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As filed with the Securities and Exchange Commission on
June 16, 2010
Registration
No. 333-165467
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 5 to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF
1933
MAGNACHIP SEMICONDUCTOR
LLC
(to be converted into MagnaChip
Semiconductor Corporation)
(Exact name of Registrant as
specified in its charter)
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Delaware
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3674
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26-1815025
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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c/o MagnaChip
Semiconductor S.A.
74, rue de Merl, B.P. 709 L-2146
Luxembourg R.C.S.
Luxembourg B97483
(352) 45-62-62
(Address, including zip code,
and telephone number, including area code, of Registrants
principal executive offices)
John McFarland
Senior Vice President, General Counsel and Secretary
c/o MagnaChip
Semiconductor, Inc.
20400 Stevens Creek Boulevard, Suite 370
Cupertino, CA 95014
Telephone:
(408) 625-5999
Fax:
(408) 625-5990
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Micheal J. Reagan
Khoa D. Do
Peter M. Astiz
DLA Piper LLP (US)
2000 University Avenue
East Palo Alto, California 94303
Telephone:
(650) 833-2000
Fax:
(650) 833-2001
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Kirk A. Davenport
Keith Benson
Latham & Watkins LLP
885 Third Avenue
New York, NY 10022-4834
Telephone: (212) 906-1200
Fax: (212) 751-4864
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
registration statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell nor does it seek an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
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Subject
to Completion. Dated June 16, 2010
MagnaChip Semiconductor
Corporation
7,500,000 Depositary Shares
Representing 7,500,000 Shares
of Common Stock
This is the initial public offering of common stock of MagnaChip
Semiconductor Corporation. MagnaChip Semiconductor Corporation
is offering 1,500,000 shares of common stock. The selling
stockholders identified in this prospectus are offering
6,000,000 shares of common stock. We will not receive any
of the proceeds from the sale of the shares by the selling
stockholders.
All of the shares of common stock sold in this offering will be
sold in the form of depositary shares. Each depositary share
represents an ownership interest in one share of common stock.
On ,
2010 (45 days after the date of this prospectus), each
holder of depositary shares will be credited with a number of
shares of common stock equal to the number of depositary shares
held by such holder on that date, and the depositary shares will
be canceled. Until the cancellation of the depositary shares
on ,
2010, holders of depositary shares will be entitled to all
proportional rights and preferences of the shares of common
stock.
Prior to this offering, there has been no public market for our
depositary shares or our common stock. We currently estimate
that the initial public offering price per depositary share will
be between $15.50 and $17.50. The depositary shares and the
common stock have been approved for listing on the New York
Stock Exchange under the symbol MX with the listing
being only for the depositary shares upon the completion of this
offering and only for the common stock following the
cancellation of the depositary shares.
See Risk Factors beginning on page 16 to read
about factors you should consider before buying the depositary
shares and shares of the common stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
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Per
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depositary share
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Total
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Initial public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds, before expenses to MagnaChip Semiconductor Corporation
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$
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$
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Proceeds, before expenses to Selling Stockholders
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$
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$
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To the extent that the underwriters sell more than
7,500,000 depositary shares, the underwriters have the
option to purchase up to an additional 225,000 depositary
shares from us and up to an additional 900,000 depositary
shares from the selling stockholders at the initial public
offering price less the underwriting discount.
The underwriters expect to deliver the depositary shares against
payment in New York, New York
on ,
2010.
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Goldman,
Sachs & Co. |
Barclays Capital |
Deutsche Bank Securities |
Prospectus
dated ,
2010
Mobile Application
Television Application
Computer Application |
MagnaChip Everywhere
Analog and Mixed Signal Semiconductors and Manufacturing Services for
High-Volume Applications
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TABLE OF
CONTENTS
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1
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16
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35
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35
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36
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36
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36
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37
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38
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40
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48
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57
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98
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114
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140
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151
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153
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159
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162
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165
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167
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171
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176
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176
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176
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F-1
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EX-23.1 |
No dealer, salesperson or other person has been authorized to
give any information or to represent anything not contained in
this prospectus. You must not rely on any unauthorized
information or representations. This prospectus is an offer to
sell only the shares offered by this prospectus, but only under
circumstances and in jurisdictions where it is lawful to do so.
The information contained in this prospectus is current only as
of its date.
MagnaChip is a registered trademark of us and our
subsidiaries and MagnaChip Everywhere is our
registered service mark. An application for United States
trademark registration of MagnaChip Everywhere is
pending. All other product, service and company names mentioned
in this prospectus are the service marks or trademarks of their
respective owners.
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all of the
information that you should consider before deciding to invest
in our common stock. You should read this entire prospectus
carefully, including the Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations sections contained in
this prospectus and our consolidated financial statements before
making an investment decision. In this prospectus, unless the
context otherwise requires, the terms we,
us, our and MagnaChip refer
to MagnaChip Semiconductor LLC and its consolidated subsidiaries
for the periods prior to the consummation of the corporate
conversion (as described below), and such terms refer to
MagnaChip Semiconductor Corporation and its consolidated
subsidiaries for the periods after the consummation of the
corporate conversion. The term Korea refers to the
Republic of Korea or South Korea. All references to shares of
common stock being sold in this offering include shares held in
the form of depositary shares, as described under
Description of Depositary Shares.
Prior to the effectiveness of the registration statement of
which this prospectus is a part, we will complete a number of
transactions pursuant to which MagnaChip Semiconductor
Corporation will succeed to the business of MagnaChip
Semiconductor LLC and its consolidated subsidiaries and the
members of MagnaChip Semiconductor LLC will become stockholders
of MagnaChip Semiconductor Corporation. In this prospectus, we
refer to such transactions as the corporate conversion.
Overview
MagnaChip is a Korea-based designer and manufacturer of analog
and mixed-signal semiconductor products for high-volume consumer
applications. We believe we have one of the broadest and deepest
analog and mixed-signal semiconductor technology platforms in
the industry, supported by our
30-year
operating history, large portfolio of approximately 2,600 novel
registered patents and 1,000 pending novel patent applications,
and extensive engineering and manufacturing process expertise.
Our business is comprised of three key segments: Display
Solutions, Power Solutions and Semiconductor Manufacturing
Services. Our Display Solutions products include display drivers
that cover a wide range of flat panel displays and mobile
multimedia devices. Our Power Solutions products include
discrete and integrated circuit solutions for power management
in high-volume consumer applications. Our Semiconductor
Manufacturing Services segment provides specialty analog and
mixed-signal foundry services for fabless semiconductor
companies that serve the consumer, computing and wireless end
markets.
Our wide variety of analog and mixed-signal semiconductor
products and manufacturing services combined with our deep
technology platform allows us to address multiple high-growth
end markets and to rapidly develop and introduce new products
and services in response to market demands. Our substantial
manufacturing operations in Korea and design centers in Korea
and Japan place us at the core of the global consumer
electronics supply chain. We believe this enables us to quickly
and efficiently respond to our customers needs and allows
us to better service and capture additional demand from existing
and new customers.
We have a long history of supplying and collaborating on product
and technology development with leading innovators in the
consumer electronics market. As a result, we have been able to
strengthen our technology platform and develop products and
services that are in high demand by our customers and end
consumers. We sold over 1,400 and 2,300 distinct products to
over 210 and 185 customers for the three months ended
March 31, 2010 and combined
twelve-month
period ended December 31, 2009, respectively, with a
substantial portion of our revenues derived from a concentrated
number of customers. Our largest semiconductor manufacturing
services customers include some of the fastest growing and
leading semiconductor companies that design analog and
mixed-signal products for the consumer, computing and wireless
end markets.
1
Our business is largely driven by innovation in the consumer
electronics markets and the growing adoption by consumers
worldwide of electronic devices for use in their daily lives.
The consumer electronics market is large and growing rapidly,
largely due to consumers increasingly accessing a wide variety
of available rich media content, such as high definition audio
and video, mobile television and games on advanced consumer
electronic devices. According to Gartner, production of liquid
crystal display, or LCD televisions, smartphones, mobile
personal computers, or PCs, and mini-notebooks is expected to
grow from 2009 to 2013 by a compound annual growth rate of 12%,
36%, 24%, and 20%, respectively. Electronics manufacturers are
continuously implementing advanced technologies in new
generations of electronic devices using analog and mixed-signal
semiconductor components, such as display drivers that enable
display of high resolution images, encoding and decoding devices
that allow playback of high definition audio and video, and
power management semiconductors that increase power efficiency,
thereby reducing heat dissipation and extending battery life.
According to iSuppli Corporation, in 2009, the display driver
semiconductor market was $6.0 billion and the power
management semiconductor market was $21.9 billion.
For the three months ended March 31, 2010, on a pro forma
basis, we generated net sales of $179.5 million, income
from continuing operations of $27.1 million, Adjusted
EBITDA of $28.7 million and Adjusted Net Income of
$15.0 million. For 2009 on a combined pro forma basis, we
generated net sales of $560.1 million, income from continuing
operations of $46.6 million, Adjusted EBITDA of $98.7 million
and Adjusted Net Income of $33.7 million. On June 12, 2009, we
filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code and our plan of reorganization
became effective on November 9, 2009. For 2008, we generated net
sales of $601.7 million, losses from continuing operations of
$325.8 million, Adjusted EBITDA of $59.8 million and Adjusted
Net Loss of $71.7 million. See Unaudited Pro Forma
Consolidated Financial Information beginning on page 48
for an explanation regarding our pro forma presentation and
Prospectus SummarySummary Historical and Unaudited
Pro Forma Consolidated Financial Data, beginning on page 9
for an explanation of our use of Adjusted EBITDA and Adjusted
Net Income.
Our Products and
Services
Our Display Solutions products include source and gate drivers
and timing controllers that cover a wide range of flat panel
displays used in LCD televisions and light emitting diode, or
LED, televisions and displays, mobile PCs and mobile
communications and entertainment devices. Our display solutions
support the industrys most advanced display technologies,
such as low temperature polysilicon, or LTPS, and active matrix
organic light emitting diode, or AMOLED, as well as high-volume
display technologies such as thin film transistor, or TFT. Our
Display Solutions business represented 50.5%, 50.5% and 46.7% of
our net sales for the fiscal years ended December 31, 2009 (on a
combined basis), 2008 and 2007, respectively, and 42.8% and
58.8% of our net sales for the three months ended March 31, 2010
and March 31, 2009, respectively.
We expanded our business and market opportunity by establishing
our Power Solutions business in late 2007. We have introduced a
number of products for power management applications, including
metal oxide semiconductor field effect transistors, or MOSFETs,
analog switches, LED drivers, DC-DC converters and linear
regulators for a range of devices, including LCD and LED digital
televisions, mobile phones, computers and other consumer
electronics products. Our Power Solutions business represented
2.2% and 0.9% of our net sales for the fiscal years ended
December 31, 2009 (on a combined basis) and 2008, respectively,
and 5.0% and 0.9% of our net sales for the three months ended
March 31, 2010 and March 31, 2009, respectively.
We offer semiconductor manufacturing services to fabless analog
and mixed-signal semiconductor companies that require
differentiated, specialty analog and mixed-signal process
technologies. We believe the majority of our top twenty
semiconductor manufacturing services customers use us as their
primary manufacturing source for the products that we
manufacture for
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them. Our process technologies are optimized for analog and
mixed-signal devices and include standard complementary
metal-oxide semiconductor, or CMOS, high voltage CMOS, ultra-low
leakage high voltage CMOS and bipolar complementary
double-diffused metal oxide semiconductor, or BCDMOS. Our
semiconductor manufacturing services customers use us to
manufacture a wide range of products, including display drivers,
LED drivers, audio encoding and decoding devices,
microcontrollers, electronic tags and power management
semiconductors. Our Semiconductor Manufacturing Services
business represented 46.7%, 47.7% and 45.2% of our net sales for
the fiscal years ended December 31, 2009 (on a combined basis),
2008 and 2007, respectively, and 51.9% and 39.6% of our net
sales for the three months ended March 31, 2010 and
March 31, 2009, respectively.
We manufacture all of our products at our three fabrication
facilities located in Korea. We have approximately 200
proprietary process flows we can utilize for our products and
offer to our semiconductor manufacturing services customers. Our
manufacturing base serves both our display driver and power
management businesses and semiconductor manufacturing services
customers, allowing us to optimize our asset utilization and
leverage our investments across our product and service
offerings. Analog and mixed-signal manufacturing facilities and
processes are typically distinguished by design and process
implementation expertise rather than the use of the most
advanced equipment. These processes also tend to migrate more
slowly to smaller geometries due to technological barriers and
increased costs. For example, some of our products use
high-voltage technology that requires larger geometries and that
may not migrate to smaller geometries for several years, if at
all. As a result, our manufacturing base and strategy does not
require substantial investment in leading edge process
equipment, allowing us to utilize our facilities and equipment
over an extended period of time with moderate required capital
investments.
Our Competitive
Strengths
We believe our strengths include:
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Broad and advanced analog and mixed-signal semiconductor
technology and intellectual property platform that allows us to
develop new products and meet market demands quickly;
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Established relationships and close collaboration with leading
global consumer electronics companies, which enhance our
visibility into new product opportunities, markets and
technology trends;
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Longstanding presence of our management, personnel and
manufacturing base in Asia and proximity to our largest
customers and to the core of the global consumer electronics
supply chain, which allows us to respond rapidly and efficiently
to our customers needs;
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Flexible, service-oriented culture and approach to customers;
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Distinctive analog and mixed-signal process technology and
manufacturing expertise; and
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Manufacturing facilities with specialty processes and a low-cost
operating structure, which allow us to maintain price
competitiveness across our product and service offerings.
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Our
Strategy
Our objective is to grow our business, our cash flow and
profitability and to establish our position as a leading
provider of analog and mixed-signal semiconductor products and
services for high-volume markets. Our business strategy
emphasizes the following key elements:
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Leverage our advanced analog and mixed-signal technology
platform to continuously innovate and deliver products with high
levels of performance and integration, as well as to expand our
technology offerings within our target markets, such as our
power management products;
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Increase business with our global customer base of leading
consumer electronics original equipment manufacturers, or OEMs,
and fabless companies by collaborating on critical design,
product and manufacturing process development and leveraging our
deep knowledge of customer needs;
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Broaden our customer base by expanding our global design centers
and local application engineering support and sales presence,
particularly in China and other high-growth regions;
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Aggressively grow our power management product portfolio
business by introducing new products, expanding distribution and
cross-selling products to our existing customers;
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Drive execution excellence in new product development,
manufacturing efficiency and quality, customer service and
personnel development; and
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Optimize asset utilization and return on capital investments by
maintaining our focus on specialty process technologies that do
not require substantial investment in leading edge process
equipment and by utilizing our manufacturing facilities for both
our display driver and power management businesses and
manufacturing services customers.
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Recent Changes To
Our Business
We have executed a significant restructuring over the last
18 months that refocused our business strategy, enhanced
our operating efficiency and improved our cash flow and
profitability. By closing our Imaging Solutions business,
restructuring our balance sheet and refining our business
processes and strategy, we believe we have made significant
structural improvements to our operating model and have enabled
better flexibility to manage our business through fluctuations
in the economy and our markets.
Specifically, our business optimization initiatives included:
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Closing our Imaging Solutions business, which had been a source
of substantial ongoing operating losses amounting to
$91.5 million and $51.7 million in 2008 and 2007,
respectively, and which required substantial ongoing capital
investment;
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Through our reorganization proceedings, reducing our
indebtedness from $845 million immediately prior to the
effectiveness of our plan of reorganization to
$61.8 million as of December 31, 2009 and retiring
$149 million of redeemable convertible preferred units;
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Streamlining our cost structure to reduce ongoing fixed and
variable expenses;
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Entering into a hedging program to mitigate the impact of
currency fluctuation on our financial results; and
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Focusing on major customers, key product lines, growth segments
and areas of competitive differentiation.
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On April 9, 2010, we completed the sale of
$250 million in aggregate principal amount of 10.500%
senior notes due 2018, which we refer to as our senior notes. Of
the $238.4 million of net proceeds, which represents
$250 million of principal amount net of $3.3 million
of original issue discount and $8.3 million of debt
issuance costs, $130.7 million was used to make a
distribution to our unitholders and $61.6 million was used
to repay all outstanding borrowings under our term loan. The
remaining proceeds were retained to fund working capital and for
general corporate purposes. As a result of our higher level of
indebtedness from our senior notes offering, our quarterly
interest expense will increase above that which was reported for
the two-month period ended December 31, 2009 and the three
months ended March 31, 2010 to approximately
$6.8 million per quarter.
4
Risks Related to
Our Company
Investing in our company entails a high degree of risk,
including those summarized below and those more fully described
in the Risk Factors section beginning on
page 16 of this prospectus. You should consider carefully
these risks before deciding to invest in our common stock.
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We have a history of losses and may not be profitable in the
future;
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On June 12, 2009, we filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code and
our plan of reorganization became effective on November 9,
2009;
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In connection with our audit for the ten-month period ended
October 25, 2009 and the two-month period ended
December 31, 2009, our auditors identified two control
deficiencies which represent a material weakness in our internal
control over financial reporting; if we fail to effectively
remediate this weakness, the accuracy and timing of our
financial reporting may be adversely affected;
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The cyclical nature of the semiconductor industry may limit our
ability to maintain or increase net sales and profit levels
during industry downturns;
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If we fail to develop new products and process technologies or
enhance our existing products and services in order to react to
rapid technological change and market demands, our business will
suffer;
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A significant portion of our sales comes from a relatively
limited number of customers and the loss of any of such
customers or a significant decrease in sales to any of such
customers would harm our revenue and gross profit;
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The average selling prices of our semiconductor products have at
times declined rapidly and will likely do so in the future,
which could harm our revenue and gross profit; and
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Upon completion of this offering, our largest stockholder,
consisting of affiliated funds of Avenue Capital Management II,
L.P., will control approximately 56.5% of our outstanding common
stock, assuming no exercise by the underwriters of their option
to purchase additional shares.
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Corporate
Information
Prior to the effectiveness of the registration statement of
which this prospectus is a part, MagnaChip Semiconductor LLC
will convert from a Delaware limited liability company to a
Delaware corporation. We refer to this as the corporate
conversion. In connection with the corporate conversion, each
common unit of MagnaChip Semiconductor LLC will be converted
into 0.125 shares of common stock of MagnaChip
Semiconductor Corporation, the members of MagnaChip
Semiconductor LLC will become stockholders of MagnaChip
Semiconductor Corporation and MagnaChip Semiconductor
Corporation will succeed to the business of MagnaChip
Semiconductor LLC and its consolidated subsidiaries. See
Corporate Conversion for further information
regarding the corporate conversion.
Our principal executive offices are located at:
c/o MagnaChip
Semiconductor S.A., 74, rue de Merl, B.P. 709 L-2146 Luxembourg
R.C.S., Luxembourg
B-97483, and
our telephone number is
(352) 45-62-62.
Our website address is www.magnachip.com. You should not
consider the information contained on our website to be part of
this prospectus or in deciding whether to purchase shares of our
common stock.
Our business was named MagnaChip Semiconductor when it was
acquired from Hynix Semiconductor, Inc., or Hynix, in October
2004. We refer to this acquisition as the Original Acquisition.
5
On June 12, 2009, MagnaChip Semiconductor LLC, along with
certain of its subsidiaries, including MagnaChip Semiconductor
S.A., filed a voluntary petition for relief in the United States
Bankruptcy Court for the District of Delaware under
Chapter 11 of the United States Bankruptcy Code, which we
refer to as the reorganization proceedings. On November 9,
2009, our plan of reorganization became effective and we emerged
from the reorganization proceedings with our management team
remaining in place. Our Chapter 11 plan of reorganization
implemented a comprehensive financial reorganization that
significantly reduced our outstanding indebtedness.
Additionally, on that date, a new board of directors of
MagnaChip Semiconductor LLC was appointed, MagnaChip
Semiconductor LLCs previously outstanding common and
preferred units, and options were cancelled, MagnaChip
Semiconductor LLC issued approximately 300 million common
units (approximately 37.5 million shares of common stock
following the corporate conversion) and warrants to purchase
15 million common units (approximately 1.9 million
shares of common stock following the corporate conversion) to
two classes of creditors and affiliated funds of Avenue Capital
Management II, L.P. became the majority unitholder of MagnaChip
Semiconductor LLC.
Avenue Capital Management II, L.P. is a global investment
management firm, and it and its affiliated funds specialize in
investing in high yield debt, debt of insolvent or financially
distressed companies and equity of companies undergoing
financial or operational turnarounds or reorganizations. In this
prospectus, we refer to funds affiliated with Avenue Capital
Management II, L.P. collectively as Avenue. Avenue generally
does not manage or operate the companies in which it invests;
however, in connection with some of its equity investments,
Avenue will appoint one or more representatives to serve on the
board of directors. Avenue was a holder of a significant portion
of our indebtedness which was outstanding prior to our
reorganization proceedings. In connection with our emergence
from our reorganization proceedings, Avenue became our majority
unitholder as a result of its participation in our rights
offering and continued as a lender under our new term loan. In
connection with our April 2010 senior notes offering, Avenue
purchased notes in the aggregate principal amount of
$35.0 million, was repaid $42.8 million in connection
with the repayment of our new term loan and received
$91.2 million in connection with our distribution to
unitholders. Avenue has the right to appoint a majority of our
board pursuant to our Fifth Amended and Restated Limited
Liability Company Operating Agreement which will terminate upon
the completion of the corporate conversion. Following the
offering Avenue will continue to be able to elect a majority of
our board as long as Avenue continues to hold or control a
majority of our outstanding shares. See Certain
Relationships and Related Transactions for additional
information.
6
The
Offering
|
|
|
Shares offered by us
|
|
1,500,000 shares in the form of depositary shares |
|
|
|
Shares offered by selling stockholders
|
|
6,000,000 shares in the form of depositary shares |
|
|
|
Shares offered by us pursuant to the underwriters option
to purchase additional shares
|
|
225,000 shares in the form of depositary shares(1) |
|
|
|
Shares offered by the selling stockholders pursuant to the
underwriters option to purchase additional shares
|
|
900,000 shares in the form of depositary shares(1) |
|
|
|
Shares of common stock to be outstanding after this offering
|
|
39,904,294 shares |
|
|
|
Use of proceeds |
|
We intend to use the net proceeds received by us in connection
with this offering, including any net proceeds received by us in
connection with the underwriters option to purchase
additional shares, to make employee incentive payments, to fund
working capital and for general corporate purposes. We will not
receive any proceeds from the sale of shares of common stock
offered by the selling stockholders, including upon the sale of
shares if the underwriters exercise their option to purchase
additional shares from the selling stockholder in this offering. |
|
Risk factors |
|
See Risk Factors beginning on page 16 and the
other information included in this prospectus for a discussion
of the factors you should consider carefully before deciding to
invest in shares of our common stock. |
|
Dividend policy |
|
We do not anticipate paying any cash dividends on our common
stock after this offering. |
|
|
|
Depositary shares |
|
All of the shares of common stock sold in this offering will be
sold in the form of depositary shares. Each depositary share
represents an ownership interest in one share of common stock.
