
|
(307
|
)
|
Group severance insurance plan
|
|
|
(643
|
)
|
|
|
(705
|
)
|
|
|
|
|
|
|
|
|
|
Accrued severance benefits, net
|
|
$
|
129,225
|
|
|
$
|
134,148
|
|
|
|
|
|
|
|
|
|
|
The severance benefits funded through the Companys National Pension Fund and group severance
insurance plan will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.
The Company is liable to pay the following future benefits to its non-executive employees upon their normal retirement age (in thousands):
|
|
|
|
|
|
|
Severance
Benefit
|
|
2017
|
|
$
|
|
|
2018
|
|
|
|
|
2019
|
|
|
788
|
|
2020
|
|
|
1,495
|
|
2021
|
|
|
2,567
|
|
2022 2026
|
|
|
19,002
|
|
The above amounts were determined based on the non-executive employees current salary rates and the
number of service years that will be accumulated upon their retirement dates. These amounts do not include amounts that might be paid to non-executive employees that will cease working with the Company before their normal retirement ages.
The above table reflects an effect of a mandatory extension of retirement age in Korea from 57 to 60 under the Employment
Promotion for the Aged Act effective from the beginning of 2016.
12. Common Stock
Common stock par value $0.01 per share, was authorized in the amount of 150,000 thousand shares, of which 41,627 thousand shares
were issued and 35,048 thousand shares were outstanding as of December 31, 2016.
102
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Changes in common stock for each period are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Common stock at the beginning of the period
|
|
|
34,568,942
|
|
|
$
|
411
|
|
|
|
34,056,468
|
|
|
$
|
406
|
|
Exercise of stock options
|
|
|
296,103
|
|
|
|
3
|
|
|
|
512,474
|
|
|
|
5
|
|
Settlement of restricted stock units
|
|
|
183,293
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common stock outstanding at the end of the period
|
|
|
35,048,338
|
|
|
$
|
416
|
|
|
|
34,568,942
|
|
|
$
|
411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Equity Incentive Plans
The Company adopted its 2009 Common Unit Plan, or the 2009 Plan, effective December 8, 2009, which is administered by the Compensation Committee of the Companys Board of Directors (the
Compensation Committee). The 2009 Plan terminated in connection with the Companys initial public offering in March 2011, and no additional options or other equity awards may be granted under the 2009 Plan. However, options granted
under the 2009 Plan prior to its termination will remain outstanding until they are either exercised or expire. The Company adopted its 2011 Equity Incentive Plan, or the 2011 Plan, in March 2010. The Company amended and restated the 2011 Plan in
February 2011, and the Companys stockholders approved the amendment in March 2011 to reflect that it became effective in 2011 in connection with the Companys initial public offering in March 2011. Awards may be granted under the 2011
Plan to the Companys employees, officers, directors, or consultants or those of any present or future parent or subsidiary corporation or other affiliated entity. While the Company may grant incentive stock options only to employees, the
Company may grant nonstatutory stock options, stock appreciation rights, restricted stock purchase rights or bonuses, restricted stock units, performance shares, performance units and cash-based awards or other stock-based awards to any eligible
participant, subject to terms and conditions determined by the Compensation Committee. The term of options shall not exceed ten years from the date of grant. Restricted stock purchase rights shall be exercisable within a period established by the
Compensation Committee, which shall in no event exceed thirty days from the effective date of the grant. As of December 31, 2016, an aggregate maximum of 7,274 thousand shares were authorized and 557 thousand shares were reserved for
all future grants.
Stock options and stock appreciation rights must have exercise prices at least equal to the fair market
value of the stock at the time of their grant pursuant to the 2011 Plan. 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. Stock
options typically vest over three years following grant.
Restricted stock units granted under the 2011 Plan represent a right
to receive shares of the Companys common stock when the restricted stock unit vests. No monetary payment (other than applicable tax withholding) shall be required as a condition of receiving shares pursuant to a restricted stock unit, the
consideration for which shall be services actually rendered to a participating company or for its benefit. Stock issued pursuant to any restricted stock unit may (but need not) be made subject to vesting conditions based upon the satisfaction of
such service requirements, conditions, restrictions or performance criteria as shall be established by the Compensation Committee and set forth in the award agreement evidencing such award. Restricted stock units typically vest over three years
following grant.
The purchase price for shares issuable under each restricted stock purchase right shall be established by
the Compensation Committee in its discretion. No monetary payment (other than applicable tax withholding) shall
103
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
be required as a condition of receiving shares pursuant to a restricted stock bonus, the consideration for which shall be services actually rendered to a participating company or for its benefit.
Stock issued pursuant to any restricted stock award may (but need not) be made subject to vesting conditions based upon the satisfaction of such service requirements, conditions, restrictions or performance criteria as shall be established by the
Compensation Committee and set forth in the award agreement evidencing such award. During any period in which stock acquired pursuant to a restricted stock award remain subject to vesting conditions, such stock may not be sold, exchanged,
transferred, pledged, assigned or otherwise disposed of other than pursuant to an ownership change event or transfer by will or the laws of descent and distribution. The grantee shall have all of the rights of a stockholder of the Company holding
stock, including the right to vote such stock and to receive all dividends and other distributions paid with respect to such stock; provided, however, that if so determined by the Compensation Committee and provided by the award agreement, such
dividends and distributions shall be subject to the same vesting conditions as the stock subject to the restricted stock award with respect to which such dividends or distributions were paid. If a grantees service terminates for any reason,
whether voluntary or involuntary (including the grantees death or disability), then (a) the Company (or its assignee) has the option to repurchase for the purchase price paid by the grantee any stock acquired by the grantee pursuant to a
restricted stock purchase right which remain subject to vesting conditions as of the date of the grantees termination of service and (b) the grantee shall forfeit to the Company any stock acquired by the grantee pursuant to a restricted
stock bonus which remain subject to vesting conditions as of the date of the grantees termination of service. The Company has the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to
one or more persons as may be selected by the Company.
The following summarizes restricted stock unit activities for the year
ended December 31, 2016 and 2015. For the year ended December 31, 2014, there were no restricted stock unit activities.
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted
Stock Units
|
|
|
Weighted
Average
Grant-Date
Fair Value of
Restricted
Stock Units
|
|
Outstanding at January 1, 2015
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
265,332
|
|
|
|
7.68
|
|
Vested
|
|
|
(129,962
|
)
|
|
|
7.64
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
135,370
|
|
|
$
|
7.72
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
505,689
|
|
|
|
5.71
|
|
Vested
|
|
|
(101,240
|
)
|
|
|
7.09
|
|
Forfeited
|
|
|
(21,339
|
)
|
|
|
6.24
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
518,480
|
|
|
$
|
5.94
|
|
|
|
|
|
|
|
|
|
|
Total compensation expenses recorded for the restricted stock units were $2,292 thousand and $1,400
thousand for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, there was $1,030 thousand of total unrecognized compensation cost related to unvested restricted stock units, which is expected to be
recognized over a weighted average future period of 0.6 of a year. Total fair value of restricted stock units vested were $717 thousand and $993 thousand for the years ended December 31, 2016 and 2015, respectively.
104
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The following summarizes stock option activities for the years ended December 31,
2016, 2015 and 2014. At the date of grant, all options had an exercise price not less than the fair value of common stock (aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price of
Stock
Options
|
|
|
Aggregate
Intrinsic
Value of
Stock
Options
|
|
|
Weighted
Average
Remaining
Contractual
Life of
Stock
Options
|
|
Outstanding at January 1, 2014
|
|
|
2,944,645
|
|
|
$
|
8.82
|
|
|
$
|
31,558
|
|
|
|
7.3 years
|
|
Granted
|
|
|
310,000
|
|
|
|
16.75
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(31,905
|
)
|
|
|
8.34
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,795
|
)
|
|
|
7.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
3,215,945
|
|
|
$
|
9.60
|
|
|
$
|
39,615
|
|
|
|
6.6 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2014
|
|
|
3,204,967
|
|
|
|
9.58
|
|
|
|
39,610
|
|
|
|
6.6 years
|
|
Exercisable at December 31, 2014
|
|
|
2,760,402
|
|
|
|
8.70
|
|
|
|
39,187
|
|
|
|
6.3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2015
|
|
|
3,215,945
|
|
|
$
|
9.60
|
|
|
$
|
39,615
|
|
|
|
6.6 years
|
|
Granted
|
|
|
802,193
|
|
|
|
7.92
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(325,765
|
)
|
|
|
9.88
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(512,474
|
)
|
|
|
6.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
3,179,899
|
|
|
$
|
9.61
|
|
|
$
|
|
|
|
|
6.7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2015
|
|
|
3,155,828
|
|
|
|
9.62
|
|
|
|
|
|
|
|
6.7 years
|
|
Exercisable at December 31, 2015
|
|
|
2,547,902
|
|
|
|
9.63
|
|
|
|
|
|
|
|
6.0 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2016
|
|
|
3,179,899
|
|
|
$
|
9.61
|
|
|
$
|
|
|
|
|
6.7 years
|
|
Granted
|
|
|
827,406
|
|
|
|
6.04
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(282,537
|
)
|
|
|
7.67
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(296,103
|
)
|
|
|
5.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
3,428,665
|
|
|
$
|
9.23
|
|
|
$
|
525
|
|
|
|
6.7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2016
|
|
|
3,389,763
|
|
|
|
9.27
|
|
|
|
508
|
|
|
|
6.7 years
|
|
Exercisable at December 31, 2016
|
|
|
2,531,243
|
|
|
|
10.11
|
|
|
|
236
|
|
|
|
5.9 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation expenses recorded for the stock options were $1,551 thousand, $1,368 thousand and
$2,072 thousand for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, there was $697 thousand of total unrecognized compensation cost related to unvested stock options, which is expected to be
recognized over a weighted average future period of 1.0 year. Total fair value of options vested was $1,011 thousand, $1,361 thousand and $2,957 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.
105
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 for the years ended December 31, 2016, 2015 and 2014 and assumptions used in the Black-Scholes option-pricing model on a weighted average basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Grant-date fair value of option
|
|
$
|
1.54
|
|
|
$
|
1.67
|
|
|
$
|
4.10
|
|
Expected term
|
|
|
2.7 Years
|
|
|
|
2.4 Years
|
|
|
|
2.7 Years
|
|
Risk-free interest rate
|
|
|
1.0
|
%
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
Expected volatility
|
|
|
36.8
|
%
|
|
|
33.8
|
%
|
|
|
36.7
|
%
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
The number and weighted average grant-date fair value of the unvested stock options are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Number
|
|
|
Weighted
Average
Grant-
Date
Fair Value
|
|
|
Number
|
|
|
Weighted
Average
Grant-
Date
Fair Value
|
|
|
Number
|
|
|
Weighted
Average
Grant-
Date
Fair Value
|
|
Unvested options at the beginning of the period
|
|
|
631,997
|
|
|
$
|
2.40
|
|
|
|
455,543
|
|
|
$
|
4.18
|
|
|
|
998,170
|
|
|
$
|
3.69
|
|
Granted options during the period
|
|
|
827,406
|
|
|
|
1.54
|
|
|
|
802,193
|
|
|
|
1.67
|
|
|
|
310,000
|
|
|
|
4.10
|
|
Vested options during the period
|
|
|
(446,570
|
)
|
|
|
2.26
|
|
|
|
(532,682
|
)
|
|
|
2.56
|
|
|
|
(819,818
|
)
|
|
|
3.61
|
|
Forfeited options during the period
|
|
|
(85,934
|
)
|
|
|
1.88
|
|
|
|
(92,959
|
)
|
|
|
4.01
|
|
|
|
(31,905
|
)
|
|
|
3.20
|
|
Exercised options during the period
|
|
|
(29,478
|
)
|
|
|
1.24
|
|
|
|
(98
|
)
|
|
|
3.08
|
|
|
|
(904
|
)
|
|
|
3.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested options at the end of the period
|
|
|
897,421
|
|
|
$
|
1.72
|
|
|
|
631,997
|
|
|
$
|
2.40
|
|
|
|
455,543
|
|
|
$
|
4.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Restructuring and Impairment Charges
2016 Restructuring Gain
During the first quarter of 2016, the Company
completed all procedures necessary to sell all machineries in its closed 6-inch fab and recognized the $7,785 thousand of restructuring gain from the related deposit of $8,165 thousand received as of December 31, 2015, net of certain direct
selling costs.