On ,
2010 (45 days after the date of this prospectus), each
holder of depositary shares will be credited with a number of
shares of common stock equal to the number of depositary shares
held by such holder on that date, and the depositary shares will
be canceled. Until the cancellation of the depositary shares
on ,
2010, holders of depositary shares will be entitled to all
proportional rights and preferences of the shares of common
stock. This offering has been structured using depositary shares
to enable our unitholders to obtain the preferred income tax
treatment for the corporate conversion. For more information
regarding the depositary shares, see Description of
Depositary Shares. |
|
|
|
Depositary |
|
American Stock Transfer & Trust Company, LLC |
|
Proposed New York Stock Exchange symbol
|
|
MX with the listing being only for the depositary shares upon
the completion of this offering and only for the common stock
following the cancellation of the depositary shares. |
7
|
|
(1) |
We have provided the underwriters an option to purchase up to
225,000 additional depositary shares and the selling
stockholders have provided the underwriters an option to
purchase up to 900,000 additional depositary shares. If the
underwriters exercise their option to purchase additional
shares, we will not receive any of the proceeds from the
additional sale of depositary shares by the selling stockholders.
|
The number of shares of our common stock outstanding after this
offering is based on common units of MagnaChip Semiconductor LLC
outstanding as of the date of this prospectus and:
|
|
|
|
|
reflects the consummation of the corporate conversion, pursuant
to which all of the outstanding common units of MagnaChip
Semiconductor LLC will be automatically converted into shares of
our common stock at a ratio of eight-for-one and all of the
outstanding options and warrants to purchase common units of
MagnaChip Semiconductor LLC will be automatically converted into
options and warrants to purchase shares of our common stock;
|
|
|
|
excludes 1,875,015 shares of our common stock reserved for
issuance upon exercise of warrants outstanding as of
April 30, 2010 at a weighted average exercise price of
$15.76 per share, assuming the conversion of all such warrants
into warrants to purchase shares of our common stock at a ratio
of eight-for-one;
|
|
|
|
excludes 1,995,375 shares of our common stock reserved for
issuance upon exercise of options outstanding as of
April 30, 2010 at a weighted average exercise price of
$6.32 per share, assuming the conversion of all such options
into options to purchase shares of our common stock at a ratio
of eight-for-one; and
|
|
|
|
|
|
excludes 1,652,961 shares of our common stock reserved for
issuance following the offering pursuant to future grants under
our 2010 Equity Incentive Plan and 2010 Employee Stock Purchase
Plan, which does not include the additional shares which may
become available for issuance pursuant to the automatic share
reserve increase provisions of such plans described below.
|
The number of shares authorized for future issuance under our
2010 Equity Incentive Plan and our 2010 Employee Stock Purchase
Plan reflected above does not include additional shares that may
become available for future issuance pursuant to the automatic
share reserve increase provisions of these plans. On January 1
of each year from 2011 through 2020, up to 2% and 1%,
respectively, of the shares of our common stock issued and
outstanding on the immediately preceding December 31 or,
in each case, a lesser amount determined by our board of
directors, will be added automatically to the number of shares
remaining available for future grants under the 2010 Equity
Incentive Plan and the 2010 Employee Stock Purchase Plan.
Unless specifically stated otherwise, the information in this
prospectus:
|
|
|
|
|
assumes completion of the corporate conversion;
|
|
|
|
|
|
assumes no exercise of the underwriters option to purchase
up to 225,000 additional depositary shares from us and up to
900,000 additional depositary shares from our selling
stockholders; and
|
|
|
|
|
|
assumes an initial public offering price of $16.50 per
depositary share, which is the midpoint of the range set forth
on the front cover of this prospectus.
|
8
Summary
Historical and Unaudited Pro Forma Consolidated Financial
Data
The following tables set forth summary historical and unaudited
pro forma consolidated financial data of MagnaChip Semiconductor
LLC (to be converted into MagnaChip Semiconductor Corporation
prior to consummation of this offering) on or as of the dates
and for the periods indicated. The summary historical and
unaudited pro forma consolidated financial data presented below
should be read together with Selected Historical
Consolidated Financial and Operating Data, Unaudited
Pro Forma Consolidated Financial Information,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our audited and
unaudited consolidated financial statements, including the notes
to those consolidated financial statements, appearing elsewhere
in this prospectus.
We have derived the summary historical consolidated financial
data as of December 31, 2009 and 2008, and for the
two-month period ended December 31, 2009, the ten-month
period ended October 25, 2009 and the years ended
December 31, 2008 and 2007 from the historical audited
consolidated financial statements of MagnaChip Semiconductor LLC
prepared in accordance with generally accepted accounting
principles in the United States, or GAAP, included elsewhere in
this prospectus. We have derived the summary historical
consolidated financial data as of December 31, 2007 from
the historical audited financial statements of MagnaChip
Semiconductor LLC not included in this prospectus. We derived
the unaudited consolidated statement of operations data for the
three months ended March 31, 2010 and March 29, 2009,
as well as unaudited consolidated balance sheet data as of
March 31, 2010, from our unaudited interim consolidated
financial statements included elsewhere in this prospectus. We
derived the unaudited consolidated balance sheet data as of
March 29, 2009 from our unaudited interim consolidated
financial statements not included in this prospectus. The
summary historical financial data for the three months ended
March 31, 2010 and the two-month period ended December 31, 2009
give retroactive effect to the corporate conversion. The
historical results of MagnaChip Semiconductor LLC for any prior
period are not necessarily indicative of the results to be
expected in any future period, and financial results for any
interim period are not necessarily indicative of results for a
full year.
In connection with our emergence from reorganization
proceedings, we implemented fresh-start reporting, or
fresh-start accounting, in accordance with applicable Accounting
Standards Codification, or ASC 852 governing reorganizations. We
elected to adopt a convenience date of October 25, 2009 (a
month end for our financial reporting purposes) for application
of fresh-start accounting. In accordance with the ASC 852
rules governing reorganizations, we recorded largely non-cash
reorganization income and expense items directly associated with
our reorganization proceedings including professional fees, the
revaluation of assets, the effects of our reorganization plan
and fresh-start accounting and write-off of debt issuance costs.
As a result of the application of fresh-start accounting, our
financial statements prior to and including October 25,
2009 represent the operations of our pre-reorganization
predecessor company and are presented separately from the
financial statements of our post-reorganization successor
company. As a result of the application of fresh-start
accounting, the financial statements prior to and including
October 25, 2009 are not fully comparable with the
financial statements for periods on or after October 26,
2009.
We have prepared the summarized unaudited pro forma financial
data as of and for the three months ended March 31, 2010
and the combined twelve-month period ended December 31,
2009 to give pro forma effect to the reorganization proceedings
and related events, the corporate conversion and the issuance of
$250 million senior notes and the application of the net
proceeds therefrom, in each case as if they had occurred at
January 1, 2009 with respect to consolidated statement of
operations data and as of March 31, 2010 with respect to
balance sheet data. The summary unaudited pro forma financial
data set forth below are presented for informational purposes
only, should not be considered indicative of actual results of
operations that would have been achieved had the reorganization
proceedings and related events, the corporate conversion and the
issuance of $250 million senior notes and the application
of the net proceeds therefrom been consummated on the dates
indicated, and do not purport to be indicative of balance sheet
data or our results of operations for any future period.
9
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|
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Pro Forma(1)
|
|
|
Historical
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Three Months
|
|
|
|
|
|
Three Months
|
|
|
Two- Month
|
|
|
|
Ten- Month
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Period Ended
|
|
|
|
Period Ended
|
|
|
Ended
|
|
|
Years Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
October 25,
|
|
|
March 29,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010*
|
|
|
2009**
|
|
|
|
2009**
|
|
|
2009*
|
|
|
2008**
|
|
|
2007**
|
|
|
|
(In millions, except per common unit/share data)
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
179.5
|
|
|
$
|
560.1
|
|
|
$
|
179.5
|
|
|
$
|
111.1
|
|
|
|
$
|
449.0
|
|
|
$
|
101.5
|
|
|
$
|
601.7
|
|
|
$
|
709.5
|
|
Cost of sales
|
|
|
129.3
|
|
|
|
378.9
|
|
|
|
130.1
|
|
|
|
90.4
|
|
|
|
|
311.1
|
|
|
|
80.6
|
|
|
|
445.3
|
|
|
|
578.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50.2
|
|
|
|
181.2
|
|
|
|
49.4
|
|
|
|
20.7
|
|
|
|
|
137.8
|
|
|
|
20.9
|
|
|
|
156.4
|
|
|
|
130.7
|
|
Selling, general and administrative expenses
|
|
|
17.9
|
|
|
|
71.6
|
|
|
|
17.9
|
|
|
|
14.5
|
|
|
|
|
56.3
|
|
|
|
15.3
|
|
|
|
81.3
|
|
|
|
82.7
|
|
Research and development expenses
|
|
|
20.5
|
|
|
|
77.3
|
|
|
|
20.5
|
|
|
|
14.7
|
|
|
|
|
56.1
|
|
|
|
17.0
|
|
|
|
89.5
|
|
|
|
90.8
|
|
Restructuring and impairment charges
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
13.4
|
|
|
|
12.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations
|
|
|
11.5
|
|
|
|
31.9
|
|
|
|
10.6
|
|
|
|
(8.6
|
)
|
|
|
|
25.0
|
|
|
|
(11.4
|
)
|
|
|
(27.7
|
)
|
|
|
(54.9
|
)
|
Interest expense, net
|
|
|
(6.9
|
)
|
|
|
(28.8
|
)
|
|
|
(2.0
|
)
|
|
|
(1.3
|
)
|
|
|
|
(31.2
|
)
|
|
|
(14.7
|
)
|
|
|
(76.1
|
)
|
|
|
(60.3
|
)
|
Foreign currency gain (loss), net
|
|
|
21.6
|
|
|
|
52.8
|
|
|
|
21.6
|
|
|
|
9.3
|
|
|
|
|
43.4
|
|
|
|
(40.2
|
)
|
|
|
(210.4
|
)
|
|
|
(4.7
|
)
|
Reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.7
|
|
|
|
24.0
|
|
|
|
19.5
|
|
|
|
8.1
|
|
|
|
|
816.8
|
|
|
|
(54.9
|
)
|
|
|
(286.5
|
)
|
|
|
(65.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
26.1
|
|
|
|
55.9
|
|
|
|
30.1
|
|
|
|
(0.5
|
)
|
|
|
|
841.8
|
|
|
|
(66.3
|
)
|
|
|
(314.3
|
)
|
|
|
(120.0
|
)
|
Income tax expenses (benefits)
|
|
|
(1.0
|
)
|
|
|
9.2
|
|
|
|
(1.0
|
)
|
|
|
1.9
|
|
|
|
|
7.3
|
|
|
|
2.6
|
|
|
|
11.6
|
|
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
27.1
|
|
|
$
|
46.6
|
|
|
|
31.1
|
|
|
|
(2.5
|
)
|
|
|
|
834.5
|
|
|
|
(68.9
|
)
|
|
|
(325.8
|
)
|
|
|
(128.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
6.6
|
|
|
|
(0.8
|
)
|
|
|
(91.5
|
)
|
|
|
(51.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
$
|
31.1
|
|
|
$
|
(2.0
|
)
|
|
|
$
|
841.1
|
|
|
$
|
(69.7
|
)
|
|
$
|
(417.3
|
)
|
|
$
|
(180.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends accrued on preferred units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.3
|
|
|
|
3.4
|
|
|
|
13.3
|
|
|
|
12.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to common
units/shares
|
|
|
|
|
|
$
|
46.6
|
|
|
$
|
31.1
|
|
|
$
|
(2.5
|
)
|
|
|
$
|
828.2
|
|
|
$
|
(72.3
|
)
|
|
$
|
(339.1
|
)
|
|
$
|
(140.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common unit/share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations per common
unit/share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.72
|
|
|
$
|
1.24
|
|
|
$
|
0.82
|
|
|
$
|
(0.07
|
)
|
|
|
$
|
15.65
|
|
|
$
|
(1.37
|
)
|
|
$
|
(6.43
|
)
|
|
$
|
(2.69
|
)
|
Diluted
|
|
$
|
0.71
|
|
|
$
|
1.24
|
|
|
$
|
0.81
|
|
|
$
|
(0.07
|
)
|
|
|
$
|
15.65
|
|
|
$
|
(1.37
|
)
|
|
$
|
(6.43
|
)
|
|
$
|
(2.69
|
)
|
Weighted average number of common units/stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37.805
|
|
|
|
37.520
|
|
|
|
37.805
|
|
|
|
37.608
|
|
|
|
|
52.923
|
|
|
|
52.923
|
|
|
|
52.769
|
|
|
|
52.297
|
|
Diluted
|
|
|
38.442
|
|
|
|
37.521
|
|
|
|
38.442
|
|
|
|
37.608
|
|
|
|
|
52.923
|
|
|
|
52.923
|
|
|
|
52.769
|
|
|
|
52.297
|
|
Unaudited pro forma earnings (loss) from continuing
operations per common share(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma earnings (loss) per
share(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.79
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.78
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma weighted average number of
common stock(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
39.305
|
|
|
|
39.108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
39.942
|
|
|
|
39.108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
128.8
|
|
|
|
|
|
|
$
|
82.7
|
|
|
$
|
64.9
|
|
|
|
|
|
|
|
$
|
7.1
|
|
|
$
|
4.0
|
|
|
$
|
64.3
|
|
Total assets
|
|
|
546.2
|
|
|
|
|
|
|
|
492.0
|
|
|
|
453.3
|
|
|
|
|
|
|
|
|
357.7
|
|
|
|
399.2
|
|
|
|
707.9
|
|
Total indebtedness(3)
|
|
|
246.7
|
|
|
|
|
|
|
|
61.6
|
|
|
|
61.8
|
|
|
|
|
|
|
|
|
845.0
|
|
|
|
845.0
|
|
|
|
830.0
|
|
Long-term obligations(4)
|
|
|
247.0
|
|
|
|
|
|
|
|
61.3
|
|
|
|
61.5
|
|
|
|
|
|
|
|
|
146.5
|
|
|
|
143.2
|
|
|
|
879.4
|
|
Total unitholders/stockholders equity (deficit)
|
|
|
100.5
|
|
|
|
|
|
|
|
231.4
|
|
|
|
215.7
|
|
|
|
|
|
|
|
|
(835.1
|
)
|
|
|
(787.8
|
)
|
|
|
(477.5
|
)
|
Supplemental Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(5)
|
|
$
|
28.7
|
|
|
$
|
98.7
|
|
|
$
|
28.7
|
|
|
$
|
22.1
|
|
|
|
$
|
76.6
|
|
|
$
|
2.3
|
|
|
$
|
59.8
|
|
|
$
|
111.2
|
|
Adjusted Net Income (Loss)(6)
|
|
|
15.0
|
|
|
|
33.7
|
|
|
|
19.9
|
|
|
|
13.3
|
|
|
|
|
9.3
|
|
|
|
(22.9
|
)
|
|
|
(71.7
|
)
|
|
|
(82.6
|
)
|
|
|
|
* |
|
Derived from our unaudited interim consolidated financial
statements. |
10
|
|
|
** |
|
Derived from our audited consolidated financial statements. |
|
(1) |
|
Gives effect to the reorganization proceedings and related
events, the corporate conversion and the issuance of
$250 million senior notes and the application of the net
proceeds therefrom. For details regarding these pro forma
adjustments, see the notes to the unaudited pro forma condensed
consolidated financial information in Unaudited Pro Forma
Consolidated Financial Information. |
|
|
|
(2) |
|
The unaudited pro forma earnings (loss) per share have been
calculated in accordance with Staff Accounting Bulletin
Topic 1.B.3 in relation to our distribution made to
shareholders in April 2010. See note 20 in the unaudited
interim consolidated financial statements and note 27(D) in
the audited consolidated financial statements. |
|
|
|
(3) |
|
Total indebtedness is calculated as long and short-term
borrowings, including the current portion of long-term
borrowings. |
|
|
|
(4) |
|
Long-term obligations include long-term borrowings, capital
leases and redeemable convertible preferred units. |
|
|
|
(5) |
|
We define Adjusted EBITDA as net income (loss) less income
(loss) from discontinued operations, net of taxes, adjusted to
exclude (i) depreciation and amortization associated with
continuing operations, (ii) interest expense, net,
(iii) income tax expense, (iv) restructuring and
impairment charges, (v) other restructuring charges,
(vi) abandoned IPO expenses, (vii) subcontractor claim
settlement, (viii) the increase in cost of sales resulting
from the fresh-start accounting inventory
step-up,
(ix) equity-based compensation expense,
(x) reorganization items, net, and (xi) foreign
currency gain (loss), net. See the footnotes to the table below
for further information regarding these items. In the case of
pro forma Adjusted EBITDA, we exclude the items above from
income (loss) from continuing operations. We present Adjusted
EBITDA as a supplemental measure of our performance because: |
|
|
|
|
|
Adjusted EBITDA eliminates the impact of a number of items that
may be either one time or recurring that we do not consider to
be indicative of our core ongoing operating performance;
|
|
|
|
we believe that Adjusted EBITDA is an enterprise level
performance measure commonly reported and widely used by
analysts and investors in our industry;
|
|
|
|
we anticipate that our investor and analyst presentations after
we are public will include Adjusted EBITDA; and
|
|
|
|
we believe that Adjusted EBITDA provides investors with a more
consistent measurement of period to period performance of our
core operations, as well as a comparison of our operating
performance to that of other companies in our industry.
|
We use Adjusted EBITDA in a number of ways, including:
|
|
|
|
|
for planning purposes, including the preparation of our annual
operating budget;
|
|
|
|
to evaluate the effectiveness of our enterprise level business
strategies;
|
|
|
|
in communications with our board of directors concerning our
consolidated financial performance; and
|
|
|
|
in certain of our compensation plans as a performance measure
for determining incentive compensation payments.
|
11
We encourage you to evaluate each adjustment and the reasons we
consider them appropriate. In evaluating Adjusted EBITDA, you
should be aware that in the future we may incur expenses similar
to the adjustments in this presentation. Adjusted EBITDA is not
a measure defined in accordance with GAAP and should not be
construed as an alternative to income from continuing
operations, cash flows from operating activities or net income
(loss), as determined in accordance with GAAP. A reconciliation
of net income (loss) to Adjusted EBITDA is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Historical
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Three Months
|
|
|
|
|
|
Three Months
|
|
|
Two- Month
|
|
|
|
Ten- Month
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Period Ended
|
|
|
|
Period Ended
|
|
|
Ended
|
|
|
Years Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
October 25,
|
|
|
March 29,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
$
|
31.1
|
|
|
$
|
(2.0
|
)
|
|
|
$
|
841.1
|
|
|
$
|
(69.7
|
)
|
|
$
|
(417.3
|
)
|
|
$
|
(180.6
|
)
|
Less: Income (loss) from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
6.6
|
|
|
|
(0.8
|
)
|
|
|
(91.5
|
)
|
|
|
(51.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
27.1
|
|
|
$
|
46.6
|
|
|
|
31.1
|
|
|
|
(2.5
|
)
|
|
|
|
834.5
|
|
|
|
(68.9
|
)
|
|
|
(325.8
|
)
|
|
|
(128.8
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization associated with continuing
operations
|
|
|
15.5
|
|
|
|
50.6
|
|
|
|
15.5
|
|
|
|
11.2
|
|
|
|
|
37.7
|
|
|
|
10.4
|
|
|
|
63.8
|
|
|
|
152.2
|
|
Interest expense, net
|
|
|
6.9
|
|
|
|
28.8
|
|
|
|
2.0
|
|
|
|
1.3
|
|
|
|
|
31.2
|
|
|
|
14.7
|
|
|
|
76.1
|
|
|
|
60.3
|
|
Income tax expenses (benefits)
|
|
|
(1.0
|
)
|
|
|
9.2
|
|
|
|
(1.0
|
)
|
|
|
1.9
|
|
|
|
|
7.3
|
|
|
|
2.6
|
|
|
|
11.6
|
|
|
|
8.8
|
|
Restructuring and impairment charges(a)
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
13.4
|
|
|
|
12.1
|
|
Other restructuring charges(b)
|
|
|
|
|
|
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
|
13.3
|
|
|
|
3.1
|
|
|
|
6.2
|
|
|
|
|
|
Abandoned IPO expenses(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.7
|
|
|
|
|
|
Subcontractor claim settlement(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
Reorganization items, net(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(804.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
step-up(f)
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
17.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation expense(g)
|
|
|
1.5
|
|
|
|
2.4
|
|
|
|
1.5
|
|
|
|
2.2
|
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
0.6
|
|
Foreign currency loss (gain), net(h)
|
|
|
(21.6
|
)
|
|
|
(52.8
|
)
|
|
|
(21.6
|
)
|
|
|
(9.3
|
)
|
|
|
|
(43.4
|
)
|
|
|
40.2
|
|
|
|
210.4
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
28.7
|
|
|
$
|
98.7
|
|
|
$
|
28.7
|
|
|
$
|
22.1
|
|
|
|
$
|
76.6
|
|
|
$
|
2.3
|
|
|
$
|
59.8
|
|
|
$
|
111.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
This adjustment is comprised of all
items included in the restructuring and impairment charges line
item on our consolidated statements of operations, and
eliminates the impact of restructuring and impairment charges
related to (i) for the three months ended March 31,
2010, impairment of two abandoned in-process research and
development projects, accounted for as indefinite-lived
intangible assets as part of the application of fresh-start
accounting, (ii) for the three months ended March 29,
2009, the closure of our research and development facilities in
Japan, (iii) for 2009, termination benefits and other
related costs, for the ten-month period ended October 25,
2009 in connection with the closure of one of our research and
development facilities in Japan, (iv) for 2008, goodwill
impairment triggered by the significant adverse change in the
revenue of our mobile display solutions, or MDS reporting unit,
and a reversal of a portion of the restructuring accrual related
to the closure of our Gumi five-inch wafer fabrication
facilities in 2007, and (v) for 2007, the closure of our
Gumi five-inch wafer fabrication facilities. We do not believe
these restructuring and impairment charges are indicative of our
core ongoing operating performance because we do not anticipate
similar facility closures and market driven events in our
ongoing operations, although we cannot guarantee that similar
events will not occur in the future.
|
|
(b)
|
|
This adjustment relates to certain
restructuring charges that are not included in the restructuring
and impairment charges line item on our consolidated statements
of operations. These items are included in selling, general and
administrative expenses in our consolidated statements of
operations. These charges are comprised of the following:
(i) for the three months ended March 29, 2009, a
charge of $3.1 million for restructuring-related
professional fees and related expenses, (ii) for 2009, a
charge of $13.3 million for restructuring-related
professional fees and related expenses and (iii) for 2008,
a charge of $6.2 million for restructuring-related
professional fees and related expenses. We do not believe these
other restructuring charges are indicative of our core ongoing
operating performance because these charges were related, in
significant part, to actions we took in response to the impacts
on our business resulting from the global economic recession
that persisted through 2008 and 2009. We cannot guarantee that
similar charges will not be incurred in the future.
|
|
(c)
|
|
This adjustment eliminates a
$3.7 million charge in 2008 related to expenses incurred in
connection with our abandoned initial public offering in 2008.
We do not believe that these charges are indicative of our core
operating performance. We expect to incur similar costs in
connection with this offering.
|
|
(d)
|
|
This adjustment eliminates a
$1.3 million charge attributable to a one-time settlement
of claims with a subcontractor. We no longer obtain services
from this subcontractor and do not expect to incur similar
charges in the future.
|
|
(e)
|
|
This adjustment eliminates the
impact of largely non-cash reorganization income and expense
items directly associated with our reorganization proceedings
from our ongoing operations including, among others,
professional fees, the revaluation of assets, the effects of the
Chapter 11 reorganization plan and fresh-start accounting
principles and the write-off of debt issuance costs. Included in
reorganization items, net for the period from January 1 to
October 25, 2009 was our predecessors gain recognized
from the effects of our reorganization proceedings. The gain
results from the difference between our predecessors
carrying value of remaining pre-petition liabilities subject to
compromise and the amounts to be distributed
|
12
|
|
|
|
|
pursuant to the reorganization
proceedings. The gain from the effects of the reorganization
proceedings and the application of fresh-start accounting
principles is comprised of the discharge of liabilities subject
to compromise, net of the issuance of new common units and new
warrants and the accrual of amounts to be settled in cash. For
details regarding this adjustment, see note 5 to the
consolidated financial statements of MagnaChip
Semiconductor LLC for the ten-month period ended
October 25, 2009 and the two-month period ended
December 31, 2009 included elsewhere in this prospectus. We
do not believe these items are indicative of our core ongoing
operating performance because they were incurred as a result of
our Chapter 11 reorganization.
|
|
(f)
|
|
This adjustment eliminates the
one-time impact on cost of sales associated with the write-up of
our inventory in accordance with the principles of fresh-start
accounting upon consummation of the Chapter 11
reorganization.
|
|
(g)
|
|
This adjustment eliminates the
impact of non-cash equity-based compensation expenses. Although
we expect to incur non-cash equity-based compensation expenses
in the future, we believe that analysts and investors will find
it helpful to review our operating performance without the
effects of these non-cash expenses, as supplemental information.
|
|
(h)
|
|
This adjustment eliminates the
impact of non-cash foreign currency translation associated with
intercompany debt obligations and foreign currency denominated
receivables and payables, as well as the cash impact of foreign
currency transaction gains or losses on collection of such
receivables and payment of such payables. Although we expect to
incur foreign currency translation gains or losses in the
future, we believe that analysts and investors will find it
helpful to review our operating performance without the effects
of these primarily non-cash gains or losses, as supplemental
information.
|
Adjusted EBITDA has limitations as an analytical tool, and you
should not consider it in isolation, or as a substitute for
analysis of our results as reported under GAAP. Some of these
limitations are:
|
|
|
|
|
Adjusted EBITDA does not reflect our cash expenditures, or
future requirements, for capital expenditures or contractual
commitments;
|
|
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
|
Adjusted EBITDA does not reflect the interest expense, or the
cash requirements necessary to service interest or principal
payments, on our debt;
|
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized will often have to be
replaced in the future, and Adjusted EBITDA does not reflect any
cash requirements for such replacements;
|
|
|
|
Adjusted EBITDA does not consider the potentially dilutive
impact of issuing equity-based compensation to our management
team and employees;
|
|
|
|
Adjusted EBITDA does not reflect the costs of holding certain
assets and liabilities in foreign currencies; and
|
|
|
|
other companies in our industry may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
|
Because of these limitations, Adjusted EBITDA should not be
considered as a measure of discretionary cash available to us to
invest in the growth of our business. We compensate for these
limitations by relying primarily on our GAAP results and using
Adjusted EBITDA only supplementally.
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(6) |
|
We present Adjusted Net Income as a further supplemental measure
of our performance. We prepare Adjusted Net Income by adjusting
net income (loss) to eliminate the impact of a number of
non-cash expenses and other items that may be either one time or
recurring that we do not consider to be indicative of our core
ongoing operating performance. We believe that Adjusted Net
Income is particularly useful because it reflects the impact of
our asset base and capital structure on our operating
performance. |
We present Adjusted Net Income for a number of reasons,
including:
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|
|
|
|
we use Adjusted Net Income in communications with our board of
directors concerning our consolidated financial performance;
|
|
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|
we believe that Adjusted Net Income is an enterprise level
performance measure commonly reported and widely used by
analysts and investors in our industry; and
|
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|
we anticipate that our investor and analyst presentations after
we are public will include Adjusted Net Income.
|
13
Adjusted Net Income is not a measure defined in accordance with
GAAP and should not be construed as an alternative to income
from continuing operations, cash flows from operating activities
or net income (loss), as determined in accordance with GAAP. We
encourage you to evaluate each adjustment and the reasons we
consider them appropriate. Other companies in our industry may
calculate Adjusted Net Income differently than we do, limiting
its usefulness as a comparative measure. In addition, in
evaluating Adjusted Net Income, you should be aware that in the
future we may incur expenses similar to the adjustments in this
presentation. We define Adjusted Net Income as net income (loss)
less income (loss) from discontinued operations, net of taxes,
excluding (i) restructuring and impairment charges, (ii) other
restructuring charges, (iii) abandoned IPO expenses, (vi)
subcontractor claim settlement, (v) reorganization items, net,
(vi) the increase in cost of sales resulting from the
fresh-start accounting inventory step-up, (vii) equity based
compensation expense, (viii) amortization of intangibles
associated with continuing operations, and (ix) foreign currency
gain (loss).
The following table summarizes the adjustments to net income
(loss) that we make in order to calculate Adjusted Net Income
for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Pro Forma
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|
Historical
|
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|
|
|
|
|
|
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Successor
|
|
|
|
Predecessor
|
|
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Three Months
|
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|
|
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Three Months
|
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Two- Month
|
|
|
|
Ten- Month
|
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Three Months
|
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|
|
|
|
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Ended
|
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Year Ended
|
|
|
Ended
|
|
|
Period Ended
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Period Ended
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Ended
|
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Years Ended
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March 31,
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December 31,
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March 31,
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December 31,
|
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October 25,
|
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March 29,
|
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December 31,
|
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2010
|
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|
2009
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2010
|
|
|
2009
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
$
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31.1
|
|
|
$
|
(2.0
|
)
|
|
|
$
|
841.1
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|
|
$
|
(69.7
|
)
|
|
$
|
(417.3
|
)
|
|
$
|
(180.6
|
)
|
Less: Income (loss) from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
6.6
|
|
|
|
(0.8
|
)
|
|
|
(91.5
|
)
|
|
|
(51.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income (loss) from continuing operations
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|
$
|
27.1
|
|
|
$
|
46.6
|
|
|
|
31.1
|
|
|
|
(2.5
|
)
|
|
|
|
834.5
|
|
|
|
(68.9
|
)
|
|
|
(325.8
|
)
|
|
|
(128.8
|
)
|
Adjustments:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and impairment charges(a)
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|
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0.3
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
13.4
|
|
|
|
12.1
|
|
Other restructuring charges(b)
|
|
|
|
|
|
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13.3
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|
|
|
|
|
|
|
|
|
|
|
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13.3
|
|
|
|
3.1
|
|
|
|
6.2
|
|
|
|
|
|
Abandoned IPO expenses(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.7
|
|
|
|
|
|
Subcontractor claim settlement(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
Reorganization items, net(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(804.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
step-up(f)
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
17.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity based compensation expense(g)
|
|
|
1.5
|
|
|
|
2.4
|
|
|
|
1.5
|
|
|
|
2.2
|
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
0.6
|
|
Amortization of intangibles associated with continuing
operations(h)
|
|
|
7.7
|
|
|
|
23.6
|
|
|
|
7.7
|
|
|
|
5.6
|
|
|
|
|
8.8
|
|
|
|
2.4
|
|
|
|
20.0
|
|
|
|
27.5
|
|
Foreign currency loss (gain), net(i)
|
|
|
(21.6
|
)
|
|
|
(52.8
|
)
|
|
|
(21.6
|
)
|
|
|
(9.3
|
)
|
|
|
|
(43.4
|
)
|
|
|
40.2
|
|
|
|
210.4
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net income (loss)
|
|
$
|
15.0
|
|
|
$
|
33.7
|
|
|
$
|
19.9
|
|
|
$
|
13.3
|
|
|
|
$
|
9.3
|
|
|
$
|
(22.9
|
)
|
|
$
|
(71.7
|
)
|
|
$
|
(82.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
This adjustment is comprised of all
items included in the restructuring and impairment charges line
item on our consolidated statements of operations, and
eliminates the impact of restructuring and impairment charges
related to (i) for the three months ended March 31,
2010, impairment of two abandoned in-process research and
development projects, accounted for as indefinite-lived
intangible assets as part of the application of fresh-start
accounting, (ii) for the three months ended March 29,
2009, the closure of our research and development facilities in
Japan, (iii) for 2009, termination benefits and other
related costs, for the ten-month period ended October 25,
2009 in connection with the closure of one of our research and
development facilities in Japan, (iv) for 2008, goodwill
impairment triggered by the significant adverse change in the
revenue of our MDS reporting unit and a reversal of a portion of
the restructuring accrual related to the closure of our Gumi
five-inch wafer fabrication facilities in 2007, and (v) for
2007, the closure of our Gumi five-inch wafer fabrication
facilities. We do not believe these restructuring and impairment
charges are indicative of our core ongoing operating performance
because we do not anticipate similar facility closures and
market driven events in our ongoing operations, although we
cannot guarantee that similar events will not occur in the
future.
|
|
|
(b)
|
|
This adjustment relates to certain
restructuring charges that are not included in the restructuring
and impairment charges line item on our consolidated statements
of operations. These items are included in selling, general and
administrative expenses in our consolidated statements of
operations. These charges are comprised of the following: (i)
for the three months ended March 29, 2009, a charge of $3.1
million for restructuring-related professional fees and related
expenses, (ii) for 2009, a charge of
|
14
|
|
|
|
|
$13.3 million for
restructuring-related professional fees and related expenses,
and (iii) for 2008, a charge of $6.2 million for
restructuring-related professional fees and related expenses. We
do not believe these other restructuring charges are indicative
of our core ongoing operating performance because these charges
were related, in significant part, to actions we took in
response to the impacts on our business resulting from the
global economic recession that persisted through 2008 and 2009.
We cannot guarantee that similar charges will not be incurred in
the future.
|
|
|
(c)
|
|
This adjustment eliminates a $3.7
million charge in 2008 related to expenses incurred in
connection with our abandoned initial public offering in 2008.
We do not believe that these charges are indicative of our core
operating performance. We expect to incur similar costs in
connection with this offering.
|
|
|
(d)
|
|
This adjustment eliminates a $1.3
million charge attributable to a one-time settlement of claims
with a subcontractor. We no longer obtain services from this
subcontractor and do not expect to incur similar charges in the
future.
|
|
|
(e)
|
|
This adjustment eliminates the
impact of largely non-cash reorganization income and expense
items directly associated with our reorganization proceedings
from our ongoing operations including, among others,
professional fees, the revaluation of assets, the effects of the
Chapter 11 reorganization plan and fresh-start accounting
principles and the write-off of debt issuance costs. Included in
reorganization items, net for the ten-month period ended
October 25, 2009 was our predecessors gain recognized
from the effects of our reorganization proceedings. The gain
results from the difference between our predecessors
carrying value of remaining pre-petition liabilities subject to
compromise and the amounts to be distributed pursuant to the
reorganization proceedings. The gain from the effects of the
reorganization proceedings and the application of fresh-start
accounting principles is comprised of the discharge of
liabilities subject to compromise, net of the issuance of new
common units and new warrants and the accrual of amounts to be
settled in cash. For details regarding this adjustment, see
note 5 to the consolidated financial statements of
MagnaChip Semiconductor LLC for the ten months ended
October 25, 2009 and the two months ended December 31,
2009 included elsewhere in this prospectus. We do not believe
these items are indicative of our core ongoing operating
performance because they were incurred as a result of our
reorganization proceedings.
|
|
(f)
|
|
This adjustment eliminates the
one-time impact on cost of sales associated with the write-up of
our inventory in accordance with the principles of fresh-start
accounting upon consummation of the Chapter 11
reorganization.
|
|
(g)
|
|
This adjustment eliminates the
impact of non-cash equity-based compensation expenses. Although
we expect to incur non-cash equity-based compensation expenses
in the future, we believe that analysts and investors will find
it helpful to review our operating performance without the
effects of these non-cash expenses, as supplemental information.
|
|
(h)
|
|
This adjustment eliminates the
non-cash impact of amortization expense for intangible assets
created as a result of the purchase accounting treatment of the
Original Acquisition and other subsequent acquisitions, and from
the application of fresh-start accounting in connection with the
reorganization proceedings. We do not believe these non-cash
amortization expenses for intangibles are indicative of our core
ongoing operating performance because the assets would not have
been capitalized on our balance sheet but for the application of
purchase accounting or fresh-start accounting, as applicable.
|
|
(i)
|
|
This adjustment eliminates the
impact of non-cash foreign currency translation associated with
intercompany debt obligations and foreign currency denominated
receivables and payables, as well as the cash impact of foreign
currency transaction gains or losses on collection of such
receivables and payment of such payables. Although we expect to
incur foreign currency translation gains or losses in the
future, we believe that analysts and investors will find it
helpful to review our operating performance without the effects
of these primarily non-cash gains or losses, as supplemental
information.
|
Adjusted Net Income has limitations as an analytical tool, and
you should not consider it in isolation, or as a substitute for
analysis of our results as reported under GAAP. Some of these
limitations are:
|
|
|
|
|
Adjusted Net Income does not reflect our cash expenditures, or
future requirements, for capital expenditures or contractual
commitments;
|
|
|
|
Adjusted Net Income does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
|
Adjusted Net Income does not consider the potentially dilutive
impact of issuing equity-based compensation to our management
team and employees;
|
|
|
|
Adjusted Net Income does not reflect the costs of holding
certain assets and liabilities in foreign currencies; and
|
|
|
|
other companies in our industry may calculate Adjusted Net
Income differently than we do, limiting its usefulness as a
comparative measure.
|
Because of these limitations, Adjusted Net Income should not be
considered as a measure of discretionary cash available to us to
invest in the growth of our business. We compensate for these
limitations by relying primarily on our GAAP results and using
Adjusted Net Income only supplementally.
15
RISK
FACTORS
You should carefully consider the risk factors set forth
below as well as the other information contained in this
prospectus before investing in our common stock. Any of the
following risks could materially and adversely affect our
business, financial condition or results of operations. As a
result, the price of our common stock could decline and you
could lose all or part of your investment in our common stock.
Additional risks and uncertainties not currently known to us or
those currently viewed by us to be immaterial may also
materially and adversely affect our business, financial
condition or results of operations.
Risks Related to
Our Business
We have a
history of losses and may not achieve or sustain profitability
in the future.
Since we began operations as a separate entity in 2004, we have
not generated a profit for a full fiscal year and have generated
significant net losses. As of October 25, 2009, prior to
our emergence from reorganization proceedings, we had an
accumulated deficit of $964.8 million and negative
unitholders equity. We may increase spending and we
currently expect to incur higher expenses in each of the next
several quarters to support increased research and development
and sales and marketing efforts. These expenditures may not
result in increased revenue or an increase in the number of
customers immediately or at all. Because many of our expenses
are fixed in the short term, or are incurred in advance of
anticipated sales, we may not be able to decrease our expenses
in a timely manner to offset any shortfall of sales.
We recently
emerged from Chapter 11 reorganization proceedings; because
our consolidated financial statements reflect fresh-start
accounting adjustments, our future financial statements will not
be comparable in many respects to our financial information from
prior periods.
On June 12, 2009, we filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code in
order to obtain relief from our debt, which was
$845 million as of December 31, 2008. Our plan of
reorganization became effective on November 9, 2009. In
connection with our emergence from the reorganization
proceedings, we implemented fresh-start accounting in accordance
with ASC 852 effective from October 25, 2009, which
had a material effect on our consolidated financial statements.
Thus, our future consolidated financial statements will not be
comparable in many respects to our consolidated financial
statements for periods prior to our adoption of fresh-start
accounting and prior to accounting for the effects of the
reorganization proceedings. Our past financial difficulties and
bankruptcy filing may have harmed, and may continue to have a
negative effect on, our relationships with investors, customers
and suppliers.
Our
independent registered public accounting firm identified two
control deficiencies which represent a material weakness in our
internal control over financial reporting in connection with our
audits for the ten-month period ended October 25, 2009 and
the
two-month
period ended December 31, 2009. If we fail to effectively
remediate this weakness and maintain effective internal control
over financial reporting in the future, the accuracy and timing
of our financial reporting may be adversely
affected.
In connection with the audit of our consolidated financial
statements for the ten-month period ended October 25, 2009
and the two-month period ended December 31, 2009, our
independent registered public accounting firm reported two
control deficiencies, which represent a material weakness in our
internal control over financial reporting. The two control
deficiencies which represent a material weakness that our
independent registered public accounting firm reported to our
board of directors (as we then did not have a separate audit
committee) are that we do not have a sufficient number of
financial personnel with the requisite financial accounting
experience and that our internal controls over non-routine
transactions are not effective to ensure that accounting
considerations are identified and appropriately recorded.
16
As we prepare for the completion of this offering, we have
identified and taken steps intended to remediate this material
weakness. Upon being notified of the material weakness, we
retained the services of an international accounting firm to
temporarily supplement our internal resources. We are also in
the process of recruiting a director of financial reporting. Any
inability to recruit, train and retain adequate finance
personnel with requisite technical and public company experience
could have an adverse impact on our ability to accurately and
timely prepare our consolidated financial statements. If our
finance and accounting organization is unable for any reason to
respond adequately to the increased demands that will result
from being a public company, the quality and timeliness of our
financial reporting may suffer, which could result in the
identification of additional material weaknesses in our internal
controls. Any consequences resulting from inaccuracies or delays
in our reported financial statements could have an adverse
effect on our business, operating results and financial
condition, our ability to run our business effectively and our
ability to meet our financial reporting requirements, and could
cause investors to lose confidence in our financial reporting.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Controls and
Procedures.
We operate in
the highly cyclical semiconductor industry, which is subject to
significant downturns that may negatively impact our results of
operations.
The semiconductor industry is highly cyclical and is
characterized by constant and rapid technological change and
price erosion, evolving technical standards, short product life
cycles (for semiconductors and for the end-user products in
which they are used) and wide fluctuations in product supply and
demand. From time to time, these and other factors, together
with changes in general economic conditions, cause significant
upturns and downturns in the industry in general and in our
business in particular. Periods of industry downturns, including
the recent economic downturn, have been characterized by
diminished demand for end-user products, high inventory levels,
underutilization of manufacturing capacity, changes in revenue
mix and accelerated erosion of average selling prices. We have
experienced these conditions in our business in the past and may
experience renewed, and possibly more severe and prolonged,
downturns in the future as a result of such cyclical changes.
This may reduce our results of operations.
We base our planned operating expenses in part on our
expectations of future revenue, and a significant portion of our
expenses is relatively fixed in the short term. If revenue for a
particular quarter is lower than we expect, we likely will be
unable to proportionately reduce our operating expenses for that
quarter, which would harm our operating results for that quarter.
If we fail to
develop new products and process technologies or enhance our
existing products and services in order to react to rapid
technological change and market demands, our business will
suffer.
Our industry is subject to constant and rapid technological
change and product obsolescence as customers and competitors
create new and innovative products and technologies. Products or
technologies developed by other companies may render our
products or technologies obsolete or noncompetitive, and we may
not be able to access advanced process technologies, including
smaller geometries, or to license or otherwise obtain essential
intellectual property required by our customers.
We must develop new products and services and enhance our
existing products and services to meet rapidly evolving customer
requirements. We design products for customers who continually
require higher performance and functionality at lower costs. We
must, therefore, continue to enhance the performance and
functionality of our products. The development process for these
advancements is lengthy and requires us to accurately anticipate
technological changes and market trends. Developing and
enhancing these products is uncertain and can be time-consuming,
costly and complex. If we do not continue to develop and
maintain process technologies that are in demand by our
semiconductor manufacturing services customers, we may be unable
to maintain existing customers or attract new customers.
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Customer and market requirements can change during the
development process. There is a risk that these developments and
enhancements will be late, fail to meet customer or market
specifications or not be competitive with products or services
from our competitors that offer comparable or superior
performance and functionality. Any new products, such as our new
line of power management solutions, which we began marketing in
2008, or product or service enhancements, may not be accepted in
new or existing markets. Our business will suffer if we fail to
develop and introduce new products and services or product and
service enhancements on a timely and cost-effective basis.
We manufacture
our products based on our estimates of customer demand, and if
our estimates are incorrect our financial results could be
negatively impacted.
We make significant decisions, including determining the levels
of business that we will seek and accept, production schedules,
component procurement commitments, personnel needs and other
resource requirements based on our estimates of customer
demand and expected demand for and success of their products.
The short-term nature of commitments by many of our customers
and the possibility of rapid changes in demand for their
products reduces our ability to estimate accurately future
customer demand for our products. On occasion, customers may
require rapid increases in supply, which can challenge our
production resources and reduce margins. We may not have
sufficient capacity at any given time to meet our
customers increased demand for our products. Conversely,
downturns in the semiconductor industry have caused and may in
the future cause our customers to reduce significantly the
amount of products they order from us. Because many of our costs
and operating expenses are relatively fixed, a reduction in
customer demand would decrease our results of operations,
including our gross profit.