2014 Impairment Charges
The Company recognized $10,269 thousand of impairment charges, which were incurred due to the planned closure of its six-inch fabrication facility. The impairment charges primarily resulted from $8,239
thousand of impairment to building, $1,763 thousand of impairment of machinery and equipment and $267 thousand of impairment of other tangible assets.
15. Foreign Currency Gain (Loss), Net
Net foreign currency gain or loss
includes non-cash translation gain or loss associated with intercompany balances. A substantial portion of the Companys net foreign currency gain or loss is non-cash translation gain or
106
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
loss associated with intercompany long-term loans to our Korean subsidiary. The loans are denominated in U.S. dollars and are affected by changes in the exchange rate between the Korean won and
the U.S. dollar. As of December 31, 2016, 2015 and 2014, the outstanding intercompany loan balances including accrued interest between the Korean subsidiary and the Dutch subsidiary were $598,212 thousand, $591,388 thousand and $765,265
thousand, respectively. The Korean won to U.S. dollar exchange rates were 1,208.5:1, 1,172.0:1 and 1,099.2:1 using the first base rate as of December 31, 2016, 2015 and 2014, respectively, as quoted by the KEB Hana Bank.
16. Income Taxes
The
Companys income tax expenses are composed of domestic and foreign income taxes depending on the relevant tax jurisdictions. Domestic income (loss) before taxes and income tax expenses are generated or incurred in the United States, where the
parent company resides.
The components of income tax expense are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(1,738
|
)
|
|
$
|
32,903
|
|
|
$
|
(22,146
|
)
|
Foreign
|
|
|
(24,133
|
)
|
|
|
(132,857
|
)
|
|
|
(93,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(25,871
|
)
|
|
$
|
(99,954
|
)
|
|
$
|
(115,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income taxes expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(6
|
)
|
|
$
|
25
|
|
|
$
|
(3,300
|
)
|
Foreign
|
|
|
3,386
|
|
|
|
(14,301
|
)
|
|
|
3,312
|
|
Uncertain tax position liability (Domestic)
|
|
|
12
|
|
|
|
10
|
|
|
|
10
|
|
Uncertain tax position liability (Foreign)
|
|
|
339
|
|
|
|
(1,220
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,731
|
|
|
|
(15,486
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
13
|
|
|
|
399
|
|
|
|
1,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
3,744
|
|
|
$
|
(15,087
|
)
|
|
$
|
1,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(14.5
|
)%
|
|
|
15.1
|
%
|
|
|
(1.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences between the annual effective tax rates and the U.S. federal statutory rate of 35.0%
primarily result from the non-income based withholding tax attributable to intercompany interest income of the Companys Dutch subsidiary, application of lower tax rates associated with certain earnings from the Companys operations
outside the U.S., the parent Companys interest income, which is non-taxable for US tax purposes and the change of deferred tax assets and valuation allowance. The significant increase in income tax expense in 2016 is related to the reversal of
withholding tax payable with respect to the waiver of the accrued interest on the loans granted to our Korean subsidiary by our Dutch subsidiary in 2015. Korean and Dutch subsidiaries agreed that our Dutch subsidiary waives and releases a partial
amount of unpaid interest of $174 million on its intercompany loans granted to our Korean subsidiary in order to decrease the cumulative losses of our Korean subsidiary to enhance the subsidiarys credit standing under the local banking rules.
This transaction created a taxable income for our Korean subsidiary but did not result in a liability because of the utilization of expired loss carryforwards, which is deductible only against gains from cancellation of debt. The loss was not tax
deductible for our Dutch
107
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
subsidiary. This transaction also resulted in taxable loss for our Luxemburg subsidiary and this tax benefit was offset by an increase in the change in valuation allowance. In connection with the
waiver of unpaid interest, the related withholding tax was reversed, resulting in the recognition of income tax benefit of $17.8 million as of December 31, 2015.
The statutory income tax rate of the Companys Korean subsidiary was approximately 24.2% in 2016, 2015 and 2014.
The provision for domestic and foreign income taxes incurred is different from the amount calculated by applying the statutory tax rate to the net income before income taxes. The significant items causing
this difference are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Provision computed at statutory rate
|
|
$
|
(9,055
|
)
|
|
$
|
(34,984
|
)
|
|
$
|
(40,498
|
)
|
Difference in foreign tax rates
|
|
|
1,995
|
|
|
|
24,359
|
|
|
|
10,130
|
|
Permanent differences
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets adjustment
|
|
|
(149
|
)
|
|
|
(143
|
)
|
|
|
(1,526
|
)
|
TPECs, hybrid and other interest
|
|
|
(10,353
|
)
|
|
|
(27,273
|
)
|
|
|
(6,813
|
)
|
Permanent impairment
|
|
|
|
|
|
|
(62,334
|
)
|
|
|
|
|
Thin capitalization
|
|
|
2,120
|
|
|
|
2,457
|
|
|
|
|
|
Permanent foreign currency gain (loss)
|
|
|
(54
|
)
|
|
|
11,575
|
|
|
|
(901
|
)
|
Penalty
|
|
|
689
|
|
|
|
|
|
|
|
|
|
Non-deductible settlement
|
|
|
|
|
|
|
|
|
|
|
6,318
|
|
Non-deductible bad debt expense
|
|
|
|
|
|
|
89
|
|
|
|
|
|
Other permanent differences
|
|
|
50
|
|
|
|
(69
|
)
|
|
|
(1,097
|
)
|
Withholding tax
|
|
|
3,092
|
|
|
|
(14,457
|
)
|
|
|
3,506
|
|
Foreign exchange rate adjustment
|
|
|
(1,838
|
)
|
|
|
(8,954
|
)
|
|
|
4,687
|
|
Change in valuation allowance
|
|
|
10,095
|
|
|
|
95,757
|
|
|
|
29,484
|
|
Tax credits claimed
|
|
|
(706
|
)
|
|
|
(875
|
)
|
|
|
(1,811
|
)
|
Tax credits expired
|
|
|
1,578
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions liability
|
|
|
351
|
|
|
|
(1,211
|
)
|
|
|
(56
|
)
|
Others
|
|
|
5,929
|
|
|
|
976
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
3,744
|
|
|
$
|
(15,087
|
)
|
|
$
|
1,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The permanent differences above include non-taxable TPECs and interest income from other financial
instruments for US tax purposes and non-deductible interest expense according to the thin capitalization rule for Korean tax purposes. The permanent impairment of $62,334 thousand in 2015 was related to the loss recognized by the Companys
Luxemburg subsidiary in connection with the cancellation of debt as described above, which was not recognized for US tax purposes.
108
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
A summary of the composition of net deferred income tax assets (liabilities) as of
December 31, 2016, 2015 and 2014 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivables
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,076
|
|
Inventories
|
|
|
1,822
|
|
|
|
4,063
|
|
|
|
11,015
|
|
Derivative assets
|
|
|
110
|
|
|
|
10
|
|
|
|
|
|
Accrued expenses
|
|
|
2,803
|
|
|
|
12,939
|
|
|
|
9,030
|
|
Product warranties
|
|
|
113
|
|
|
|
345
|
|
|
|
719
|
|
Other reserves
|
|
|
372
|
|
|
|
474
|
|
|
|
457
|
|
Royalty income
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Property, plant and equipment
|
|
|
13,314
|
|
|
|
13,986
|
|
|
|
15,914
|
|
Intangible assets
|
|
|
103
|
|
|
|
407
|
|
|
|
780
|
|
Accumulated severance benefits
|
|
|
31,478
|
|
|
|
31,038
|
|
|
|
30,413
|
|
Foreign currency translation losses
|
|
|
53,130
|
|
|
|
52,294
|
|
|
|
17,496
|
|
NOL carry-forwards
|
|
|
167,590
|
|
|
|
155,545
|
|
|
|
80,979
|
|
Tax credit
|
|
|
20,249
|
|
|
|
21,868
|
|
|
|
25,161
|
|
Other long-term payable
|
|
|
2,079
|
|
|
|
2,385
|
|
|
|
1,034
|
|
Others
|
|
|
4,885
|
|
|
|
1,974
|
|
|
|
1,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
298,048
|
|
|
|
297,328
|
|
|
|
196,211
|
|
Less: Valuation allowance
|
|
|
(281,473
|
)
|
|
|
(279,867
|
)
|
|
|
(194,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,575
|
|
|
|
17,461
|
|
|
|
1,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains
|
|
|
14,338
|
|
|
|
14,859
|
|
|
|
748
|
|
Prepaid expense
|
|
|
1,644
|
|
|
|
1,953
|
|
|
|
|
|
Others
|
|
|
410
|
|
|
|
478
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
16,392
|
|
|
|
17,290
|
|
|
|
895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
183
|
|
|
$
|
171
|
|
|
$
|
577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred income tax assets
|
|
$
|
37
|
|
|
$
|
34
|
|
|
$
|
237
|
|
Non-current deferred income tax assets
|
|
$
|
193
|
|
|
$
|
238
|
|
|
$
|
415
|
|
Current deferred income tax liabilities
|
|
$
|
(46
|
)
|
|
$
|
(98
|
)
|
|
$
|
(72
|
)
|
Non-current deferred income tax liabilities
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
|
$
|
(3
|
)
|
The valuation allowances at December 31, 2016, 2015 and 2014 are primarily attributable to deferred
tax assets for the uncertainty in taxable income at the Companys Korean subsidiary. The Company has recorded a full valuation allowance against the deferred tax assets, net of its deferred tax liabilities, and against certain foreign
subsidiarys deferred tax assets pertaining to its related tax loss carry-forwards that are not anticipated to generate a tax benefit.
109
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Changes in valuation allowance for deferred tax assets for the years ended
December 31, 2016, 2015 and 2014 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
279,867
|
|
|
$
|
194,739
|
|
|
$
|
178,729
|
|
Charged to expense
|
|
|
10,095
|
|
|
|
95,757
|
|
|
|
29,484
|
|
NOL/tax credit claimed/expired
|
|
|
(872
|
)
|
|
|
(1,197
|
)
|
|
|
(7,605
|
)
|
Translation adjustments
|
|
|
(7,617
|
)
|
|
|
(9,432
|
)
|
|
|
(5,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
281,473
|
|
|
$
|
279,867
|
|
|
$
|
194,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount presented as Charged to expense primarily relates to the utilization of net
operating loss and tax credit carry-forwards, or pre-tax losses for which there is no tax benefit.