Our customers
may cancel their orders, reduce quantities or delay production,
which would adversely affect our margins and results of
operations.
We generally do not obtain firm, long-term purchase commitments
from our customers. Customers may cancel their orders, reduce
quantities or delay production for a number of reasons.
Cancellations, reductions or delays by a significant customer or
by a group of customers, which we have experienced as a result
of periodic downturns in the semiconductor industry or failure
to achieve design wins, have affected and may continue to affect
our results of operations adversely. These risks are exacerbated
because many of our products are customized, which hampers our
ability to sell excess inventory to the general market. We may
incur charges resulting from the write-off of obsolete
inventory. In addition, while we do not obtain long-term
purchase commitments, we generally agree to the pricing of a
particular product over a set period of time. If we
underestimate our costs when determining pricing, our margins
and results of operations would be adversely affected.
We depend on
high utilization of our manufacturing capacity, a reduction of
which could have a material adverse effect on our business,
financial condition and the results of our
operations.
An important factor in our success is the extent to which we are
able to utilize the available capacity in our fabrication
facilities. As many of our costs are fixed, a reduction in
capacity utilization, as well as changes in other factors, such
as reduced yield or unfavorable product mix, could reduce our
profit margins and adversely affect our operating results. A
number of factors and circumstances may reduce utilization
rates, including periods of industry overcapacity, low levels of
customer orders, operating inefficiencies, mechanical failures
and disruption of operations due to expansion or relocation of
operations, power interruptions and fire, flood or other natural
disasters or calamities. The potential delays and costs
resulting from these steps could have a material adverse effect
on our business, financial condition and results of operations.
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A significant
portion of our sales comes from a relatively limited number of
customers, the loss of which would adversely affect our
financial results.
Historically, we have relied on a limited number of customers
for a substantial portion of our total revenue. If we were to
lose key customers or if customers cease to place orders for our
high-volume products or services, our financial results would be
adversely affected. Net sales to our ten largest customers
represented 64%, 66%, 69% and 63% of our net sales for the three
months ended March 31, 2010, the two-month period ended
December 31, 2009, the ten-month period ended
October 25, 2009 and the year ended December 31, 2008,
respectively. LG Display represented 20% and 26% of our net
sales and a substantial portion of the net sales generated by
our top ten customers for the three months ended March 31,
2010 and the combined twelve-month period ended
December 31, 2009. Significant reductions in sales to any
of these customers, especially our few largest customers, the
loss of other major customers or a general curtailment in orders
for our high-volume products or services within a short period
of time would adversely affect our business.
The average
selling prices of our semiconductor products have at times
declined rapidly and will likely do so in the future, which
could harm our revenue and gross profit.
The semiconductor products we develop and sell are subject to
rapid declines in average selling prices. From time to time, we
have had to reduce our prices significantly to meet customer
requirements, and we may be required to reduce our prices in the
future. This would cause our gross profit to decrease. Our
financial results will suffer if we are unable to offset any
reductions in our average selling prices by increasing our sales
volumes, reducing our costs or developing new or enhanced
products on a timely basis with higher selling prices or gross
profit.
Our industry
is highly competitive and our ability to compete could be
negatively impacted by a variety of factors.
The semiconductor industry is highly competitive and includes
hundreds of companies, a number of which have achieved
substantial market share both within our product categories and
end markets. Current and prospective customers for our products
and services evaluate our capabilities against the merits of our
competitors. Some of our competitors are well established as
independent companies and have substantially greater market
share and manufacturing, financial, research and development and
marketing resources than we do. We also compete with emerging
companies that are attempting to sell their products in certain
of our end markets and with the internal semiconductor design
and manufacturing capabilities of many of our significant
customers. We expect to experience continuing competitive
pressures in our markets from existing competitors and new
entrants.
Any consolidation among our competitors could enhance their
product offerings and financial resources, further enhancing
their competitive position. Our ability to compete will depend
on a number of factors, including the following:
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our ability to offer cost-effective and high quality products
and services on a timely basis using our technologies;
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our ability to accurately identify and respond to emerging
technological trends and demand for product features and
performance characteristics;
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our ability to continue to rapidly introduce new products that
are accepted by the market;
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our ability to adopt or adapt to emerging industry standards;
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the number and nature of our competitors and competitiveness of
their products and services in a given market;
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entrance of new competitors into our markets;
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our ability to enter the highly competitive power management
market; and
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our ability to continue to offer in demand semiconductor
manufacturing services at competitive prices.
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Many of these factors are outside of our control. In the future,
our competitors may replace us as a supplier to our existing or
potential customers, and our customers may satisfy more of their
requirements internally. As a result, we may experience
declining revenues and results of operations.
Changes in
demand for consumer electronics in our end markets can impact
our results of operations.
Demand for our products will depend in part on the demand for
various consumer electronics products, in particular, mobile
phones and multimedia devices, digital televisions, flat panel
displays, mobile PCs and digital cameras, which in turn depends
on general economic conditions and other factors beyond our
control. If our customers fail to introduce new products that
employ our products or component parts, demand for our products
will suffer. To the extent that we cannot offset periods of
reduced demand that may occur in these markets through greater
penetration of these markets or reduction in our production and
costs, our sales and gross profit may decline, which would
negatively impact our business, financial condition and results
of operations.
If we fail to
achieve design wins for our semiconductor products, we may lose
the opportunity for sales to customers for a significant period
of time and be unable to recoup our investments in our
products.
We expend considerable resources on winning competitive
selection processes, known as design wins, to develop
semiconductor products for use in our customers products.
These selection processes are typically lengthy and can require
us to incur significant design and development expenditures. We
may not win the competitive selection process and may never
generate any revenue despite incurring significant design and
development expenditures. Once a customer designs a
semiconductor into a product, that customer is likely to
continue to use the same semiconductor or enhanced versions of
that semiconductor from the same supplier across a number of
similar and successor products for a lengthy period of time due
to the significant costs associated with qualifying a new
supplier and potentially redesigning the product to incorporate
a different semiconductor. If we fail to achieve an initial
design win in a customers qualification process, we may
lose the opportunity for significant sales to that customer for
a number of products and for a lengthy period of time. This may
cause us to be unable to recoup our investments in our
semiconductor products, which would harm our business.
We have
lengthy and expensive
design-to-mass
production and manufacturing process development cycles that may
cause us to incur significant expenses without realizing
meaningful sales, the occurrence of which would harm our
business.
The cycle time from the design stage to mass production for some
of our products is long and requires the investment of
significant resources with many potential customers without any
guarantee of sales. Our
design-to-mass
production cycle typically begins with a
three-to-twelve
month semiconductor development stage and test period followed
by a
three-to-twelve
month end-product qualification period by our customers. The
fairly lengthy front end of our sales cycle creates a risk that
we may incur significant expenses but may be unable to realize
meaningful sales. Moreover, prior to mass production, customers
may decide to cancel their products or change production
specifications, resulting in sudden changes in our product
specifications, increasing our production time and costs.
Failure to meet such specifications may also delay the launch of
our products or result in lost sales.
In addition, we collaborate and jointly develop certain process
technologies and manufacturing process flows custom to certain
of our semiconductor manufacturing services customers. To the
extent that our semiconductor manufacturing services customers
fail to achieve market acceptance for
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their products, we may be unable to recoup our engineering
resources commitment and our investment in process technology
development, which would harm our business.
Research and
development investments may not yield profitable and
commercially viable product and service offerings and thus will
not necessarily result in increases in revenues for
us.
We invest significant resources in our research and development.
Our research and development efforts, however, may not yield
commercially viable products or enhance our semiconductor
manufacturing services offerings. During each stage of research
and development there is a substantial risk that we will have to
abandon a potential product or service offering that is no
longer marketable and in which we have invested significant
resources. In the event we are able to develop viable new
products or service offerings, a significant amount of time will
have elapsed between our investment in the necessary research
and development effort and the receipt of any related revenues.
We face
numerous challenges relating to executing our growth strategy,
and if we are unable to execute our growth strategy effectively,
our business and financial results could be materially and
adversely affected.
Our growth strategy is to leverage our advanced analog and
mixed-signal technology platform, continue to innovate and
deliver new products and services, increase business with
existing customers, broaden our customer base, aggressively grow
our power business, drive execution excellence and focus on
specialty process technologies. As part of our growth strategy,
we began marketing a new line of power management semiconductor
products in 2008 and expect to introduce other new products and
services in the future. If we are unable to execute our growth
strategy effectively, we may not be able to take advantage of
market opportunities, execute our business plan or respond to
competitive pressures. Moreover, if our allocation of resources
does not correspond with future demand for particular products,
we could miss market opportunities and our business and
financial results could be materially and adversely affected.
We are subject
to risks associated with currency fluctuations, and changes in
the exchange rates of applicable currencies could impact our
results of operations.
Historically, a portion of our revenues and greater than the
majority of our operating expenses and costs of sales have been
denominated in
non-U.S. currencies,
principally the Korean won, and we expect that this will remain
true in the future. Because we report our results of operations
in U.S. dollars, changes in the exchange rate between the
Korean won and the U.S. dollar could materially impact our
reported results of operations and distort period to period
comparisons. In particular, because of the difference in the
amount of our consolidated revenues and expenses that are in
U.S. dollars relative to Korean won, a depreciation in the
U.S. dollar relative to the Korean won could result in a
material increase in reported costs relative to revenues, and
therefore could cause our profit margins and operating income to
appear to decline materially, particularly relative to prior
periods. The converse is true if the U.S. dollar were to
appreciate relative to the Korean won. Fluctuations in foreign
currency exchange rates also impact the reporting of our
receivables and payables in
non-U.S.
currencies. Foreign currency fluctuations had a materially
beneficial impact on our results of operations in the fiscal
year ended December 31, 2008 relative to the fiscal year
ended December 31, 2007, as well as in the combined
twelve-month period ended December 31, 2009 relative to the
fiscal year ended December 31, 2008. As a result of foreign
currency fluctuations, it could be more difficult to detect
underlying trends in our business and results of operations. In
addition, to the extent that fluctuations in currency exchange
rates cause our results of operations to differ from our
expectations or the expectations of our investors, the trading
price of our stock following the completion of this offering
could be adversely affected.
21
From time to time, we may engage in exchange rate hedging
activities in an effort to mitigate the impact of exchange rate
fluctuations. For example, in January 2010 and May 2010 our
Korean subsidiary entered into foreign currency option and
forward contracts in order to mitigate a portion of the impact
of U.S. dollar-Korean won exchange rate fluctuations on our
operating results. The January 2010 option and forward contracts
require us to sell specified notional amounts in
U.S. dollars and provide us the option to sell specified
notional amounts in U.S. dollars during each month of 2010
commencing February 2010 to our counterparty, in each case, in
exchange for Korean won at specified fixed exchange rates. The
May 2010 option and forward contracts require us to sell
specified notional amounts in U.S. dollars and provide us the
option to sell specified notional amounts in U.S. dollars
during the months of January 2011 through June 2011 to our
counterparty, in each case, in exchange for Korean won at
specified fixed exchange rates. Obligations under these foreign
currency option and forward contracts must be cash
collateralized if our exposure exceeds certain specified
thresholds. These option and forward contracts may be terminated
by the counterparty in a number of circumstances, including if
our long-term debt rating falls below B-/B3 or if our total cash
and cash equivalents is less than $30 million at the end of
a fiscal quarter. We cannot assure you that any hedging
technique we implement will be effective. If our hedging
activities are not effective, changes in currency exchange rates
may have a more significant impact on our results of operations.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Factors
Affecting our Results of Operations.
The global
recession and related financial crisis negatively affected our
business. Poor economic conditions may negatively affect our
future business, results of operations and financial
condition.
The global recession and related financial crisis led to slower
economic activity, increased unemployment, concerns about
inflation and energy costs, decreased business and consumer
confidence, reduced corporate profits and capital spending,
adverse business conditions and lower levels of liquidity in
many financial markets. Consumers and businesses deferred
purchases in response to tighter credit and negative financial
news, which has in turn negatively affected product demand and
other related matters. The global recession led to reduced
customer spending in the semiconductor market and in our target
markets, made it difficult for our customers, our vendors and us
to accurately forecast and plan future business activities, and
caused U.S. and foreign businesses to slow spending on our
products. Although recently there have been indications of
improved economic conditions generally and in the semiconductor
industry specifically, we cannot assure you of the extent to
which such conditions will continue to improve or whether the
improvement will be sustainable. If the global economic recovery
is not sustained or the global economy experiences another
recession, such adverse economic conditions could lead to the
insolvency of key suppliers resulting in product delays, limit
the ability of customers to obtain credit to finance purchases
of our products, lead to customer insolvencies, and also result
in counterparty failures that may negatively impact our treasury
operations. As a result, our business, financial condition and
result of operations could be materially adversely affected in
future periods as a result of economic downturns.
The loss of
our key employees would materially adversely affect our
business, and we may not be able to attract or retain the
technical or management employees necessary to compete in our
industry.
Our key executives have substantial experience and have made
significant contributions to our business, and our continued
success is dependent upon the retention of our key management
executives, including our Chief Executive Officer and Chairman,
Sang Park. The loss of such key personnel would have a material
adverse effect on our business. In addition, our future success
depends on our ability to attract and retain skilled technical
and managerial personnel. We do not know whether we will be able
to retain all of these employees as we continue to pursue our
business strategy. The loss of the services of key employees,
especially our key design and technical personnel, or our
inability to retain, attract and motivate qualified design and
technical personnel,
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could have a material adverse effect on our business, financial
condition and results of operations. This could hinder our
research and product development programs or otherwise have a
material adverse effect on our business.
If we
encounter future labor problems, we may fail to deliver our
products and services in a timely manner, which could adversely
affect our revenues and profitability.
As of April 30, 2010, 2,176 employees, or
approximately 66.2% of our employees, were represented by the
MagnaChip Semiconductor Labor Union, which is a member of the
Federation of Korean Metal Workers Trade Unions. We can offer no
assurance that issues with the labor union and other employees
will be resolved favorably for us in the future, that we will
not experience work stoppages or other labor problems in future
years or that we will not incur significant expenses related to
such issues.
We may incur
costs to engage in future business combinations or strategic
investments, and we may not realize the anticipated benefits of
those transactions.
As part of our business strategy, we may seek to enter into
business combinations, investments, joint ventures and other
strategic alliances with other companies in order to maintain
and grow revenue and market presence as well as to provide us
with access to technology, products and services. Any such
transaction would be accompanied by risks that may harm our
business, such as difficulties in assimilating the operations,
personnel and products of an acquired business or in realizing
the projected benefits, disruption of our ongoing business,
potential increases in our indebtedness and contingent
liabilities and charges if the acquired company or assets are
later determined to be worth less than the amount paid for them
in an earlier original acquisition. In addition, our
indebtedness may restrict us from making acquisitions that we
may otherwise wish to pursue.
The failure to
achieve acceptable manufacturing yields could adversely affect
our business.
The manufacture of semiconductors involves highly complex
processes that require precision, a highly regulated and sterile
environment and specialized equipment. Defects or other
difficulties in the manufacturing process can prevent us from
achieving acceptable yields in the manufacture of our products
or those of our semiconductor manufacturing services customers,
which could lead to higher costs, a loss of customers or delay
in market acceptance of our products. Slight impurities or
defects in the photomasks used to print circuits on a wafer or
other factors can cause significant difficulties, particularly
in connection with the production of a new product, the adoption
of a new manufacturing process or any expansion of our
manufacturing capacity and related transitions. We may also
experience manufacturing problems in achieving acceptable yields
as a result of, among other things, transferring production to
other facilities, upgrading or expanding existing facilities or
changing our process technologies. Yields below our target
levels can negatively impact our gross profit and may cause us
to eliminate underperforming products.
We rely on a
number of independent subcontractors and the failure of any of
these independent subcontractors to perform as required could
adversely affect our operating results.
A substantial portion of our net sales are derived from
semiconductor devices assembled in packages or on film. The
packaging and testing of semiconductors require technical skill
and specialized equipment. For the portion of packaging and
testing that we outsource, we use subcontractors located in
Korea, China, Taiwan, Malaysia and Thailand. We rely on these
subcontractors to package and test our devices with acceptable
quality and yield levels. We could be adversely affected by
political disorders, labor disruptions, and natural disasters
where our subcontractors are located. If our semiconductor
packagers and test service providers experience problems in
packaging and testing our semiconductor devices, experience
prolonged quality or yield problems or decrease the capacity
available to us, our operating results could be adversely
affected.
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We depend on
successful parts and materials procurement for our manufacturing
processes, and a shortage or increase in the price of these
materials could interrupt our operations and result in a decline
of revenues and results of operations.
We procure materials and electronic and mechanical components
from international sources and original equipment manufacturers.
We use a wide range of parts and materials in the production of
our semiconductors, including silicon, processing chemicals,
processing gases, precious metals and electronic and mechanical
components, some of which, such as silicon wafers, are
specialized raw materials that are generally only available from
a limited number of suppliers. We do not have long-term
agreements providing for all of these materials, thus, if demand
increases or supply decreases, the costs of our raw materials
could significantly increase. For example, worldwide supplies of
silicon wafers, an important raw material for the semiconductors
we manufacture, were constrained in recent years due to an
increased demand for silicon. Silicon is also a key raw material
for solar cells, the demand for which has increased in recent
years. Although supplies of silicon have recently improved due
to the entrance of additional suppliers and capacity expansion
by existing suppliers, we cannot assure you that such supply
increases will match demand increases. If we cannot obtain
adequate materials in a timely manner or on favorable terms for
the manufacture of our products, revenues and results of
operations will decline.
We face
warranty claims, product return, litigation and liability risks
and the risk of negative publicity if our products
fail.
Our semiconductors are incorporated into a number of end
products, and our business is exposed to product return,
warranty and product liability risk and the risk of negative
publicity if our products fail. Although we maintain insurance
for product liability claims, the amount and scope of our
insurance may not be adequate to cover a product liability claim
that is asserted against us. In addition, product liability
insurance could become more expensive and difficult to maintain
and, in the future, may not be available on commercially
reasonable terms, or at all.
In addition, we are exposed to the product liability risk and
the risk of negative publicity affecting our customers. Our
sales may decline if any of our customers are sued on a product
liability claim. We also may suffer a decline in sales from the
negative publicity associated with such a lawsuit or with
adverse public perceptions in general regarding our
customers products. Further, if our products are delivered
with impurities or defects, we could incur additional
development, repair or replacement costs, and our credibility
and the markets acceptance of our products could be harmed.
We could
suffer adverse tax and other financial consequences as a result
of changes in, or differences in the interpretation of,
applicable tax laws.
Our company organizational structure was created in part based
on certain interpretations and conclusions regarding various tax
laws, including withholding tax, and other tax laws of
applicable jurisdictions. Our Korean subsidiary, MagnaChip
Semiconductor, Ltd., or MagnaChip Korea, was granted a limited
tax holiday under Korean law in October 2004. This grant
provided for certain tax exemptions for corporate taxes and
withholding taxes until December 31, 2008, and for
acquisition taxes, property and land use taxes and certain other
taxes until December 31, 2013. Our interpretations and
conclusions regarding tax laws, however, are not binding on any
taxing authority and, if these interpretations and conclusions
are incorrect, if our business were to be operated in a way that
rendered us ineligible for tax exemptions or caused us to become
subject to incremental tax, or if the authorities were to
change, modify, or have a different interpretation of the
relevant tax laws, we could suffer adverse tax and other
financial consequences and the anticipated benefits of our
organizational structure could be materially impaired.
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Our ability to
compete successfully and achieve future growth will depend, in
part, on our ability to protect our proprietary technology and
know-how, as well as our ability to operate without infringing
the proprietary rights of others.
We seek to protect our proprietary technologies and know-how
through the use of patents, trade secrets, confidentiality
agreements and other security measures. The process of seeking
patent protection takes a long time and is expensive. There can
be no assurance that patents will issue from pending or future
applications or that, if patents issue, they will not be
challenged, invalidated or circumvented, or that the rights
granted under the patents will provide us with meaningful
protection or any commercial advantage. Some of our technologies
are not covered by any patent or patent application. The
confidentiality agreements on which we rely to protect these
technologies may be breached and may not be adequate to protect
our proprietary technologies. We cannot assure you that other
countries in which we market our services will protect our
intellectual property rights to the same extent as the United
States. In particular, the validity, enforceability and scope of
protection of intellectual property in China, where we derive a
significant portion of our net sales, and certain other
countries where we derive net sales, are uncertain and still
evolving and historically have not protected and may not protect
in the future, intellectual property rights to the same extent
as do the laws and enforcement procedures in the United States.
Our ability to compete successfully depends on our ability to
operate without infringing the proprietary rights of others. We
have no means of knowing what patent applications have been
filed in the United States until they are published. In
addition, the semiconductor industry is characterized by
frequent litigation regarding patent and other intellectual
property rights. We may need to file lawsuits to enforce our
patents or intellectual property rights, and we may need to
defend against claimed infringement of the rights of others. Any
litigation could result in substantial costs to us and divert
our resources. Despite our efforts in bringing or defending
lawsuits, we may not be able to prevent third parties from
infringing upon or misappropriating our intellectual property.
In the event of an adverse outcome in any such litigation, we
may be required to:
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pay substantial damages or indemnify customers or licensees for
damages they may suffer if the products they purchase from us or
the technology they license from us violate the intellectual
property rights of others;
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stop our manufacture, use, sale or importation of infringing
products; expend significant resources to develop or acquire
non-infringing technologies;
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discontinue processes; or
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obtain licenses to the intellectual property we are found to
have infringed.
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There can be no assurance that we would be successful in such
development or acquisition or that such licenses would be
available under reasonable terms, or at all. The termination of
key third party licenses relating to the use of intellectual
property in our products and our design processes, such as our
agreements with Silicon Works Co., Ltd. and ARM Limited, would
materially and adversely affect our business.
Our competitors may develop, patent or gain access to know-how
and technology similar to our own. In addition, many of our
patents are subject to cross licenses, several of which are with
our competitors. The noncompetition arrangement agreed to by
Hynix in connection with the Original Acquisition expired on
October 1, 2007. Under that arrangement, Hynix retained a
perpetual license to use the intellectual property that we
acquired from Hynix in the Original Acquisition. Now that these
noncompetition restrictions have expired, Hynix and its
subsidiaries are free to develop products that may incorporate
or embody intellectual property developed by us prior to October
2004.
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Our expenses
could increase if Hynix were unwilling or unable to provide
certain services related to our shared facilities with Hynix,
and if Hynix were to become insolvent, we could lose certain of
our leases.
We are party to a land lease and easement agreement with Hynix
pursuant to which we lease the land for our facilities in
Cheongju, Korea. If this agreement were terminated for any
reason, including the insolvency of Hynix, we would have to
renegotiate new lease terms with Hynix or the new owner of the
land. We cannot assure you that we could negotiate new lease
terms on favorable terms or at all. Because we share certain
facilities with Hynix, several services that are essential to
our business are provided to us by or through Hynix under our
general service supply agreement with Hynix. These services
include electricity, bulk gases and de-ionized water, campus
facilities and housing, wastewater and sewage management,
environmental safety and certain utilities and infrastructure
support services. If any of our agreements with Hynix were
terminated or if Hynix were unwilling or unable to fulfill its
obligations to us under the terms of these agreements, we would
have to procure these services on our own and as a result may
experience an increase in our expenses.
We are subject
to many environmental laws and regulations that could affect our
operations or result in significant expenses.
We are subject to requirements of environmental, health and
safety laws and regulations in each of the jurisdictions in
which we operate, governing air emissions, wastewater
discharges, the generation, use, handling, storage and disposal
of, and exposure to, hazardous substances (including asbestos)
and wastes, soil and groundwater contamination and employee
health and safety. These laws and regulations are complex,
change frequently and have tended to become more stringent over
time. There can be no assurance that we have been, or will be,
in compliance with all such laws and regulations or that we will
not incur material costs or liabilities in connection with these
laws and regulations in the future. The adoption of new
environmental, health and safety laws, the failure to comply
with new or existing laws, or issues relating to hazardous
substances could subject us to material liability (including
substantial fines or penalties), impose the need for additional
capital equipment or other process requirements upon us, curtail
our operations or restrict our ability to expand operations.
If our Korean
subsidiary is designated as a regulated business under Korean
environmental law, such designation could have an adverse effect
on our financial position and results of
operations.
In April 2010, the Korean governments Enforcement Decree
to the Framework Act on Low Carbon Green Growth, or the
Enforcement Decree, became effective. Businesses that exceed
25,000 tons of greenhouse gas emissions and 100 terajoules
of energy consumption for the prior three years will be subject
to regulation and will be required to submit plans to reduce
greenhouse emissions and energy consumption as well as
performance reports and will be subject to government
requirements to take further action. Our Korean subsidiary meets
the thresholds under the Enforcement Decree and we expect that
that it will be designated as a regulated business by the end of
September 2010. Our Korean subsidiary will then have until
December 2011 to reach an agreement with Korean governmental
authorities to set reduction targets and draft an implementation
plan. If the ultimate implementation plan agreed upon with
Korean governmental authorities requires us to reduce our
emissions or energy consumption, we could be subject to
additional and potentially costly compliance or remediation
expenses, including potentially the installation of equipment
and changes in the type of materials we use in manufacturing,
that could adversely affect our financial position and results
of operations.
26
We will likely
need additional capital in the future, and such capital may not
be available on acceptable terms or at all, which would have a
material adverse effect on our business, financial condition and
results of operations.
We will likely require more capital in the future from equity or
debt financings to fund operating expenses, such as research and
development costs, finance investments in equipment and
infrastructure, acquire complimentary businesses and
technologies, and respond to competitive pressures and potential
strategic opportunities. If we raise additional funds through
further issuances of equity or other securities convertible into
equity, our existing stockholders could suffer significant
dilution, and any new shares we issue could have rights,
preferences or privileges senior to those of the holders of our
common stock, including the shares of common stock sold in this
offering. In addition, additional capital may not be available
when needed or, if available, may not be available on favorable
terms. In addition, our indebtedness limits our ability to incur
additional indebtedness under certain circumstances. If we are
unable to obtain capital on favorable terms, or if we are unable
to obtain capital at all, we may have to reduce our operations
or forego opportunities, and this may have a material adverse
effect on our business, financial condition and results of
operations.
Our business
depends on international customers, suppliers and operations in
Asia, and as a result we are subject to regulatory, operational,
financial and political risks, which could adversely affect our
financial results.
We rely on, and expect to continue to rely on, suppliers,
subcontractors and operations located primarily in Asia. As a
result, we face risks inherent in international operations, such
as unexpected changes in regulatory requirements, tariffs and
other market barriers, political, social and economic
instability, adverse tax consequences, war, civil disturbances
and acts of terrorism, difficulties in accounts receivable
collection, extended payment terms and differing labor
standards, enforcement of contractual obligations and protection
of intellectual property. These risks may lead to increased
costs or decreased revenue growth, or both. Although we do not
derive any revenue from, nor sell any products in, North Korea,
any future increase in tensions between South Korea and North
Korea that may occur, such as an outbreak of military
hostilities, would adversely affect our business, financial
condition and results of operations.
You may not be
able to bring an action or enforce any judgment obtained in
United States courts, or bring an action in any other
jurisdiction, against us or our subsidiaries or our directors,
officers or independent auditors that are organized or residing
in jurisdictions other than the United States.
Most of our subsidiaries are organized or incorporated outside
of the United States and some of our directors and executive
officers as well as our independent auditors are organized or
reside outside of the United States. Most of our and our
subsidiaries assets are located outside of the United
States and in particular, in Korea. Accordingly, any judgment
obtained in the United States against us or our subsidiaries may
not be collectible in the United States. As a result, it may not
be possible for you to effect service of process within the
United States upon these persons or to enforce against them or
us court judgments obtained in the United States that are
predicated upon the civil liability provisions of the federal
securities laws of the United States or of the securities laws
of any state of the United States. In particular, there is doubt
as to the enforceability in Korea or any other jurisdictions
outside the United States, either in original actions or in
actions for enforcement of judgments of United States courts, of
civil liabilities predicated on the federal securities laws of
the United States or the securities laws of any state of the
United States.
Investor
confidence may be adversely impacted if we are unable to comply
with Section 404 of the Sarbanes-Oxley Act of 2002, and as
a result, our stock price could decline.
We will be subject to rules adopted by the Securities Exchange
Commission, or SEC, pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, which require
us to include
27
in our Annual Report on
Form 10-K
our managements report on, and assessment of the
effectiveness of, our internal controls over financial
reporting. Beginning with our fiscal year ending
December 31, 2011, our independent auditors will be
required to attest to and report on the effectiveness of our
internal control over financial reporting. In connection with
audits of our consolidated financial statements for the
ten-month period ended October 25, 2009 and two-month
period ended December 31, 2009, our independent registered
public accounting firm has reported two control deficiencies
that existed prior to their review, which represent a material
weakness in our internal control over financial reporting. The
two control deficiencies which represent a material weakness
that our independent registered public accounting firm reported
to our board of directors are that we do not have a sufficient
number of financial personnel with the requisite financial
accounting experience and that our controls over non-routine
transactions are not effective to ensure that accounting
considerations are identified and appropriately recorded. If we
fail to achieve and maintain the adequacy of our internal
controls, there is a risk that we will not comply with all of
the requirements imposed by Section 404. Moreover,
effective internal controls, particularly those related to
revenue recognition, are necessary for us to produce reliable
financial reports and are important to helping prevent financial
fraud. Any of these possible outcomes could result in an adverse
reaction in the financial marketplace due to a loss of investor
confidence in the reliability of our consolidated financial
statements and could result in investigations or sanctions by
the SEC, the New York Stock Exchange, or NYSE, or other
regulatory authorities or in stockholder litigation. Any of
these factors ultimately could harm our business and could
negatively impact the market price of our securities.
Ineffective control over financial reporting could also cause
investors to lose confidence in our reported financial
information, which could adversely affect the trading price of
our common stock.
Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives. However, our
management, including our principal executive officer and
principal financial officer, does not expect that our disclosure
controls and procedures will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of
a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, have been detected.
Our level of
indebtedness is substantial, and we may not be able to generate
sufficient cash to service all of our indebtedness and may be
forced to take other actions to satisfy our obligations under
our indebtedness, which may not be successful. A decline in the
ratings of our existing or future indebtedness may make the
terms of any new indebtedness we choose to incur more
costly.
As of March 31, 2010, our total indebtedness on a pro forma
basis was $246.7 million. See Capitalization
for additional information. Our substantial debt could have
important consequences, including:
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increasing our vulnerability to general economic and industry
conditions;
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requiring a substantial portion of our cash flow from operations
to be dedicated to the payment of principal and interest on our
indebtedness, therefore reducing our ability to use our cash
flow to fund our operations, capital expenditures and future
business opportunities;
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limiting our ability to obtain additional financing for working
capital, capital expenditures, debt service requirements,
acquisitions and general corporate or other purposes; and
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limiting our ability to adjust to changing market conditions and
placing us at a competitive disadvantage compared to our
competitors who have less debt.
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Our ability to make scheduled payments on or to refinance our
debt obligations depends on our financial condition and
operating performance, which is subject to prevailing economic
and competitive
28
conditions and to certain financial, business and other factors
beyond our control. We cannot assure you that we will generate a
level of cash flows from operating activities sufficient to
permit us to pay the principal, premium, if any, and interest on
our indebtedness.
The credit ratings assigned to our debt reflect each rating
agencys opinion of our ability to make payments on the
debt obligations when such payments are due. The current rating
of our senior notes is B2 by Moodys and B+ by Standard and
Poors, both of which are below investment grade. A rating may be
subject to revision or withdrawal at any time by the assigning
rating agency. We may experience downgrades in our debt ratings
in the future. Any lowering of our debt ratings would adversely
impact our ability to raise additional debt financing and
increase the cost of any such financing that is obtained. In the
event any ratings downgrades are significant, we may choose not
to incur new debt or refinance existing debt if we are unable to
incur or refinance such debt at favorable interest rates or on
favorable terms.
If our cash flows and capital resources are insufficient to fund
our debt service obligations or if we are unable to refinance
existing indebtedness on favorable terms, we may be forced to
reduce or delay capital expenditures, sell assets, seek
additional capital or restructure or refinance our indebtedness.
These alternative measures may not be successful and may not
permit us to meet our scheduled debt service obligations. In the
absence of such operating results and resources, we could face
substantial liquidity problems and might be required to dispose
of material assets or operations to meet our debt service and
other obligations. The indentures governing our notes restrict
our ability to dispose of assets and use the proceeds from the
disposition. We may not be able to consummate those dispositions
or be able to obtain the proceeds which we could realize from
them and these proceeds may not be adequate to meet any debt
service obligations then due.
Restrictions
on MagnaChip Koreas ability to make payments on its
intercompany loans from MagnaChip Semiconductor B.V., or on its
ability to pay dividends in excess of statutory limitations,
could hinder our ability to make payments on our 10.500% senior
notes due 2018.
We anticipate that payments under our 10.500% senior notes due
2018 will be funded in part by MagnaChip Koreas repayment
of its existing loans from MagnaChip Semiconductor B.V., with
MagnaChip Semiconductor B.V. using such repayments in turn to
repay the loans owed to MagnaChip Semiconductor S.A. Under the
Korean Foreign Exchange Transaction Act, the minister of the
Ministry of Strategy and Finance is authorized to temporarily
suspend payments in foreign currencies in the event of natural
calamities, wars, conflicts of arms, grave and sudden changes in
domestic or foreign economic conditions, or other similar
situations. In addition, under the Korean Commercial Code, a
Korean company is permitted to make a dividend payment in
accordance with the provisions in its articles of incorporation
out of retained earnings (as determined in accordance with the
Korean Commercial Code and the generally accepted accounting
principles in Korea), but no more than twice a year. If
MagnaChip Korea is prevented from making payments under its
intercompany loans due to restrictions on payments of foreign
currency or if it has an insufficient amount of retained
earnings under the Korean Commercial Code to make dividend
payments to MagnaChip Semiconductor B.V., we may not have
sufficient funds to make payments on the notes.
We may need to
incur impairment and other restructuring charges, which could
materially affect our results of operations and financial
conditions.
During industry downturns and for other reasons, we may need to
record impairment or restructuring charges. From April 4,
2005 through March 31, 2010, we recognized aggregate
restructuring and impairment charges of $64.0 million,
which consisted of $58.4 million of impairment charges and
$5.6 million of restructuring charges. In the future, we
may need to record additional impairment charges or to further
restructure our business or incur additional restructuring
charges, any of which could have a material adverse effect on
our results of operations or financial condition.
29
We are subject
to litigation risks, which may be costly to defend and the
outcome of which is uncertain.
All industries, including the semiconductor industry, are
subject to legal claims, with and without merit, that may be
particularly costly and which may divert the attention of our
management and our resources in general. We are involved in a
variety of legal matters, most of which we consider routine
matters that arise in the normal course of business. These
routine matters typically fall into broad categories such as
those involving customers, employment and labor and intellectual
property. Even if the final outcome of these legal claims does
not have a material adverse effect on our financial position,
results of operations or cash flows, defense and settlement
costs can be substantial. Due to the inherent uncertainty of the
litigation process, the resolution of any particular legal claim
or proceeding could have a material effect on our business,
financial condition, results of operations or cash flows.
Risks Related to
Our Common Stock
The price of
our depositary shares and common stock may be volatile and you
may lose all or a part of your investment.
Prior to this offering, there has not been a public market for
our depositary shares or common stock. Even though we anticipate
that our shares will be quoted on the New York Stock Exchange,
an active trading market for our depositary shares or common
stock may not develop following this offering. You may not be
able to sell your shares quickly or at the current market price
if trading in our depositary shares or common stock is not
active. The initial public offering price for the shares will be
determined by negotiations between the underwriters, the selling
stockholders and us, and may not be indicative of prices that
will prevail in the trading market.
In addition, the trading price of our depositary shares and
common stock might be subject to wide fluctuations. Factors,
some of which are beyond our control, that could affect the
trading price of our depositary shares or common stock may
include:
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actual or anticipated variations in our results of operations
from quarter to quarter or year to year;
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announcements by us or our competitors of significant
agreements, technological innovations or strategic alliances;
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changes in recommendations or estimates by any securities
analysts who follow our securities;
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addition or loss of significant customers;
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recruitment or departure of key personnel;
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changes in economic performance or market valuations of
competing companies in our industry;
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price and volume fluctuations in the overall stock market;
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market conditions in our industry, end markets and the economy
as a whole;
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subsequent sales of stock and other financings;
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litigation, legislation, regulation or technological
developments that adversely affect our business; and
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the expiration of contractual
lock-up
agreements with our executive officers, directors and greater
than 1% stockholders.
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In the past, following periods of volatility in the market price
of a public companys securities, securities class action
litigation often has been instituted against the public company.
Regardless of its outcome, this type of litigation could result
in substantial costs to us and a likely diversion of our
managements attention. You may not receive a positive
return on your investment when you sell your shares, and you
could lose some or the entire amount of your investment.
30
Control by
principal stockholders could adversely affect our other
stockholders.
Based upon the MagnaChip Semiconductor LLC units outstanding as
of April 30, 2010, our executive officers, directors and
greater than 5% unitholders collectively beneficially owned
approximately 86% of the common units of MagnaChip Semiconductor
LLC, excluding units issuable upon exercise of outstanding
options and warrants, and 86% of the common units, including
units issuable upon exercise of outstanding options and warrants
that are exercisable within sixty days of April 30, 2010.
After giving effect to the corporate conversion and the sale of
shares in this offering, our executive officers, directors and
greater than 5% stockholders, collectively, would have owned
approximately 69.4% of our common stock as of April 30,
2010, assuming no exercise of the underwriters option to
purchase additional shares from us or the selling stockholders.
On the same adjusted basis, and assuming exercise of the
underwriters option to purchase an additional
225,000 shares from us and 900,000 shares from the
selling stockholders, our executive officers, directors and
greater than 5% stockholders, collectively, would have owned
approximately 67.0% of our common stock as of April 30,
2010. In the event that we sell less than 7,500,000 shares
in this offering, the ownership percentage of our executive
officers, directors and greater than 5% stockholders will
increase. In addition, Avenue has three designees serving as
members of our seven-member board of directors. Therefore,
Avenue will continue to have significant influence over our
affairs for the foreseeable future, including influence over the
election of directors and significant corporate transactions,
such as a merger or other sale of our company or our assets.
Our concentration of ownership will limit the ability of other
stockholders to influence corporate matters and, as a result, we
may take actions that our non-sponsor stockholders do not view
as beneficial. For example, our concentration of ownership could
have the effect of delaying or preventing a change in control or
otherwise discouraging a potential acquirer from attempting to
obtain control of us, which in turn could cause the market price
of our common stock to decline or prevent our stockholders from
realizing a premium over the market price for their shares of
our common stock.
Under our certificate of incorporation, our non-employee
directors and non-employee holders of five percent or more of
our outstanding common stock do not have a duty to refrain from
engaging in a corporate opportunity in the same or similar
activities or lines of business as those engaged in by us, our
subsidiaries and other related parties. Also, we have renounced
any interest or expectancy in such business opportunities even
if the opportunity is one that we might reasonably have pursued
or had the ability or desire to pursue if granted an opportunity
to do so.
We are a
controlled company within the meaning of NYSE rules,
controlled by Avenue whose interests in our business may
conflict with yours.
Upon completion of this offering, Avenue will beneficially own
approximately 22,853,513 shares, or 56.5%, of our
outstanding common stock assuming no exercise of the
underwriters option to purchase additional shares.
Accordingly, Avenue will be able to control most matters
requiring stockholder approval, including the election of
directors and approval of significant corporate transactions,
including mergers and sales of substantially all of our assets.
Because of the equity ownership of Avenue, we will be considered
a controlled company for purposes of the NYSE
listing requirements. As such, we will be exempt from the NYSE
corporate governance requirements that our board of directors
meet the standards of independence established by those
corporate governance requirements and exempt from the
requirements that we have separate Compensation and Nominating
and Corporate Governance Committees made up entirely of
directors who meet such independence standards. Although we do
not intend to rely upon the exemption available for controlled
companies, we may choose to utilize the exemption at any time
that we remain a controlled company. The NYSE independence
standards are intended to ensure that directors who meet the
independence standards are free of any conflicting interest with
management that could influence their actions as directors. It
is possible that the interests of Avenue may in some
circumstances conflict with our interests and the interests of
our other stockholders.
31
The future
sale of significant amounts of our common stock may negatively
affect our stock price, even if our business is doing
well.
Sales of substantial amounts of shares of our common stock in
the public market, or the prospect of such sales, could
adversely affect the market price of our common stock. After
giving effect to the corporate conversion and the sale of shares
in this offering, we would have had 39,904,294 shares of
common stock outstanding as of April 30, 2010, based on the
number of MagnaChip Semiconductor LLC units outstanding as of
that date. All of the shares outstanding prior to this offering
are subject to
lock-up
agreements under which the holders of such shares have agreed
not to sell or otherwise dispose of any of their shares for a
period of 180 days after the date of this prospectus
without the prior written consent of Goldman, Sachs &
Co., and Barclays Capital Inc. (or other agreements which impose
similar restrictions), other than any shares such holders may
sell to the underwriters in this offering after the date of this
prospectus pursuant to the underwriters option to purchase
up to 225,000 additional shares of our common stock from us
and 900,000 shares from the selling stockholders; provided,
that these agreements do not restrict the ability of the
stockholders party to the registration rights agreement to cause
a resale registration statement to be filed in accordance with
the demand registration rights described under Description
of Capital Stock Registration Rights. After
the 180-day
period, all currently outstanding shares will be eligible for
sale from time to time in the future under Rule 144,
Rule 701 or Section 4(1) of the Securities Act with
respect to shares covered by Section 1145 of the
U.S. Bankruptcy Code.
Goldman, Sachs & Co. and Barclays Capital Inc. can
together waive the restrictions of the
lock-up
agreements at an earlier time without prior notice or
announcement and allow stockholders to sell their shares. As
restrictions on resale end, the market price of our common stock
could drop significantly if the holders of the restricted shares
sell such restricted shares or are perceived by the market as
intending to sell such restricted shares.
Provisions in
our charter documents and Delaware Law may make it difficult for
a third party to acquire us and could depress the price of our
common stock.
Provisions in our certificate of incorporation and bylaws may
have the effect of delaying or preventing a change of control or
changes in our management. Among other things, our certificate
of incorporation and bylaws:
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authorize our board of directors to issue, without stockholder
approval, preferred stock with such terms as the board of
directors may determine;
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divide our board of directors into three classes so that only
approximately one-third of the total number of directors is
elected each year;
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permit directors to be removed only for cause by a majority vote;
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prohibit action by written consent of our stockholders;
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prohibit any person other than our board of directors, the
chairman of our board of directors, our Chief Executive Officer
or holders of at least 25% of the voting power of all then
outstanding shares of capital stock of the corporation entitled
to vote generally in the election of directors to call a special
meeting of our stockholders; and
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specify advance notice requirements for stockholder proposals
and director nominations.
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In addition, following this offering, we will be subject to the
provisions of Section 203 of the Delaware General
Corporation Law, or DGCL, regulating corporate takeovers and
which has an anti-takeover effect with respect to transactions
not approved in advance by our board of directors, including
discouraging takeover attempts that might result in a premium
over the market price for shares of our common stock. In
general, those provisions prohibit a Delaware corporation from
32
engaging in any business combination with any interested
stockholder for a period of three years following the date that
the stockholder became an interested stockholder, unless:
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the transaction is approved by the board of directors before the
date the interested stockholder attained that status;
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upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction
commenced; or
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on or after such date, the business combination is approved by
the board of directors and authorized at a meeting of
stockholders, and not by written consent, by at least two-thirds
of the outstanding voting stock that is not owned by the
interested stockholder.
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In general, Section 203 defines a business combination to
include the following:
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any merger or consolidation involving the corporation and the
interested stockholder;
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any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested
stockholder;
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subject to certain exceptions, any transaction that results in
the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
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any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
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In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by any such
entity or person.
A Delaware corporation may opt out of this provision by express
provision in its original certificate of incorporation or by
amendment to its certificate of incorporation or bylaws approved
by its stockholders. However, we have not opted out of, and do
not currently intend to opt out of, this provision.
We may apply
the proceeds of this offering to uses that do not improve our
operating results or increase the value of your
investment.