The evaluation of the
recoverability of the deferred tax asset and the need for a valuation allowance requires the Company to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset
will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a
conclusion that a valuation allowance is not needed. Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Companys ability to generate future taxable income within the period
during which the temporary differences reverse, the outlook for the economic environment in which the Company operates and the overall future industry outlook.
As of December 31, 2016, 2015 and 2014, the Company had net deferred tax assets of $183 thousand, $171 thousand and $577 thousand, respectively, related to the Companys Japanese
subsidiary. As of December 31, 2016, 2015 and 2014, the Company recorded a valuation allowance of $281,473 thousand, $279,867 thousand and $194,739 thousand on its deferred tax assets related to temporary differences, net operating loss
carry-forwards and tax credits of domestic and foreign subsidiaries. The Company recorded these valuation allowances on deferred tax assets based on its assessment that the negative evidence of expected losses in early future years outweighs the
positive evidence of historical income.
As of December 31, 2016, the Company had approximately $684,851 thousand of net
operating loss carry-forwards available to offset future taxable income, of which $280,417 thousand is associated with the Companys Korean subsidiary, which expires in part at various dates through 2026. The net operating loss of $268,959
thousand associated with the Companys Luxembourg subsidiary is mainly attributable to certain expenses incurred in connection with its shareholding in the Companys Dutch subsidiary. Although this net operating loss amount is the carried
forward indefinitely, it will be recaptured on future capital gain. The remaining net operating loss mainly relates to the US parent company and its domestic subsidiary, which expires in part at various dates through 2036. The Company utilized net
operating loss of $279 thousand, $121 thousand and $1,219 thousand, for the years ended December 31, 2016, 2015 and 2014, respectively. The Company also has Korean, Dutch and U.S. tax credit carry-forwards of approximately $6,738 thousand,
$13,121 thousand and $390 thousand, respectively, as of December 31, 2016. The Korean tax credits expire at various dates starting from 2017 to 2021, and the Dutch tax credits are carried forward to be used for an indefinite period of
time.
110
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Uncertainty in Income Taxes
The Company and its subsidiaries file income tax returns in Korea, Japan, Taiwan, the U.S. and in various other jurisdictions. The
Company is subject to income tax examinations by tax authorities of these jurisdictions for all open tax years.
As of
December 31, 2016, 2015 and 2014, the Company recorded $2,459 thousand, $2,139 thousand and $3,491 thousand of liabilities for unrecognized tax benefits, respectively. For the years ended December 31, 2016, 2015and 2014, the Company
recorded $670 thousand, $1,606 thousand and $110 thousand of income tax benefits, respectively, by reversing liabilities due to the lapse of the applicable statute of limitations and incurred $687 thousand, $351 thousand and $44 thousand of income
tax expenses, respectively, for uncertain tax positions mainly resulting from imputed interest related to intercompany balances.
For the years ended December 31, 2016, 2015 and 2014, the Company recognized $334 thousand, $45 thousand, $10 thousand of interest and penalties, respectively, related to unrecognized tax benefits as
a component of income tax expense. Total interest and penalties accrued as of December 31, 2016, 2015 and 2014 were $691 thousand, $359 thousand and $480 thousand, respectively.
The Company is currently unaware of any uncertain tax positions that could result in significant additional payments, accruals, or other
material deviation in this estimate over the next 12 months.
A tabular reconciliation of the total amounts of unrecognized
tax benefits at the beginning and end of each period is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Unrecognized tax benefits, balance at the beginning
|
|
$
|
13,330
|
|
|
$
|
14,969
|
|
|
$
|
11,865
|
|
Additions based on tax positions related to the current year
|
|
|
942
|
|
|
|
1,789
|
|
|
|
4,472
|
|
Additions for tax positions of prior years
|
|
|
317
|
|
|
|
|
|
|
|
47
|
|
Lapse of statute of limitations
|
|
|
(2,380
|
)
|
|
|
(2,142
|
)
|
|
|
(1,040
|
)
|
Translation adjustments
|
|
|
(315
|
)
|
|
|
(1,287
|
)
|
|
|
(375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, balance at the ending
|
|
$
|
11,894
|
|
|
$
|
13,330
|
|
|
$
|
14,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. Geographic and Segment Information
The Company had previously reported its results of operations under one operating segment. During the second quarter of 2015, organizational changes were made to (i) realign the Companys
businesses and organizational structure and (ii) streamline and consolidate certain business processes to achieve greater operating efficiencies. In furtherance of these objectives, the Company combined its Display Solutions and Power Solutions
business lines into a new segment called Standard Products Group. Beginning in the second quarter of 2015, the Company began reporting its financial results in two operating segments: Semiconductor Manufacturing Services and Standard Products Group.
During the third quarter of 2015, the Company changed the name of its Semiconductor Manufacturing Services segment to Foundry Services Group. The Companys chief operating decision maker is its Chief Executive Officer who allocates resources
and assesses performance of the business and other activities based on gross profit. The two newly established operating segments were managed prospectively and all prior period amounts related to the segment change have been retrospectively
reclassified to conform to the new presentation.