We intend to use the net proceeds from this offering to pay
certain employee incentive payments payable upon the closing of
this offering, to pay certain expenses of this offering, and for
general corporate purposes, including working capital and
capital expenditures. We may also use a portion of the net
proceeds to acquire or invest in companies and technologies that
we believe will complement our business although we have no
specific plans at this time to do so. However, we will have
broad discretion in how we use the net proceeds of this
offering. These proceeds could be applied in ways that do not
improve our operating results or increase the value of your
investment. Until the net proceeds are used, they may be placed
in investments that do not produce income or that lose value.
You will incur
immediate and substantial dilution and may experience further
dilution immediately upon the sale of our common stock in this
offering.
The initial public offering price of our common stock is
substantially higher than $1.64, the net tangible book value per
share of our common stock as of March 31, 2010, calculated
on a pro forma basis as adjusted for the $130.7 million
distribution made to our unitholders in April 2010 and the sale
of shares in this offering. Therefore, if you purchase our
common stock in this offering, you will incur an immediate
dilution of $14.86 in net tangible book value per share from the
price you paid, based on the assumed initial offering price of
$16.50 per share. The exercise of outstanding options and
warrants to purchase shares of our common stock at a weighted
average exercise price of $6.32 and $15.76 per share,
respectively (assuming a conversion ratio of eight-for-one
between the common units of MagnaChip Semiconductor LLC and our
shares of common stock), will result in further dilution.
33
The U.S.
federal income tax consequences of the cancellation of the
depositary shares are not specifically addressed by applicable
law.
Applicable law does not specifically address, under
circumstances comparable to ours, the U.S. federal income
tax consequences of cancellation of the depositary shares, and
the issuance of a credit for the number of shares of common
stock equal to the number of cancelled depositary shares.
Further, we have not, and will not, obtain a ruling from the
Internal Revenue Service, or IRS, with respect to the
U.S. federal income tax consequences of the cancellation of
the depositary shares and issuance of a credit for common stock.
If the IRS were to conclude that a holder of our depositary
shares did not own the underlying shares, the cancellation of
the depositary shares might be a taxable transaction to the
holder, causing the holder to recognize gain or loss in an
amount equal to the fair market value of the underlying common
stock at the time of cancellation of the depositary shares and
the holders tax basis in the depositary shares.
We will incur
increased costs as a result of being a publicly listed company,
and these additional costs could harm our business and results
of operations.
The Sarbanes-Oxley Act, as well as rules promulgated by the SEC
and the NYSE, require us to adopt corporate governance practices
applicable to U.S. public companies. These rules and
regulations will increase our legal and financial compliance
costs and make certain compliance and reporting activities more
time-consuming. We also expect it to be more difficult and more
expensive for us to obtain and maintain director and officer
liability insurance, which may cause us to accept reduced policy
limits and reduced coverage or to incur substantially higher
costs to obtain the same or similar coverage. As a result, it
may be more difficult for us to attract and retain qualified
persons to serve on our board of directors or as executive
officers. We cannot predict or estimate the amount of additional
costs we may incur, but these additional costs and demands on
management time and attention may harm our business and results
of operations.
We do not
intend to pay dividends for the foreseeable future after this
offering, and therefore, investors should rely on sales of their
common stock as the only way to realize any future gains on
their investments.
We do not intend to pay any cash dividends in the foreseeable
future after this offering. The payment of cash dividends on
common stock is restricted under the terms of the indenture for
our senior notes. We anticipate that we will retain all of our
future earnings after this offering for use in the development
of our business and for general corporate purposes. Any
determination to pay dividends in the future will be at the
discretion of our board of directors. Accordingly, investors
must rely on sales of their common stock after price
appreciation, which may never occur, as the only way to realize
any future gains on their investments.
34
INDUSTRY AND
MARKET DATA
In this prospectus, we rely on and refer to information
regarding the semiconductor market from iSuppli Corporation, or
iSuppli, and Gartner, Inc., or Gartner. Market data attributed
to iSuppli is from Display Driver ICs Q4 2009 Market
Tracker and Power Management Q4 2009 Market
Tracker and market data attributed to Gartner is from
Semiconductor Forecast Worldwide: Forecast Database,
24 Feb 2010. Although we believe that this
information is reliable, we have not independently verified it.
We do not have any obligation to announce or otherwise make
publicly available updates or revisions to forecasts contained
in these documents. In addition, in many cases, we have made
statements in this prospectus regarding our industry and our
position in the industry based on our experience in the industry
and our own investigation of market conditions.
SPECIAL
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS
Information concerning us and this offering is subject to risks
and uncertainties. Forward-looking statements give our current
expectations and projections relating to our financial
condition, results of operations, plans, objectives, future
performance and business. These statements can be identified by
the fact that they do not relate strictly to historical or
current facts. These statements may include words such as
anticipate, estimate,
expect, project, intend,
plan, believe and other words and terms
of similar meaning in connection with any discussion of the
timing or nature of future operating or financial performance or
other events. All statements other than statements of historical
facts included in this prospectus that address activities,
events or developments that we expect, believe or anticipate
will or may occur in the future are forward-looking statements.
These forward-looking statements are largely based on our
expectations and beliefs concerning future events, which reflect
estimates and assumptions made by our management. These
estimates and assumptions reflect our best judgment based on
currently known market conditions and other factors relating to
our operations and business environment, all of which are
difficult to predict and many of which are beyond our control.
Although we believe our estimates and assumptions to be
reasonable, they are inherently uncertain and involve a number
of risks and uncertainties that are beyond our control. In
addition, managements assumptions about future events may
prove to be inaccurate. Management cautions all readers that the
forward-looking statements contained in this prospectus are not
guarantees of future performance, and we cannot assure any
reader that those statements will be realized or the
forward-looking events and circumstances will occur. Actual
results may differ materially from those anticipated or implied
in the forward-looking statements due to the factors listed in
the Risk Factors, Managements Discussion
and Analysis of Financial Condition and Results of
Operations and Business sections and elsewhere
in this prospectus.
All forward-looking statements speak only as of the date of this
prospectus. We do not intend to publicly update or revise any
forward-looking statements as a result of new information or
future events or otherwise, except as required by law. These
cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
35
USE OF
PROCEEDS
We estimate that the net proceeds from the sale of the common
stock that we are offering will be approximately
$16.6 million, after deducting the underwriting discounts
and commissions and the estimated offering expenses payable by
us (assuming an initial public offering price of $16.50 per
share, the midpoint of the range set forth on the cover page of
this prospectus). We will not receive any of the proceeds from
the sale of our common stock by the selling stockholders.
We intend to use the net proceeds to us from this offering as
follows:
|
|
|
|
|
approximately $12 million to fund discretionary incentive
payments to all of our employees, excluding our executive
officers; and
|
|
|
|
|
|
approximately $4.6 million to fund working capital and for
general corporate purposes.
|
Pending such uses, we intend to invest the net proceeds of this
offering in short-term, investment-grade, interest-bearing
securities.
If we raise more or fewer proceeds from this offering than
anticipated, including any additional proceeds raised as a
result of the exercise of the underwriters option to
purchase additional depositary shares, we expect to increase or
reduce the amount that we use to fund working capital and for
general corporate purposes by a commensurate amount.
DIVIDEND
POLICY
We do not intend to pay any cash dividends on our common stock
in the foreseeable future after this offering. We anticipate
that we will retain all of our future earnings after this
offering for use in the development of our business and for
general corporate purposes. Any determination to pay dividends
in the future will be at the discretion of our board of
directors. The payment of cash dividends on our common stock is
restricted under the terms of the indenture governing our senior
notes.
On April 19, 2010, we made a $130.7 million cash
distribution to our unitholders using proceeds from the sale of
our senior notes. The per common unit distribution was $0.4254.
CORPORATE
CONVERSION
In connection with this offering, our board of directors and the
holders of a majority of our outstanding common units will elect
to convert MagnaChip Semiconductor LLC from a Delaware limited
liability company to a Delaware corporation. In order to
consummate such a conversion, a certificate of conversion will
be filed with the Secretary of State of the State of Delaware
prior to the effectiveness of the registration statement of
which this prospectus is a part. In connection with the
corporate conversion, outstanding common units of MagnaChip
Semiconductor LLC will be automatically converted into shares of
common stock of MagnaChip Semiconductor Corporation, outstanding
options to purchase common units of MagnaChip Semiconductor LLC
will be automatically converted into options to purchase shares
of common stock of MagnaChip Semiconductor Corporation and
outstanding warrants to purchase common units of MagnaChip
Semiconductor LLC will be automatically converted into warrants
to purchase shares of common stock of MagnaChip Semiconductor
Corporation, all at a ratio of
eight-for-one.
36
CAPITALIZATION
The following table sets forth the following information:
|
|
|
|
|
the actual capitalization of MagnaChip Semiconductor LLC as of
March 31, 2010; and
|
|
|
|
|
|
our pro forma as adjusted capitalization as of March 31,
2010 after giving effect to (i) the issuance of
$250 million senior notes and the application of the net
proceeds therefrom and (ii) the sale of
1,500,000 shares of our common stock in this offering at an
initial public offering price of $16.50 per share (the
midpoint of the range set forth on the front cover of this
prospectus), after the deduction of the underwriting discounts
and commissions of $1.7 million and the estimated offering
expenses of $6.4 million payable by us, and the application
of the related proceeds as described under Use of
Proceeds.
|
This table should be read together with Use of
Proceeds, Selected Historical Consolidated Financial
and Operating Data, Unaudited Pro Forma Consolidated
Financial Information, Managements Discussion
and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
related notes included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
|
|
(in millions)
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
as Adjusted(1)
|
|
|
Indebtedness (including current maturities)
|
|
|
|
|
|
|
|
|
Senior secured credit facility
|
|
$
|
61.6
|
|
|
$
|
|
|
10.500% senior notes due 2018(2)
|
|
|
|
|
|
|
246.7
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 150,000,000 shares
authorized, 38,404,294 shares issued and outstanding,
actual; and 39,904,294 shares issued and outstanding, pro
forma as adjusted
|
|
|
0.4
|
|
|
|
0.4
|
|
Preferred stock, $0.01 par value, no shares authorized,
issued and outstanding, actual; 5,000,000 shares
authorized, no shares issued and outstanding, pro forma as
adjusted.
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
224.3
|
|
|
|
110.2
|
(3)
|
Retained earnings
|
|
|
29.1
|
|
|
|
28.9
|
|
Accumulated other comprehensive loss
|
|
|
(22.4
|
)
|
|
|
(22.4
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
231.4
|
|
|
|
117.2
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
293.0
|
|
|
$
|
363.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A $1.00 decrease or increase in the assumed initial public
offering price would result in approximately a $1.4 million
decrease or increase in each of pro forma as adjusted additional
paid-in capital, total stockholders equity and total
capitalization, assuming the total number of shares offered by
us remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us. |
|
|
|
(2) |
|
Represents principal amount of notes net of original issue
discount of $3.3 million. |
|
|
|
(3) |
|
Reflects a $130.7 million distribution to unitholders using
a portion of the proceeds from the issuance of our
$250 million in aggregate principal amount senior notes and
the sale of 1,500,000 shares of common stock by us in this
offering. |
37
DILUTION
Our pro forma net tangible book value as of March 31, 2010
was approximately $48.8 million, or $1.27 per share of our
common stock. Pro forma net tangible book value represents our
total tangible assets reduced by our total liabilities as of
March 31, 2010 after giving effect to the issuance of
$250 million principal amount of senior notes and the
application of net proceeds therefrom in April 2010. Pro forma
net tangible book value per share represents pro forma net
tangible book value divided by the number of shares of common
stock outstanding as of March 31, 2010. Dilution in pro
forma net tangible book value per share represents the
difference between the amount per share that you pay in this
offering and the pro forma net tangible book value per share
immediately after this offering.
After giving effect to the issuance of $250 million
principal amount of senior notes and the application of net
proceeds therefrom in April 2010 and the receipt of the
estimated net proceeds from the sale by us of
1,500,000 shares, our net tangible book value as of
March 31, 2010 on a pro forma as adjusted basis would have
been $65.4 million, or $1.64 per share of common
stock. This represents an immediate increase in pro forma net
tangible book value per share of $0.37 to existing stockholders
and an immediate decrease in pro forma net tangible book value
per share of $14.86 to you. The following table illustrates the
dilution.
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
16.50
|
|
Pro forma net tangible book value per share as of March 31,
2010
|
|
$
|
1.27
|
|
|
|
|
|
Increase in pro forma net tangible book value per share
attributable to new investors
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share after giving effect
to this offering
|
|
|
|
|
|
|
1.64
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
14.86
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price of $16.50 per share would increase or decrease
the pro forma net tangible book value per share after giving
effect to this offering by $0.03 per share and would
increase or decrease the dilution in pro forma net tangible book
value per share to investors in this offering by $0.97 per
share. This calculation assumes that the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same and reflects the deduction of the
underwriting discounts and commissions and estimated expenses of
this offering.
If the underwriters exercise their option to purchase additional
shares of our common stock from us in full in this offering, the
pro forma net tangible book value per share after the offering
would be $1.72 per share, the increase in pro forma net
tangible book value per share to existing stockholders would be
$0.45 per share and the dilution to new investors
purchasing shares in this offering would be $14.78 per
share.
The following table sets forth, as of March 31, 2010, on
the pro forma as adjusted basis giving effect to the issuance of
$250 million principal amount of senior notes and the
application of net proceeds therefrom in April 2010 and this
offering, the differences between the amounts paid or to be paid
by the groups set forth in the table with respect to the
aggregate number of shares of our common stock acquired or to be
acquired by each group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Total
|
|
|
Average
|
|
|
|
Purchased
|
|
|
Consideration
|
|
|
Price
|
|
|
|
Number
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Per Share
|
|
|
|
(In millions, except share and % data)
|
|
|
Existing stockholders
|
|
|
32,404,294
|
|
|
|
81.2
|
%
|
|
$
|
46.8
|
|
|
|
27.4
|
%
|
|
$
|
1.44
|
|
New investors(1)
|
|
|
7,500,000
|
|
|
|
18.8
|
|
|
|
123.8
|
|
|
|
72.6
|
|
|
|
16.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
39,904,294
|
|
|
|
100.0
|
%
|
|
$
|
170.5
|
|
|
|
100.0
|
%
|
|
$
|
4.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
(1) |
|
Before deduction of the underwriting discounts and commissions
and estimated offering expenses payable by us. |
If the underwriters option to purchase additional shares
from us and the selling stockholders is exercised in full, the
number of shares of common stock held by existing stockholders
will be reduced to 31,504,294 shares, or 78.5% of the
aggregate number of shares of common stock outstanding after
this offering, and the number of shares of common stock held by
new investors will be increased to 8,625,000 shares, or
21.5% of the aggregate number of shares of common stock
outstanding after this offering. The total consideration paid by
our existing stockholders would be $45.5 million, or 24.2%,
and the total consideration paid by our new investors would be
$142.3 million, or 75.8% and the average price per share
paid by our existing stockholders and new investors would be
$1.44 and $16.50, respectively.
To the extent that any outstanding options and warrants to
purchase shares of our common stock are exercised, investors in
this offering will experience further dilution. The table below
sets forth the matters described with respect to the table above
and assumes the exercise of all options and warrants outstanding
or exercisable as of March 31, 2010. Assuming such
exercise, the total number of shares purchased would be
increased as a result of the additional shares underlying the
options and warrants being issued. Therefore the percentage of
shares purchased by the existing stockholders and new investors
relative to all three groups would be decreased. Similarly, as a
result of the option and warrant exercises, the total
consideration to be received by us would be increased because of
the additional cash received by us from option and warrant
exercises. Such increase in total consideration would have the
effect of decreasing the percentage of total consideration paid
by the existing stockholders and new investors relative to all
three groups. The average price per share for the existing
stockholders and new investors would remain unchanged.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Total
|
|
|
Price
|
|
|
|
Purchased
|
|
|
Consideration
|
|
|
Per
|
|
|
|
Number
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Share
|
|
|
|
|
|
|
(In millions, except share and % data)
|
|
|
|
|
|
Existing stockholders
|
|
|
32,404,294
|
|
|
|
74.0
|
%
|
|
$
|
46.8
|
|
|
|
22.0
|
%
|
|
$
|
1.44
|
|
New investors(1)
|
|
|
7,500,000
|
|
|
|
17.1
|
|
|
|
123.8
|
|
|
|
58.2
|
|
|
|
16.50
|
|
Option and warrant holders(2)
|
|
|
3,884,390
|
|
|
|
8.9
|
|
|
|
42.2
|
|
|
|
19.9
|
|
|
|
10.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
43,788,684
|
|
|
|
100.0
|
%
|
|
$
|
212.8
|
|
|
|
100.0
|
%
|
|
$
|
4.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Before deduction of the underwriting discounts and commissions
and estimated offering expenses payable by us. |
|
(2) |
|
Includes shares of common stock issuable upon exercise of
options previously granted to our officers, directors and
employees and warrants issued in connection with our
reorganization proceedings. |
If the underwriters option to purchase additional shares
from us and the selling stockholders is exercised in full, the
number of shares of common stock held by existing stockholders
will be reduced to 31,504,294 shares, or 71.6% of the
aggregate number of shares of common stock outstanding after
this offering, and the number of shares of common stock held by
new investors will be increased to 8,625,000 shares, or
19.6% of the aggregate number of shares of common stock
outstanding after this offering. The total consideration paid by
our existing stockholders would be $45.5 million, or 19.8%,
and the total consideration paid by our new investors would be
$142.3 million, or 61.9% and the average price per share
paid by our existing stockholders and new investors would be
$1.44 and $16.50, respectively.
39
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following tables set forth selected historical consolidated
financial data of MagnaChip Semiconductor LLC (to be converted
into MagnaChip Semiconductor Corporation in connection with this
offering) on or as of the dates and for the periods indicated.
The selected historical consolidated financial data presented
below should be read together with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements,
including the notes to those consolidated financial statements,
appearing elsewhere in this prospectus.
We have derived the selected consolidated financial data as of
December 31, 2009 and 2008 and for the two-month period
ended December 31, 2009, the ten-month period ended
October 25, 2009 and the years ended December 31, 2008
and 2007 from the historical audited consolidated financial
statements of MagnaChip Semiconductor LLC included elsewhere in
this prospectus. We have derived the unaudited consolidated
statement of operations data for the three months ended
March 31, 2010 and March 29, 2009 from the unaudited
interim consolidated financial statements of MagnaChip
Semiconductor LLC included elsewhere in this prospectus. We have
derived the selected consolidated financial data as of
December 31, 2007, 2006 and 2005 and for the years ended
December 31, 2006 and 2005 from the historical audited
consolidated financial statements of MagnaChip Semiconductor LLC
not included in this prospectus. We have derived the selected
consolidated financial data as of March 31, 2010 from the
unaudited interim consolidated financial statements of MagnaChip
Semiconductor LLC included elsewhere in this prospectus. We
derived the unaudited consolidated balance sheet data as of
March 29, 2009 from our unaudited interim consolidated
financial statements not included in this prospectus. The
historical consolidated financial data for the three months
ended March 31, 2010 and the two-month period ended
December 31, 2009 give retroactive effect to the corporate
conversion. The historical results of MagnaChip Semiconductor
LLC for any prior period are not necessarily indicative of the
results to be expected in any future period, and financial
results for any interim period are not necessarily indicative of
results for a full year.
In connection with our emergence from reorganization
proceedings, we implemented fresh-start accounting in accordance
with applicable ASC 852 governing reorganizations. We
elected to adopt a convenience date of October 25, 2009 (a
month end for our financial reporting purposes) for application
of fresh-start accounting. In accordance with the ASC 852
governing reorganizations, we recorded largely non-cash
reorganization income and expense items directly associated with
our reorganization proceedings including professional fees, the
revaluation of assets, the effects of our reorganization plan
and fresh-start accounting and write-off of debt issuance costs.
As a result of the application of fresh-start accounting, our
financial statements prior to and including October 25,
2009 represent the operations of our pre-reorganization
predecessor company and are presented separately from the
financial statements of our post-reorganization successor
company. As a result of the application of fresh-start
accounting, the financial statements prior to and including
October 25, 2009 are not fully comparable with the
financial statements for periods on or after October 25,
2009.
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor(1)
|
|
|
|
Predecessor
|
|
|
|
Three Months
|
|
|
Two- Month
|
|
|
|
Ten- Month
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Period Ended
|
|
|
|
Period Ended
|
|
|
Ended
|
|
|
Years Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
October 25,
|
|
|
March 29,
|
|
|
December 31,
|
|
|
|
2010*
|
|
|
2009**
|
|
|
|
2009**
|
|
|
2009*
|
|
|
2008**
|
|
|
2007**
|
|
|
2006**
|
|
|
2005**
|
|
|
|
(In millions, except per common unit/share data)
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
179.5
|
|
|
$
|
111.1
|
|
|
|
$
|
449.0
|
|
|
$
|
101.5
|
|
|
$
|
601.7
|
|
|
$
|
709.5
|
|
|
$
|
683.9
|
|
|
$
|
774.3
|
|
Cost of sales
|
|
|
130.1
|
|
|
|
90.4
|
|
|
|
|
311.1
|
|
|
|
80.6
|
|
|
|
445.3
|
|
|
|
578.9
|
|
|
|
580.4
|
|
|
|
591.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
49.4
|
|
|
|
20.7
|
|
|
|
|
137.8
|
|
|
|
20.9
|
|
|
|
156.4
|
|
|
|
130.7
|
|
|
|
103.4
|
|
|
|
183.2
|
|
Selling, general and administrative expenses
|
|
|
17.9
|
|
|
|
14.5
|
|
|
|
|
56.3
|
|
|
|
15.3
|
|
|
|
81.3
|
|
|
|
82.7
|
|
|
|
76.1
|
|
|
|
119.4
|
|
Research and development expenses
|
|
|
20.5
|
|
|
|
14.7
|
|
|
|
|
56.1
|
|
|
|
17.0
|
|
|
|
89.5
|
|
|
|
90.8
|
|
|
|
87.2
|
|
|
|
96.1
|
|
Restructuring and impairment charges
|
|
|
0.3
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
13.4
|
|
|
|
12.1
|
|
|
|
1.7
|
|
|
|
36.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations
|
|
|
10.6
|
|
|
|
(8.6
|
)
|
|
|
|
25.0
|
|
|
|
(11.4
|
)
|
|
|
(27.7
|
)
|
|
|
(54.9
|
)
|
|
|
(61.6
|
)
|
|
|
(68.4
|
)
|
Interest expense, net
|
|
|
(2.0
|
)
|
|
|
(1.3
|
)
|
|
|
|
(31.2
|
)
|
|
|
(14.7
|
)
|
|
|
(76.1
|
)
|
|
|
(60.3
|
)
|
|
|
(57.2
|
)
|
|
|
(57.2
|
)
|
Foreign currency gain (loss), net
|
|
|
21.6
|
|
|
|
9.3
|
|
|
|
|
43.4
|
|
|
|
(40.2
|
)
|
|
|
(210.4
|
)
|
|
|
(4.7
|
)
|
|
|
50.9
|
|
|
|
16.5
|
|
Reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
|
804.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.5
|
|
|
|
8.1
|
|
|
|
|
816.8
|
|
|
|
(54.9
|
)
|
|
|
(286.5
|
)
|
|
|
(65.0
|
)
|
|
|
(6.3
|
)
|
|
|
(40.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
30.1
|
|
|
|
(0.5
|
)
|
|
|
|
841.8
|
|
|
|
(66.3
|
)
|
|
|
(314.3
|
)
|
|
|
(120.0
|
)
|
|
|
(67.9
|
)
|
|
|
(109.1
|
)
|
Income tax expenses (benefits)
|
|
|
(1.0
|
)
|
|
|
1.9
|
|
|
|
|
7.3
|
|
|
|
2.6
|
|
|
|
11.6
|
|
|
|
8.8
|
|
|
|
9.1
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
31.1
|
|
|
|
(2.5
|
)
|
|
|
|
834.5
|
|
|
|
(68.9
|
)
|
|
|
(325.8
|
)
|
|
|
(128.8
|
)
|
|
|
(76.9
|
)
|
|
|
(111.1
|
)
|
Income (loss) from discontinued operations, net of taxes
|
|
|
|
|
|
|
0.5
|
|
|
|
|
6.6
|
|
|
|
(0.8
|
)
|
|
|
(91.5
|
)
|
|
|
(51.7
|
)
|
|
|
(152.4
|
)
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
31.1
|
|
|
$
|
(2.0
|
)
|
|
|
$
|
841.1
|
|
|
$
|
(69.7
|
)
|
|
$
|
(417.3
|
)
|
|
$
|
(180.6
|
)
|
|
$
|
(229.3
|
)
|
|
$
|
(100.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends accrued on preferred units
|
|
|
|
|
|
|
|
|
|
|
|
6.3
|
|
|
|
3.4
|
|
|
|
13.3
|
|
|
|
12.0
|
|
|
|
10.9
|
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to common
units
|
|
$
|
31.1
|
|
|
$
|
(2.5
|
)
|
|
|
$
|
828.2
|
|
|
$
|
(72.3
|
)
|
|
$
|
(339.1
|
)
|
|
$
|
(140.9
|
)
|
|
$
|
(87.9
|
)
|
|
$
|
(121.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common units
|
|
$
|
31.1
|
|
|
$
|
(2.0
|
)
|
|
|
$
|
834.8
|
|
|
$
|
(73.1
|
)
|
|
$
|
(430.6
|
)
|
|
$
|
(192.6
|
)
|
|
$
|
(240.2
|
)
|
|
$
|
(110.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per unit/share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations per common
unit/share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.82
|
|
|
$
|
(0.07
|
)
|
|
|
$
|
15.65
|
|
|
$
|
(1.37
|
)
|
|
$
|
(6.43
|
)
|
|
$
|
(2.69
|
)
|
|
$
|
(1.66
|
)
|
|
$
|
(2.29
|
)
|
Diluted
|
|
$
|
0.81
|
|
|
$
|
(0.07
|
)
|
|
|
$
|
15.65
|
|
|
$
|
(1.37
|
)
|
|
$
|
(6.43
|
)
|
|
$
|
(2.69
|
)
|
|
$
|
(1.66
|
)
|
|
$
|
(2.29
|
)
|
Earnings (loss) from discontinued operations per common
unit/share Basic and diluted
|
|
$
|
|
|
|
$
|
0.02
|
|
|
|
$
|
0.12
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.73
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(2.88
|
)
|
|
$
|
0.19
|
|
Earnings (loss) per common unit/share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.82
|
|
|
$
|
(0.05
|
)
|
|
|
$
|
15.77
|
|
|
$
|
(1.38
|
)
|
|
$
|
(8.16
|
)
|
|
$
|
(3.68
|
)
|
|
$
|
(4.54
|
)
|
|
$
|
(2.10
|
)
|
Diluted
|
|
$
|
0.81
|
|
|
$
|
(0.05
|
)
|
|
|
$
|
15.77
|
|
|
$
|
(1.38
|
)
|
|
$
|
(8.16
|
)
|
|
$
|
(3.68
|
)
|
|
$
|
(4.54
|
)
|
|
$
|
(2.10
|
)
|
Weighted average number of common units/stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37.805
|
|
|
|
37.608
|
|
|
|
|
52.923
|
|
|
|
52.923
|
|
|
|
52.769
|
|
|
|
52.297
|
|
|
|
52.912
|
|
|
|
52.898
|
|
Diluted
|
|
|
38.442
|
|
|
|
37.608
|
|
|
|
|
52.923
|
|
|
|
52.923
|
|
|
|
52.769
|
|
|
|
52.297
|
|
|
|
52.912
|
|
|
|
52.898
|
|
Unaudited pro forma earnings (loss) from continuing
operations per common share(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma earnings from discontinued
operations per common share Basic and diluted(2)
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma earnings (loss) per common
share(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.79
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.78
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma weighted average number of
common stock(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
39.305
|
|
|
|
39.108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
39.942
|
|
|
|
39.108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
82.7
|
|
|
$
|
64.9
|
|
|
|
|
|
|
|
$
|
7.1
|
|
|
$
|
4.0
|
|
|
$
|
64.3
|
|
|
$
|
89.2
|
|
|
$
|
86.6
|
|
Total assets
|
|
|
492.0
|
|
|
|
453.3
|
|
|
|
|
|
|
|
|
357.7
|
|
|
|
399.2
|
|
|
|
707.9
|
|
|
|
770.1
|
|
|
|
1,040.6
|
|
Total indebtedness(3)
|
|
|
61.6
|
|
|
|
61.8
|
|
|
|
|
|
|
|
|
845.0
|
|
|
|
845.0
|
|
|
|
830.0
|
|
|
|
750.0
|
|
|
|
750.0
|
|
Long-term obligations(4)
|
|
|
61.3
|
|
|
|
61.5
|
|
|
|
|
|
|
|
|
146.5
|
|
|
|
143.2
|
|
|
|
879.4
|
|
|
|
867.4
|
|
|
|
856.7
|
|
Unitholders equity
|
|
|
231.4
|
|
|
|
215.7
|
|
|
|
|
|
|
|
|
(835.1
|
)
|
|
|
(787.8
|
)
|
|
|
(477.5
|
)
|
|
|
(284.5
|
)
|
|
|
(46.5
|
)
|
Supplemental Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(5)
|
|
$
|
28.7
|
|
|
$
|
22.1
|
|
|
|
$
|
76.6
|
|
|
$
|
2.3
|
|
|
$
|
59.8
|
|
|
$
|
111.2
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income (Loss)(6)
|
|
|
19.9
|
|
|
|
13.3
|
|
|
|
|
9.3
|
|
|
|
(22.9
|
)
|
|
|
(71.7
|
)
|
|
|
(82.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Derived from our unaudited interim consolidated financial
statements. |
|
** |
|
Derived from our audited consolidated financial statements. |
41
|
|
|
(1) |
|
As of October 25, 2009, the fresh-start adoption date, we
adopted fresh-start accounting for our consolidated financial
statements. Because of the emergence from reorganization
proceedings and adoption of fresh-start accounting, the
historical financial information for periods after
October 25, 2009 is not fully comparable to periods before
October 25, 2009. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Recent Changes to Our Business. |
|
|
|
(2) |
|
The unaudited pro forma earnings (loss) per share have been
calculated in accordance with Staff Accounting Bulletin
Topic 1.B.3 in relation to our distribution made to
shareholders in April 2010. See note 20 in the unaudited
interim consolidated financial statements and
note 27 (D) in the audited consolidated financial
statements. |
|
|
|
(3) |
|
Total indebtedness is calculated as long and short-term
borrowings, including the current portion of long-term
borrowings. |
|
|
|
(4) |
|
Long-term obligations include long-term borrowings, capital
leases and redeemable convertible preferred units. |
|
|
|
(5) |
|
We define Adjusted EBITDA as net income (loss) less income
(loss) from discontinued operations, net of taxes, adjusted to
exclude (i) depreciation and amortization associated with
continuing operations, (ii) interest expense, net,
(iii) income tax expenses, (iv) restructuring and
impairment charges, (v) other restructuring charges,
(vi) abandoned IPO expenses, (vii) subcontractor claim
settlement, (viii) the increase in cost of sales resulting
from the fresh-start inventory accounting
step-up,
(ix) equity-based compensation expense,
(x) reorganization items, net and (xi) foreign
currency gain (loss), net. See the footnotes to the table below
for further information regarding these items. We present
Adjusted EBITDA as a supplemental measure of our performance
because: |
|
|
|
|
|
Adjusted EBITDA eliminates the impact of a number of items that
may be either one time or recurring items that we do not
consider to be indicative of our core ongoing operating
performance;
|
|
|
|
we believe that Adjusted EBITDA is an enterprise level
performance measure commonly reported and widely used by
analysts and investors in our industry;
|
|
|
|
we anticipate that our investor and analyst presentations after
we are public will include Adjusted EBITDA; and
|
|
|
|
we believe that Adjusted EBITDA provides investors with a more
consistent measurement of period to period performance of our
core operations, as well as a comparison of our operating
performance to that of other companies in our industry.
|
We use Adjusted EBITDA in a number of ways, including:
|
|
|
|
|
for planning purposes, including the preparation of our annual
operating budget;
|
|
|
|
to evaluate the effectiveness of our enterprise level business
strategies;
|
|
|
|
in communications with our board of directors concerning our
consolidated financial performance; and
|
|
|
|
in certain of our compensation plans as a performance measure
for determining incentive compensation payments.
|
42
We encourage you to evaluate each adjustment and the reasons we
consider them appropriate. In evaluating Adjusted EBITDA, you
should be aware that in the future we may incur expenses similar
to the adjustments in this presentation. Adjusted EBITDA is not
a measure defined in accordance with GAAP and should not be
construed as an alternative to income from continuing
operations, cash flows from operating activities or net income
(loss), as determined in accordance with GAAP. A reconciliation
of net income (loss) to Adjusted EBITDA is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Three Months
|
|
|
Two- Month
|
|
|
|
Ten- Month
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Period Ended
|
|
|
|
Period Ended
|
|
|
Ended
|
|
|
Years Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
October 25,
|
|
|
March 29,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
Net income (loss)
|
|
$
|
31.1
|
|
|
$
|
(2.0
|
)
|
|
|
$
|
841.1
|
|
|
$
|
(69.7
|
)
|
|
$
|
(417.3
|
)
|
|
$
|
(180.6
|
)
|
Less: Income (loss) from discontinued operations, net of taxes
|
|
|
|
|
|
|
0.5
|
|
|
|
|
6.6
|
|
|
|
(0.8
|
)
|
|
|
(91.5
|
)
|
|
|
(51.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
31.1
|
|
|
|
(2.5
|
)
|
|
|
|
834.5
|
|
|
|
(68.9
|
)
|
|
|
(325.8
|
)
|
|
|
(128.8
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization associated with continuing
operations
|
|
|
15.5
|
|
|
|
11.2
|
|
|
|
|
37.7
|
|
|
|
10.4
|
|
|
|
63.8
|
|
|
|
152.2
|
|
Interest expense, net
|
|
|
2.0
|
|
|
|
1.3
|
|
|
|
|
31.2
|
|
|
|
14.7
|
|
|
|
76.1
|
|
|
|
60.3
|
|
Income tax expenses (benefits)
|
|
|
(1.0
|
)
|
|
|
1.9
|
|
|
|
|
7.3
|
|
|
|
2.6
|
|
|
|
11.6
|
|
|
|
8.8
|
|
Restructuring and impairment charges(a)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
13.4
|
|
|
|
12.1
|
|
Other restructuring charges(b)
|
|
|
|
|
|
|
|
|
|
|
|
13.3
|
|
|
|
3.1
|
|
|
|
6.2
|
|
|
|
|
|
Abandoned IPO expenses(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.7
|
|
|
|
|
|
Subcontractor claim settlement(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
Reorganization items, net(e)
|
|
|
|
|
|
|
|
|
|
|
|
(804.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
step-up(f)
|
|
|
0.9
|
|
|
|
17.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity based compensation expense(g)
|
|
|
1.5
|
|
|
|
2.2
|
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
0.6
|
|
Foreign currency loss (gain), net(h)
|
|
|
(21.6
|
)
|
|
|
(9.3
|
)
|
|
|
|
(43.4
|
)
|
|
|
40.2
|
|
|
|
210.4
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
28.7
|
|
|
$
|
22.1
|
|
|
|
$
|
76.6
|
|
|
$
|
2.3
|
|
|
$
|
59.8
|
|
|
$
|
111.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
This adjustment is comprised of all items included in the
restructuring and impairment charges line item on our
consolidated statements of operations, and eliminates the impact
of restructuring and impairment charges related to (i) for
the three months ended March 31, 2010, impairment of two
abandoned in-process research and development projects,
accounted for as indefinite-lived intangible assets as part of
the application of fresh-start accounting, (ii) for the
three months ended March 29, 2009, the closure of our
research and development facilities in Japan, (iii) for
2009, termination benefits and other related costs, for the
ten-month period ended October 25, 2009 in connection with
the closure of one of our research and development facilities in
Japan, (iv) for 2008, goodwill impairment triggered by the
significant adverse change in the revenue of our mobile display
solutions, or MDS reporting unit, and a reversal of a portion of
the restructuring accrual related to the closure of our Gumi
five-inch wafer fabrication facilities in 2007, and (v) for
2007, the closure of our Gumi five-inch wafer fabrication
facilities. We do not believe these restructuring and impairment
charges are indicative of our core ongoing operating performance
because we do not anticipate similar facility closures and
market driven events in our ongoing operations, although we
cannot guarantee that similar events will not occur in the
future. |
|
(b) |
|
This adjustment relates to certain restructuring charges that
are not included in the restructuring and impairment charges
line item on our consolidated statements of operations. These
items are included in selling, general and administrative
expenses in our consolidated |
43
|
|
|
|
|
statements of operations. These charges are comprised of the
following: (i) for the three months ended March 29,
2009, a charge of $3.1 million for restructuring-related
professional fees and related expenses, (ii) for 2009, a
charge of $13.3 million for restructuring-related
professional fees and related expenses, and (iii) for 2008,
a charge of $6.2 million for restructuring-related
professional fees and related expenses. We do not believe these
other restructuring charges are indicative of our core ongoing
operating performance because these charges were related, in
significant part, to actions we took in response to the impacts
on our business resulting from the global economic recession
that persisted through 2008 and 2009. We cannot guarantee that
similar charges will not be incurred in the future. |
|
(c) |
|
This adjustment eliminates a $3.7 million charge in 2008
related to expenses incurred in connection with our abandoned
initial public offering in 2008. We do not believe that these
charges are indicative of our core operating performance. We
expect to incur similar costs in connection with this offering. |
|
(d) |
|
This adjustment eliminates a $1.3 million charge
attributable to a one-time settlement of claims with a
subcontractor. We no longer obtain services from this
subcontractor and do not expect to incur similar charges in the
future. |
|
(e) |
|
This adjustment eliminates the impact of largely non-cash
reorganization income and expense items directly associated with
our reorganization proceedings from our ongoing operations
including, among others, professional fees, the revaluation of
assets, the effects of the Chapter 11 reorganization plan
and fresh-start accounting principles and the write-off of debt
issuance costs. Included in reorganization items, net for the
ten-month period ended October 25, 2009 was our
predecessors gain recognized from the effects of our
reorganization proceedings. The gain results from the difference
between our predecessors carrying value of remaining
pre-petition liabilities subject to compromise and the amounts
to be distributed pursuant to the reorganization proceedings.
The gain from the effects of the reorganization proceedings and
the application of fresh-start accounting principles is
comprised of the discharge of liabilities subject to compromise,
net of the issuance of new common units and new warrants and the
accrual of amounts to be settled in cash. For details regarding
this adjustment, see note 5 to the consolidated financial
statements of MagnaChip Semiconductor LLC for the ten-month
period ended October 25, 2009 and the two-month period
ended December 31, 2009 included elsewhere in this
prospectus. We do not believe these items are indicative of our
core ongoing operating performance because they were incurred as
a result of our Chapter 11 reorganization. |
|
(f) |
|
This adjustment eliminates the one-time impact on cost of sales
associated with the write-up of our inventory in accordance with
the principles of fresh-start accounting upon consummation of
the Chapter 11 reorganization. |
|
(g) |
|
This adjustment eliminates the impact of non-cash equity-based
compensation expenses. Although we expect to incur non-cash
equity-based compensation expenses in the future, we believe
that analysts and investors will find it helpful to review our
operating performance without the effects of these non-cash
expenses, as supplemental information. |
|
(h) |
|
This adjustment eliminates the impact of non-cash foreign
currency translation associated with intercompany debt
obligations and foreign currency denominated receivables and
payables, as well as the cash impact of foreign currency
transaction gains or losses on collection of such receivables
and payment of such payables. Although we expect to incur
foreign currency translation gains or losses in the future, we
believe that analysts and investors will find it helpful to
review our operating performance without the effects of these
primarily non-cash gains or losses, as supplemental information. |
44
Adjusted EBITDA has limitations as an analytical tool, and you
should not consider it in isolation, or as a substitute for
analysis of our results as reported under GAAP. Some of these
limitations are:
|
|
|
|
|
Adjusted EBITDA does not reflect our cash expenditures, or
future requirements, for capital expenditures or contractual
commitments;
|
|
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
|
Adjusted EBITDA does not reflect the interest expense, or the
cash requirements necessary to service interest or principal
payments, on our debt;
|
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized will often have to be
replaced in the future, and Adjusted EBITDA does not reflect any
cash requirements for such replacements;
|
|
|
|
Adjusted EBITDA does not consider the potentially dilutive
impact of issuing equity-based compensation to our management
team and employees;
|
|
|
|
Adjusted EBITDA does not reflect the costs of holding certain
assets and liabilities in foreign currencies; and
|
|
|
|
other companies in our industry may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
|
Because of these limitations, Adjusted EBITDA should not be
considered as a measure of discretionary cash available to us to
invest in the growth of our business. We compensate for these
limitations by relying primarily on our GAAP results and using
Adjusted EBITDA only supplementally.
|
|
|
(6) |
|
We present Adjusted Net Income as a further supplemental measure
of our performance. We prepare Adjusted Net Income by adjusting
net income (loss) to eliminate the impact of a number of
non-cash expenses and other items that may be either one time or
recurring that we do not consider to be indicative of our core
ongoing operating performance. We believe that Adjusted Net
Income is particularly useful because it reflects the impact of
our asset base and capital structure on our operating
performance. |
We present Adjusted Net Income for a number of reasons,
including:
|
|
|
|
|
we use Adjusted Net Income in communications with our board of
directors concerning our consolidated financial performance;
|
|
|
|
we believe that Adjusted Net Income is an enterprise level
performance measure commonly reported and widely used by
analysts and investors in our industry; and
|
|
|
|
we anticipate that our investor and analyst presentations after
we are public will include Adjusted Net Income.
|
Adjusted Net Income is not a measure defined in accordance with
GAAP and should not be construed as an alternative to income
from continuing operations, cash flows from operating activities
or net income (loss), as determined in accordance with GAAP. We
encourage you to evaluate each adjustment and the reasons we
consider them appropriate. Other companies in our industry may
calculate Adjusted Net Income differently than we do, limiting
its usefulness as a comparative measure. In addition, in
evaluating Adjusted Net Income, you should be aware that in the
future we may incur expenses similar to the adjustments in this
presentation. We define Adjusted Net Income as net income (loss)
less income (loss) from discontinued operations, net of taxes,
excluding (i) restructuring and impairment charges, (ii) other
restructuring charges, (iii) abandoned IPO expenses, (vi)
subcontractor claim settlement, (v) reorganization items, net,
(vi) the increase in cost of sales resulting from the
fresh-start accounting inventory step-up, (vii) equity based
compensation expense, (viii) amortization of intangibles
associated with continuing operations and (ix) foreign currency
gain (loss).
45
The following table summarizes the adjustments to net income
(loss) that we make in order to calculate Adjusted Net Income
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Three Months
|
|
|
Two- Month
|
|
|
|
Ten- Month
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Period Ended
|
|
|
|
Period Ended
|
|
|
Ended
|
|
|
Years Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
October 25,
|
|
|
March 29,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
Net income (loss)
|
|
$
|
31.1
|
|
|
$
|
(2.0
|
)
|
|
|
$
|
841.1
|
|
|
$
|
(69.7
|
)
|
|
$
|
(417.3
|
)
|
|
$
|
(180.6
|
)
|
Less: Income (loss) from discontinued operations, net of taxes
|
|
|
|
|
|
|
0.5
|
|
|
|
|
6.6
|
|
|
|
(0.8
|
)
|
|
|
(91.5
|
)
|
|
|
(51.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
31.1
|
|
|
|
(2.5
|
)
|
|
|
|
834.5
|
|
|
|
(68.9
|
)
|
|
|
(325.8
|
)
|
|
|
(128.8
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and impairment charges(a)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
13.4
|
|
|
|
12.1
|
|
Other restructuring charges(b)
|
|
|
|
|
|
|
|
|
|
|
|
13.3
|
|
|
|
3.1
|
|
|
|
6.2
|
|
|
|
|
|
Abandoned IPO expenses(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.7
|
|
|
|
|
|
Subcontractor claim settlement(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
Reorganization items, net(e)
|
|
|
|
|
|
|
|
|
|
|
|
(804.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
step-up(f)
|
|
|
0.9
|
|
|
|
17.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity based compensation expense(g)
|
|
|
1.5
|
|
|
|
2.2
|
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
0.6
|
|
Amortization of intangibles associated with continuing
operations(h)
|
|
|
7.7
|
|
|
|
5.6
|
|
|
|
|
8.8
|
|
|
|
2.4
|
|
|
|
20.0
|
|
|
|
27.5
|
|
Foreign currency loss (gain), net(i)
|
|
|
(21.6
|
)
|
|
|
(9.3
|
)
|
|
|
|
(43.4
|
)
|
|
|
40.2
|
|
|
|
210.4
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income (Loss)
|
|
$
|
19.9
|
|
|
$
|
13.3
|
|
|
|
$
|
9.3
|
|
|
$
|
(22.9
|
)
|
|
$
|
(71.7
|
)
|
|
$
|
(82.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
This adjustment is comprised of all
items included in the restructuring and impairment charges line
item on our consolidated statements of operations, and
eliminates the impact of restructuring and impairment charges
related to (i) for the three months ended March 31,
2010, impairment of two abandoned in-process research and
development projects, accounted for as indefinite-lived
intangible assets as part of the application of fresh-start
accounting, (ii) for the three months ended March 29,
2009, the closure of our research and development facilities in
Japan, (iii) for 2009, termination benefits and other
related costs, for the ten-month period ended October 25,
2009 in connection with the closure of one of our research and
development facilities in Japan, (iv) for 2008, goodwill
impairment triggered by the significant adverse change in the
revenue of our MDS reporting unit and a reversal of a portion of
the restructuring accrual related to the closure of our Gumi
five-inch wafer fabrication facilities in 2007, and (v) for
2007, the closure of our Gumi five-inch wafer fabrication
facilities. We do not believe these restructuring and impairment
charges are indicative of our core ongoing operating performance
because we do not anticipate similar facility closures and
market driven events in our ongoing operations, although we
cannot guarantee that similar events will not occur in the
future.
|
|
(b)
|
|
This adjustment relates to certain
restructuring charges that are not included in the restructuring
and impairment charges line item on our consolidated statements
of operations. These items are included in selling, general and
administrative expenses in our consolidated statements of
operations. These charges are comprised of the following: (i)
for the three months ended March 29, 2009, a charge of $3.1
million for restructuring-related professional fees and related
expenses, (ii) for 2009, a charge of $13.3 million for
restructuring-related professional fees and related expenses,
and (iii) for 2008, a charge of $6.2 million for
restructuring-related professional fees and related expenses. We
do not believe these other restructuring charges are indicative
of our core ongoing operating performance because these charges
were related, in significant part, to actions we took in
response to the impacts on our business resulting from the
global economic recession that persisted through 2008 and 2009.