111
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The following sets forth information relating to the operating segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Foundry Services Group
|
|
$
|
273,961
|
|
|
$
|
290,775
|
|
|
$
|
360,549
|
|
Standard Products Group
|
|
|
|
|
|
|
|
|
|
|
|
|
Display Solutions
|
|
|
281,967
|
|
|
|
207,480
|
|
|
|
199,861
|
|
Power Solutions
|
|
|
131,468
|
|
|
|
134,814
|
|
|
|
137,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Standard Products Group
|
|
|
413,435
|
|
|
|
342,294
|
|
|
|
337,107
|
|
All other
|
|
|
573
|
|
|
|
643
|
|
|
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
687,969
|
|
|
$
|
633,712
|
|
|
$
|
698,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Foundry Services Group
|
|
$
|
69,412
|
|
|
$
|
66,175
|
|
|
$
|
75,739
|
|
Standard Products Group
|
|
|
87,194
|
|
|
|
68,094
|
|
|
|
76,561
|
|
All other
|
|
|
(380
|
)
|
|
|
595
|
|
|
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
156,226
|
|
|
$
|
134,864
|
|
|
$
|
152,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of net sales by geographic region, based on the location to which the products
are billed (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Korea
|
|
$
|
219,618
|
|
|
$
|
241,715
|
|
|
$
|
260,139
|
|
Asia Pacific (other than Korea)
|
|
|
391,875
|
|
|
|
316,562
|
|
|
|
324,248
|
|
U.S.A.
|
|
|
33,201
|
|
|
|
51,164
|
|
|
|
91,308
|
|
Europe
|
|
|
42,274
|
|
|
|
23,461
|
|
|
|
21,159
|
|
Others
|
|
|
1,001
|
|
|
|
810
|
|
|
|
1,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
687,969
|
|
|
$
|
633,712
|
|
|
$
|
698,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales from the Companys top ten largest customers accounted for 64%, 64% and 61% for the years
ended December 31, 2016, 2015 and 2014, respectively.
For the year ended December 31, 2016, the Company had two
customers that represented 23.5% and 11.4% of its net sales, respectively. For the year ended December 31, 2015, the Company had two customers that represented 15.2% and 11.0% of its net sales, respectively. For the year ended December 31,
2014, the Company had two customers that represented 11.4% and 10.7% of its net sales, respectively.
96% of the
Companys property, plant and equipment are located in Korea as of December 31, 2016.
112
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
18. Commitments and Contingencies
Operating Agreements with SK Hynix
In connection with the
acquisition of the non-memory semiconductor business from SK Hynix on October 4, 2004 (the Original Acquisition), the Company entered into several agreements with SK Hynix, including a non-exclusive cross license that provides
the Company with access to certain of SK Hynixs intellectual property for use in the manufacture and sale of non-memory semiconductor products. The Company also agreed to provide certain utilities and infrastructure support services to SK
Hynix.
Upon the closing of the Original Acquisition, the Companys Korean subsidiary and SK Hynix also entered into
lease agreements under which the Companys Korean subsidiary leases space to SK Hynix in several buildings, primarily warehouses and utility facilities, in Cheongju, Korea. These leases are generally for an initial term of 20 years plus an
indefinite number of renewal terms of 10 years each. Each of the leases is cancelable upon 90 days notice by the lessee. The Company also leases certain land from SK Hynix located in Cheongju, Korea. The term of this lease is
indefinite unless otherwise agreed by the parties, and as long as the buildings remain on the lease site and are owned and used by the Company for permitted uses.
Operating Leases
The Company leases land, office space and
equipment under various operating lease agreements with various terms. Rental expenses were approximately $8,898 thousand, $8,194 thousand and $9,421 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.
As of December 31, 2016, the minimum aggregate rental payments due under non-cancelable lease contracts are as follows (in
thousands):
|
|
|
|
|
2017
|
|
$
|
4,781
|
|
2018
|
|
|
2,786
|
|
2019
|
|
|
2,279
|
|
2020
|
|
|
2,200
|
|
2021
|
|
|
1,844
|
|
2022 and thereafter
|
|
|
23,547
|
|
|
|
|
|
|
|
|
$
|
37,437
|
|
|
|
|
|
|
Securities Class Action Complaints
The Company recorded the $23,500 thousand of the settlement obligation for the Class Action Litigation as accrued expenses in the consolidated balance sheets as of December 31, 2015 and as selling,
general and administrative expenses in the consolidated statements of operations for the year ended December 31, 2015. For further information regarding the Class Action Litigation, see Item 3. Legal Proceedings included elsewhere
in this Report. The Company recorded $29,571 thousand of the proceeds from the insurers as other receivables in the consolidated balance sheets as of December 31, 2015 and as a deduction of the selling, general and administrative expenses in
the consolidated statements of operations for the year ended December 31, 2015. The proceeds from the insurers of $29,571 thousand were deposited into the Companys escrow account during the first quarter of 2016 and the Company
reclassified the $29,571 thousand deposits recorded in other receivables into restricted cash. During the third quarter of 2016, the Company disbursed the aggregate settlement payment
113
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
of $23,500 thousand after the court granted plaintiffs renewed motion for preliminary approval of the settlement in July 2016. Upon the settlement payment, $6,114 thousand of the insurance
proceeds remained in the Companys escrow account. For subsequent treatment of the escrow amount, see
Shareholder Derivative Complaints
below.
SEC Enforcement Staff Review
In March 2014, the Company voluntarily
reported to the SEC that the Companys Audit Committee (the Audit Committee) had determined that the Company incorrectly recognized revenue on certain transactions and as a result would restate its financial statements, and that the
Audit Committee had commenced an independent investigation. Over the course of 2014 and the first two quarters of 2015, the Company voluntarily produced documents to the SEC regarding the various accounting issues identified during the independent
investigation, and whether the Companys hiring of an accountant from the Companys independent registered public accounting firm impacted that accounting firms independence. On July 22, 2014, the Staff of the SECs
Division of Enforcement obtained a Formal Order of Investigation. On March 12, 2015, the SEC issued a subpoena for documents to the Company in connection with its investigation. The Company will continue to cooperate with the SEC in this
investigation, and has produced documents in response to the subpoena. At this time, the Company is unable to estimate any reasonably possible loss, or range of reasonably possible losses, with respect to the matters described above.
Shareholder Derivative Complaints
The settlement for the shareholder derivative actions described in Item 3. Legal Proceedings provided for an aggregate payment from the Company defendants directors and officers
insurance policies of $3,000 thousand to be made to an escrow account, which will be payable to the Company (less certain deductions and applicable interest) once the settlement becomes effective. For further information regarding the
shareholder derivative actions, see Item 3. Legal Proceedings included elsewhere in this Report. The $3,000 thousand settlement payment was included in the insurance proceeds of $29,571 thousand as discussed in
Securities
Class Action Complaints
above.
On June 10, 2016, the court granted plaintiffs motion for preliminary
approval of the proposed settlement. On October 18, 2016, after a hearing held on October 14, 2016, the court entered its order and final judgment (the Judgment) granting final approval of the proposed settlement and awarding
plaintiffs counsel $750 thousand for attorneys fees and litigation expenses. As a result, $750 thousand was paid out of the Companys escrow account. The Judgment was not appealed within the applicable appeals period (on or before
December 19, 2016). The settlement therefore became effective after the expiration of the appeals period and $2,258 thousand was paid to the Company from the escrow account, previously recorded as restricted cash, in December 2016. The
remaining restricted cash related to insurance proceeds of $3,078 thousand was also released in December 2016.
19. Related Party
Transactions
Stockholders
Funds affiliated with Avenue Capital Management II, L.P. (Avenue) owned 11.7% of the Companys common stock issued and outstanding at December 31, 2016.
Funds affiliated with Engaged Capital, LLC. owned 11.0% of the Companys common stock issued and outstanding at December 31,
2016.
114
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
20. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of the following at December 31, 2016 and 2015, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Foreign currency translation adjustments
|
|
$
|
14,460
|
|
|
$
|
(190
|
)
|
Derivative adjustments
|
|
|
(436
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,024
|
|
|
$
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2016, 2015
and 2014 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Foreign
currency
translation
adjustments
|
|
|
Derivative
adjustments
|
|
|
Unrealized
gain on
investments
|
|
|
Total
|
|
Beginning balance
|
|
$
|
(190
|
)
|
|
$
|
(41
|
)
|
|
$
|
|
|
|
$
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
14,650
|
|
|
|
(1,032
|
)
|
|
|
|
|
|
|
13,618
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
|
|
|
|
637
|
|
|
|
|
|
|
|
637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
14,650
|
|
|
|
(395
|
)
|
|
|
|
|
|
|
14,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
14,460
|
|
|
$
|
(436
|
)
|
|
$
|
|
|
|
$
|
14,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
Foreign
currency
translation
adjustments
|
|
|
Derivative
adjustments
|
|
|
Unrealized
gain on
investments
|
|
|
Total
|
|
Beginning balance
|
|
$
|
(35,551
|
)
|
|
$
|
485
|
|
|
$
|
|
|
|
$
|
(35,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
35,361
|
|
|
|
(3,748
|
)
|
|
|
|
|
|
|
31,613
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
|
|
|
|
3,222
|
|
|
|
|
|
|
|
3,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
35,361
|
|
|
|
(526
|
)
|
|
|
|
|
|
|
34,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(190
|
)
|
|
$
|
(41
|
)
|
|
$
|
|
|
|
$
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
Foreign
currency
translation
adjustments
|
|
|
Derivative
adjustments
|
|
|
Unrealized
gain on
investments
|
|
|
Total
|
|
Beginning balance
|
|
$
|
(57,326
|
)
|
|
$
|
6,587
|
|
|
$
|
681
|
|
|
$
|
(50,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
21,775
|
|
|
|
(69
|
)
|
|
|
1,201
|
|
|
|
22,907
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
|
|
|
|
(6,033
|
)
|
|
|
(1,882
|
)
|
|
|
(7,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
21,775
|
|
|
|
(6,102
|
)
|
|
|
(681
|
)
|
|
|
14,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(35,551
|
)
|
|
$
|
485
|
|
|
$
|
|
|
|
$
|
(35,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
21. Loss per Share
The following table illustrates the computation of basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(In thousands of US dollars, except share data)
|
|
Net loss
|
|
$
|
(29,615
|
)
|
|
$
|
(84,867
|
)
|
|
$
|
(117,232
|
)
|
Weighted average common stock outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic/ Diluted
|
|
|
34,833,967
|
|
|
|
34,380,517
|
|
|
|
34,055,513
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic/ Diluted
|
|
$
|
(0.85
|
)
|
|
$
|
(2.47
|
)
|
|
$
|
(3.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following outstanding instruments were excluded from the computation of diluted loss per share, as
they would have an anti-dilutive effect on the calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Options
|
|
|
3,428,665
|
|
|
|
3,179,899
|
|
|
|
3,215,945
|
|
Restricted Stock Units
|
|
|
518,480
|
|
|
|
135,370
|
|
|
|
|
|
Rights Plan
On March 5, 2015, the Company entered into a Rights Agreement, dated as of March 5, 2015 between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (as
amended, the Rights Agreement), and the Board of Directors of the Company authorized and declared a dividend of one preferred stock purchase right (a Right and collectively, the Rights) for each share of the
Companys common stock, par value $0.01 per share, outstanding at the close of business on March 16, 2015. The Company amended the Rights Agreement on March 2, 2016 and September 2, 2016. As amended, each Right, once exercisable,
will entitle the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, at a purchase price of $12, subject to adjustment (the Purchase
Price). The Rights are not presently exercisable and remain attached to the shares of common stock unless and until the occurrence of the earlier of the following (the Distribution Date): (i) the tenth day after the public
announcement or disclosure by the Company or any person or group of affiliated or associated persons that any person or group of affiliated or associated persons has become an Acquiring Person by obtaining beneficial ownership of 12.5%
(or 20% in the case of a passive institutional investor, which is defined generally as any person who has reported beneficial ownership of shares of common stock on Schedule 13G under the Securities Exchange Act of 1934) or more of the
Companys outstanding common stock, subject to certain exceptions; or (ii) the tenth business day (or such later date as the Companys Board of Directors may designate before a person or group of affiliated or associated persons
becomes an Acquiring Person) after the commencement of, or first public announcement of the intent of any person to commence, a tender or exchange offer by any person or group of affiliated or associated persons, which would, if consummated, result
in such person or group becoming an Acquiring Person. The Board of Directors may redeem all of the Rights for $0.001 per Right at any time before any person or group of affiliated or associated persons becomes an Acquiring Person. In addition, at
any time on or after any person or group of affiliated or associated persons becomes an Acquiring Person (but before any person or group of affiliated or associated persons becomes the owner of 50% or more of the Companys outstanding common
stock), the Board of Directors may exchange all or part of the
116
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Rights (other than the Rights beneficially owned by the Acquiring Person and certain affiliated persons) for shares of common stock at an exchange ratio of one share of common stock per Right.
The Rights will expire at the close of business on March 5, 2017, unless redeemed or exchanged prior to that time.
If
any person or group of affiliated or associated persons becomes an Acquiring Person, then, after the Distribution Date, each Right (other than Rights beneficially owned by the Acquiring Person and certain affiliated persons or transferees thereof)
will entitle the holder to purchase, for the Purchase Price, a number of shares of common stock having a market value of twice the Purchase Price. Alternatively, if, after any person or group of affiliated or associated persons becomes an Acquiring
Person, (1) the Company is involved in a merger or other business combination in which the Company is not the surviving corporation or its common stock is changed into or exchanged for other securities or assets; or (2) the Company or one
or more of its subsidiaries sell or otherwise transfer assets or earning power aggregating more than 50% of the assets or earning power of the Company and its subsidiaries, taken as a whole, then each Right will entitle the holder to purchase, for
the Purchase Price, a number of shares of common stock of the other party to such business combination or sale (or in certain circumstances, an affiliate) having a market value of twice the Purchase Price.
22. Unaudited Quarterly Financial Results
The following tables present selected unaudited Consolidated Statements of Operations for each quarter of the years ended December 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2016
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
|
(In thousands of US dollars, except share data)
|
|
Net sales
|
|
$
|
148,105
|
|
|
$
|
167,106
|
|
|
$
|
192,296
|
|
|
$
|
180,462
|
|
Gross profit
|
|
|
34,249
|
|
|
|
36,749
|
|
|
|
39,139
|
|
|
|
46,089
|
|
Operating income (loss)
|
|
|
4,267
|
|
|
|
(7,377
|
)
|
|
|
618
|
|
|
|
5,229
|
|
Net income (loss)
|
|
$
|
8,125
|
|
|
$
|
(17,816
|
)
|
|
$
|
29,866
|
|
|
$
|
(49,790
|
)
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
(0.51
|
)
|
|
$
|
0.86
|
|
|
$
|
(1.42
|
)
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
(0.51
|
)
|
|
$
|
0.85
|
|
|
$
|
(1.42
|
)
|
Weighted average common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
34,698,904
|
|
|
|
34,716,081
|
|
|
|
34,849,805
|
|
|
|
35,068,330
|
|
Diluted
|
|
|
34,918,568
|
|
|
|
34,716,081
|
|
|
|
35,302,706
|
|
|
|
35,068,330
|
|
|
|
|
|
Fiscal Year 2015
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
|
(In thousands of US dollars, except share data)
|
|
Net sales
|
|
$
|
164,885
|
|
|
$
|
162,015
|
|
|
$
|
154,382
|
|
|
$
|
152,430
|
|
Gross profit
|
|
|
34,977
|
|
|
|
35,286
|
|
|
|
34,699
|
|
|
|
29,902
|
|
Operating loss
|
|
|
(12,213
|
)
|
|
|
(15,233
|
)
|
|
|
(7,858
|
)
|
|
|
(7,630
|
)
|
Net income (loss)
|
|
$
|
(20,029
|
)
|
|
$
|
(30,626
|
)
|
|
$
|
(57,066
|
)
|
|
$
|
22,854
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.59
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
(1.65
|
)
|
|
$
|
0.66
|
|
Diluted
|
|
$
|
(0.59
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
(1.65
|
)
|
|
$
|
0.66
|
|
Weighted average common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
34,056,468
|
|
|
|
34,092,402
|
|
|
|
34,664,246
|
|
|
|
34,698,777
|
|
Diluted
|
|
|
34,056,468
|
|
|
|
34,092,402
|
|
|
|
34,664,246
|
|
|
|
34,713,034
|
|
117
MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(TABULAR DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
23. Subsequent Events
Derivative Contracts
On January 4, 2017, the Company and the
counterparty, the Nomura Financial Investment (Korea) Co., Ltd., entered into derivative contracts of zero cost collars for the period from March 2017 to June 2017. The total notional amounts are $82,000 thousand. In connection with the contracts,
the Company paid $3,800 thousand of cash deposits to the counterparty in January 2017.
Stock Repurchase
On January 11, 2017, the Company repurchased 1,795,444 shares of its common stock in the open market under the
Companys stock repurchase programs, which was authorized by its board of directors on January 10, 2017, at an aggregate cost of $11,401 thousand.
Issuance of Exchangeable Senior Notes
As disclosed in the
Companys Form 8-K filed on January 17, 2017, MagnaChip Semiconductor S.A., the Companys Luxembourg subsidiary, closed an offering of 5.00% Exchangeable Senior Notes due 2021 with an $86,250 thousand aggregate principal
amount.
118