We cannot guarantee that similar charges will not be incurred in
the future.
|
|
(c)
|
|
This adjustment eliminates a $3.7
million charge in 2008 related to expenses incurred in
connection with our abandoned initial public offering in 2008.
We do not believe that these charges are indicative of our core
operating performance. We expect to incur costs in connection
with this offering.
|
46
|
|
|
(d)
|
|
This adjustment eliminates a $1.3
million charge attributable to a one-time settlement of claims
with a subcontractor. We no longer obtain services from this
subcontractor and do not expect to incur similar charges in the
future.
|
|
(e)
|
|
This adjustment eliminates the
impact of largely non-cash reorganization income and expense
items directly associated with our reorganization proceedings
from our ongoing operations including, among others,
professional fees, the revaluation of assets, the effects of the
Chapter 11 reorganization plan and fresh-start accounting
principles and the write-off of debt issuance costs. Included in
reorganization items, net for the ten-month period ended
October 25, 2009 was our predecessors gain recognized
from the effects of our reorganization proceedings. The gain
results from the difference between our predecessors
carrying value of remaining pre-petition liabilities subject to
compromise and the amounts to be distributed pursuant to the
reorganization proceedings. The gain from the effects of the
reorganization proceedings and the application of fresh-start
accounting principles is comprised of the discharge of
liabilities subject to compromise, net of the issuance of new
common units and new warrants and the accrual of amounts to be
settled in cash. For details regarding this adjustment, see
note 5 to the consolidated financial statements of
MagnaChip Semiconductor LLC for the ten-month period ended
October 25, 2009 and the two-month period ended
December 31, 2009 included elsewhere in this prospectus. We
do not believe these items are indicative of our core ongoing
operating performance because they were incurred as a result of
our reorganization proceedings.
|
|
(f)
|
|
This adjustment eliminates the
one-time impact on cost of sales associated with the write-up of
our inventory in accordance with the principles of fresh-start
accounting upon consummation of the Chapter 11
reorganization.
|
|
(g)
|
|
This adjustment eliminates the
impact of non-cash equity-based compensation expenses. Although
we expect to incur non-cash equity-based compensation expenses
in the future, we believe that analysts and investors will find
it helpful to review our operating performance without the
effects of these non-cash expenses, as supplemental information.
|
|
(h)
|
|
This adjustment eliminates the
non-cash impact of amortization expense for intangible assets
created as a result of the purchase accounting treatment of the
Original Acquisition and other subsequent acquisitions, and from
the application of fresh-start accounting in connection with the
reorganization proceedings. We do not believe these non-cash
amortization expenses for intangibles are indicative of our core
ongoing operating performance because the assets would not have
been capitalized on our balance sheet but for the application of
purchase accounting or fresh-start accounting, as applicable.
|
|
(i)
|
|
This adjustment eliminates the
impact of non-cash foreign currency translation associated with
intercompany debt obligations and foreign currency denominated
receivables and payables, as well as the cash impact of foreign
currency transaction gains or losses on collection of such
receivables and payment of such payables. Although we expect to
incur foreign currency translation gains or losses in the
future, we believe that analysts and investors will find it
helpful to review our operating performance without the effects
of these primarily non-cash gains or losses, as supplemental
information.
|
Adjusted Net Income has limitations as an analytical tool, and
you should not consider it in isolation, or as a substitute for
analysis of our results as reported under GAAP. Some of these
limitations are:
|
|
|
|
|
Adjusted Net Income does not reflect our cash expenditures, or
future requirements, for capital expenditures or contractual
commitments;
|
|
|
|
Adjusted Net Income does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
|
|
|
Adjusted Net Income does not consider the potentially dilutive
impact of issuing equity-based compensation to our management
team and employees;
|
|
|
|
Adjusted Net Income does not reflect the costs of holding
certain assets and liabilities in foreign currencies; and
|
|
|
|
other companies in our industry may calculate Adjusted Net
Income differently than we do, limiting its usefulness as a
comparative measure.
|
Because of these limitations, Adjusted Net Income should not be
considered as a measure of discretionary cash available to us to
invest in the growth of our business. We compensate for these
limitations by relying primarily on our GAAP results and using
Adjusted Net Income only supplementally.
47
UNAUDITED PRO
FORMA CONSOLIDATED FINANCIAL INFORMATION
We have prepared the unaudited pro forma condensed consolidated
financial information of MagnaChip for the combined twelve-month
period ended December 31, 2009 as of and for the three
months ended March 31, 2010 and in accordance with
Article 11 of Regulation S-X.
The unaudited pro forma condensed consolidated statements of
operations for the three months ended March 31, 2010 and
the combined
twelve-month
period ended December 31, 2009 is derived from the
historical consolidated financial statements of MagnaChip
Semiconductor LLC and gives pro forma effect to the following as
if these events had occurred on January 1, 2009:
|
|
|
|
|
the reorganization proceedings and adoption of fresh-start
reporting;
|
|
|
|
the corporate conversion; and
|
|
|
|
the issuance of $250 million senior notes by MagnaChip
Semiconductor S.A. and MagnaChip Semiconductor Finance Company,
our wholly-owned subsidiaries, and the application of the net
proceeds therefrom.
|
The unaudited pro forma condensed consolidated balance sheet as
of March 31, 2010 is derived from the historical
consolidated balance sheet of MagnaChip Semiconductor LLC and
gives pro forma effect to the following as if it occurred on
March 31, 2010.
|
|
|
|
|
the corporate conversion; and
|
|
|
|
the issuance of $250 million senior notes by MagnaChip
Semiconductor S.A. and MagnaChip Semiconductor Finance Company,
and the application of the net proceeds therefrom.
|
Basis of
Presentation
The following information should be read in conjunction with
Selected Historical Consolidated Financial and Operating
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations, Risk
Factors, Capitalization and the audited and
unaudited consolidated financial statements of MagnaChip
Semiconductor LLC and the related notes included elsewhere in
this prospectus. The unaudited pro forma consolidated financial
information is not necessarily indicative of operating results
or the financial position that would have been achieved if the
transactions identified above had occurred on the dates
indicated, nor does it purport to represent the results we will
obtain in the future.
Management has prepared the accompanying unaudited pro forma
balance sheet as of March 31, 2010 and consolidated
statements of operations for the combined twelve-month period
ended December 31, 2009 and the three months ended
March 31, 2010 in accordance with Article 11 of
Regulation S-X
for inclusion in this prospectus.
The accounting policies used in the preparation of the unaudited
pro forma consolidated financial statements are those disclosed
in the audited consolidated financial statements of MagnaChip
Semiconductor LLC for the ten-month period ended
October 25, 2009 and the two-month period ended
December 31, 2009.
The following unaudited pro forma condensed consolidated
financial information should be read in conjunction with
Capitalization, Selected Historical
Consolidated Financial and Operating Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements, including the notes to those consolidated
financial statements, included elsewhere in this prospectus.
The
Reorganization Proceedings and Fresh-Start Reporting
On June 12, 2009 MagnaChip Semiconductor LLC, along with
certain of its subsidiaries, including MagnaChip Semiconductor
S.A., filed a voluntary petition for relief in the United States
Bankruptcy Court
48
for the District of Delaware under Chapter 11 of the United
States Bankruptcy Code. On November 9, 2009, our plan of
reorganization became effective and we emerged from the
reorganization proceedings.
In connection with our emergence from the reorganization
proceedings, we implemented fresh-start accounting in accordance
with ASC 852. We elected to adopt a convenience date of
October 25, 2009 (a month end for our financial reporting
purposes) for application of fresh-start accounting. In
accordance with ASC 852, we recorded largely non-cash
reorganization income and expense items directly associated with
our reorganization proceedings including the revaluation of
assets, the effects of our reorganization plan and fresh-start
accounting, the write-off of debt issuance costs and
professional fees.
In implementing fresh-start accounting, we re-measured our asset
values and stated all liabilities, other than deferred taxes and
severance benefits, at fair value or at present values of the
amounts to be paid using appropriate market interest rates. As
of October 25, 2009, the fair value of our assets and the
fair value or present value of our liabilities were as follows:
|
|
|
|
|
|
|
Successor
|
|
|
|
October 25, 2009
|
|
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
67.6
|
|
Inventories
|
|
|
69.3
|
|
Other current assets
|
|
|
110.5
|
|
Property plant and equipment
|
|
|
158.4
|
|
Intangible assets
|
|
|
55.2
|
|
Other non-current assets
|
|
|
24.5
|
|
|
|
|
|
|
Total Assets
|
|
|
485.5
|
|
Liabilities:
|
|
|
|
|
Current portion long term debt
|
|
|
0.5
|
|
Other current liabilities
|
|
|
123.9
|
|
Long-term debt
|
|
|
61.3
|
|
Other non-current liabilities
|
|
|
81.5
|
|
|
|
|
|
|
Total liabilities
|
|
|
267.2
|
|
|
|
|
|
|
Net Assets acquired
|
|
$
|
218.4
|
|
|
|
|
|
|
The intangible assets recognized as part of fresh-start
accounting and the related estimated useful lives are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
Intangible Assets
|
|
Fair Value
|
|
|
Useful lives
|
|
|
Technology
|
|
$
|
14.7
|
|
|
|
1-5
|
|
Customer relationships
|
|
|
26.1
|
|
|
|
0.5-5
|
|
Intellectual property assets
|
|
|
4.7
|
|
|
|
4
|
|
In-process research and development
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
$
|
55.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The adjustments made for the reorganization proceedings in the
unaudited pro forma condensed consolidated statements of
operations for the three months ended March 31, 2010 and
the combined twelve-month period ended December 31, 2009
assumes the financial effects on us resulting from the
implementation of the Chapter 11 plan of reorganization and
the adoption of fresh-start accounting as described above.
The Corporate
Conversion
Prior to the effectiveness of the registration statement of
which this prospectus is a part, MagnaChip Semiconductor LLC
will convert from a Delaware limited liability company to a
Delaware corporation. The
49
corporate conversion adjustments in the unaudited pro forma
consolidated financial information for the three months ended
March 31, 2010 and the combined twelve-month period ended
December 31, 2009 assume the consummation of the corporate
conversion of MagnaChip Semiconductor LLC and the effectiveness
of our certificate of incorporation, which is expected to occur
prior to the effectiveness of the registration statement of
which this prospectus is a part. No U.S. federal taxable
income or taxable gain is expected to be recognized by MagnaChip
Semiconductor Corporation as a result of our conversion from a
limited liability company to a corporation.
Issuance of
$250 Million Senior Notes and Applications of Net
Proceeds
On April 9, 2010, MagnaChip Semiconductor S.A. and MagnaChip
Semiconductor Finance Company, our wholly-owned subsidiaries,
completed the sale of $250 million in aggregate principal
amount of 10.500% senior notes due 2018 at an offering price of
98.674%. Net proceeds from the notes offering were
$238.4 million which represents $250 million of
principal amount net of $3.3 million of original issue
discount and $8.3 million of debt issuance costs, including
professional fees. Of the $238.4 million of net proceeds,
$130.7 million was used to make a distribution to our
unitholders and $61.6 million was used to repay all
outstanding borrowings under our term loan. The remaining
proceeds were retained to fund working capital and for general
corporate purposes.
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
|
|
Pro Forma
|
|
|
|
Three Months
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
Adjustments
|
|
|
2010
|
|
|
|
(In millions, except per common share data)
|
|
|
Condensed Pro Forma Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
179.5
|
|
|
$
|
|
|
|
$
|
179.5
|
|
Cost of sales
|
|
|
130.1
|
|
|
|
(0.9
|
)(1)
|
|
|
129.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
49.4
|
|
|
|
|
|
|
|
50.2
|
|
Selling, general and administrative expenses
|
|
|
17.9
|
|
|
|
|
|
|
|
17.9
|
|
Research and development expenses
|
|
|
20.5
|
|
|
|
|
|
|
|
20.5
|
|
Restructuring and impairment charges
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income from continuing operations
|
|
|
10.6
|
|
|
|
|
|
|
|
11.5
|
|
Interest expense, net
|
|
|
(2.0
|
)
|
|
|
(4.9
|
)(2)
|
|
|
(6.9
|
)
|
Foreign currency gain, net
|
|
|
21.6
|
|
|
|
|
|
|
|
21.6
|
|
Others
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.5
|
|
|
|
|
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
30.1
|
|
|
|
|
|
|
|
26.1
|
|
Income tax benefits
|
|
|
(1.0
|
)
|
|
|
|
(3)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
31.1
|
|
|
|
|
|
|
$
|
27.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.82
|
|
|
|
|
|
|
$
|
0.72
|
|
Diluted
|
|
$
|
0.81
|
|
|
|
|
|
|
$
|
0.71
|
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37.805
|
|
|
|
|
|
|
|
37.805
|
|
Diluted
|
|
|
38.442
|
|
|
|
|
|
|
|
38.442
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
|
|
Pro Forma
|
|
|
|
As of
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
Adjustments
|
|
|
2010
|
|
|
|
(In millions, except common share data)
|
|
|
Condensed Pro Forma Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
82.7
|
|
|
$
|
46.1
|
(4)
|
|
$
|
128.8
|
|
Accounts receivables, net
|
|
|
104.5
|
|
|
|
|
|
|
|
104.5
|
|
Inventories, net
|
|
|
58.2
|
|
|
|
|
|
|
|
58.2
|
|
Other
|
|
|
25.3
|
|
|
|
(0.0
|
)(5)
|
|
|
25.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
270.7
|
|
|
|
|
|
|
|
316.9
|
|
Property, plant and equipment, net
|
|
|
154.7
|
|
|
|
|
|
|
|
154.7
|
|
Intangible assets, net
|
|
|
43.5
|
|
|
|
|
|
|
|
43.5
|
|
Other non-current assets
|
|
|
23.1
|
|
|
|
8.0
|
(5)
|
|
|
31.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
492.0
|
|
|
|
|
|
|
$
|
546.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
77.9
|
|
|
|
|
|
|
$
|
77.9
|
|
Other accounts payable
|
|
|
7.6
|
|
|
|
|
|
|
|
7.6
|
|
Accrued expenses
|
|
|
25.3
|
|
|
|
|
|
|
|
25.3
|
|
Current portion of long-term debt
|
|
|
0.6
|
|
|
|
(0.6
|
)(6)
|
|
|
|
|
Other current liabilities
|
|
|
4.6
|
|
|
|
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
115.9
|
|
|
|
|
|
|
|
115.2
|
|
Long-term borrowings
|
|
|
61.0
|
|
|
|
(61.0
|
)(6)
|
|
|
|
|
|
|
|
|
|
|
|
246.7
|
(6)
|
|
|
246.7
|
|
Accrued severance benefits, net
|
|
|
76.8
|
|
|
|
|
|
|
|
76.8
|
|
Other non-current liabilities
|
|
|
6.9
|
|
|
|
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
260.6
|
|
|
|
|
|
|
|
445.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock; 150,000,000 shares authorized,
38,404,294 shares issued and outstanding at March 31,
2010.
|
|
|
0.4
|
|
|
|
|
|
|
|
0.4
|
|
Additional paid-in capital
|
|
|
224.3
|
|
|
|
(130.7
|
)(6)
|
|
|
93.6
|
|
Retained earnings
|
|
|
29.1
|
|
|
|
(0.2
|
)(5)
|
|
|
28.9
|
|
Accumulated other comprehensive (loss)
|
|
|
(22.4
|
)
|
|
|
|
|
|
|
(22.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
231.4
|
|
|
|
|
|
|
|
100.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
492.0
|
|
|
|
|
|
|
$
|
546.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to
Unaudited Pro Forma Consolidated Financial Information as of
March 31, 2010 and for the Three Months Ended
March 31, 2010
|
|
|
(1) |
|
To eliminate the $0.9 million one-time impact on cost of
sales associated with the step up of our inventory resulting
from implementation of fresh-start accounting in 2009 which was
charged to cost of sales in the historical statement of
operations for the three months ended March 31, 2010. |
52
|
|
|
|
|
The pro forma financial statements assume the transaction
occurred as of January 1, 2009 and as such this amount is being
eliminated from the historical statement of operations in
presenting the unaudited pro forma statement of operations, as
for pro forma purposes, this charge would not have occurred in
the three months ended March 31, 2010. |
(2) |
|
To eliminate interest expense of $2.0 million which was
incurred on our $61.6 million aggregate principal amount
new term loan which was recognized in the three months ended
March 31, 2010. In addition, the pro forma adjustment
assumes the 10.500% senior notes in the aggregate principal
amount of $250.0 million, issued on April 9, 2010,
were outstanding as of January 1, 2009. The resulting
additional interest expense from our 10.500% senior notes
would have been $6.8 million using the effective interest
rate method. |
(3) |
|
We believe that the pro forma adjustments related to the
issuance of $250 million aggregate principal amount of
senior notes and the application of the net proceeds should not
have an impact on income tax expense for the three months ended
March 31, 2010. The pro forma adjustment resulting in an
increase in interest expense, net is primarily related to our
foreign subsidiaries that have sufficient amounts of operating
loss carry forwards and, accordingly, such pro forma adjustment
will have no income tax impact. |
|
|
In addition, we believe that there would be no income tax impact
from the corporate conversion and the change in tax status to a
corporation. The corporate conversion does not impact MagnaChip
Semiconductor LLCs operating structure which is a holding
company without its own revenue or income generating activities
with a history of consecutive losses. Accordingly, the converted
MagnaChip Semiconductor Corporation is expected to have minimal
net taxable income or loss for the three months ended
March 31, 2010 and in subsequent periods and therefore any
tax consequences would be immaterial. Consequently, even if the
corporate conversion had occurred as of January 1, 2009, we
would expect that any tax consequences would have been
immaterial. |
|
|
|
(4) |
|
To reflect a $46.1 million increase in cash and cash
equivalents which represents the portion of the net proceeds
from the issuance of $250 million aggregate principal
amount of senior notes that was applied to fund working capital
and for general corporate purposes. |
|
|
|
(5) |
|
To reflect $8.3 million of debt issuance costs in
connection with the offering of $250 million aggregate
principal amount of senior notes and $0.2 million
elimination of existing debt issuance costs regarding the
repayment of our new term loan. |
|
|
|
(6) |
|
To reflect the issuance of $250.0 million aggregate
principal amount of senior notes with $3.3 million of
original issue discount and application of $130.7 million
of net proceeds to make a distribution to unitholders and
resulting decrease in additional paid in capital and application
of $61.6 million of net proceeds to repay our new term loan
of $61.6 million of which $0.6 million was classified
as short-term as of March 31, 2010. |
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
Pro Forma
|
|
|
Successor
|
|
Predecessor
|
|
|
|
|
|
|
Two-Month
|
|
Ten-Month
|
|
|
|
|
|
|
Period
|
|
Period
|
|
|
|
|
|
|
Ended
|
|
Ended
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
October 25,
|
|
|
|
December 31,
|
|
|
2009
|
|
2009
|
|
Adjustments
|
|
2009
|
|
|
(In millions, except per common unit/share data)
|
|
Condensed Pro Forma Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
111.1
|
|
|
$
|
449.0
|
|
|
$
|
|
|
|
$
|
560.1
|
|
Cost of sales
|
|
|
90.4
|
|
|
|
311.1
|
|
|
|
(5.4
|
)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17.2
|
)(2)
|
|
|
378.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
20.7
|
|
|
|
137.8
|
|
|
|
|
|
|
|
181.2
|
|
Selling, general and administrative expenses
|
|
|
14.5
|
|
|
|
56.3
|
|
|
|
0.8
|
(1)
|
|
|
71.6
|
|
Research and development expenses
|
|
|
14.7
|
|
|
|
56.1
|
|
|
|
6.4
|
(1)
|
|
|
77.3
|
|
Restructuring and impairment charges
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations
|
|
|
(8.6
|
)
|
|
|
25.0
|
|
|
|
|
|
|
|
31.9
|
|
Interest expense, net
|
|
|
(1.3
|
)
|
|
|
(31.2
|
)
|
|
|
3.6
|
(3)
|
|
|
(28.8
|
)
|
Foreign currency gain, net
|
|
|
9.3
|
|
|
|
43.4
|
|
|
|
|
|
|
|
52.8
|
|
Reorganization items, net
|
|
|
|
|
|
|
804.6
|
|
|
|
(804.6
|
)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.1
|
|
|
|
816.8
|
|
|
|
|
|
|
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(0.5
|
)
|
|
|
841.8
|
|
|
|
|
|
|
|
55.9
|
|
Income tax expenses
|
|
|
1.9
|
|
|
|
7.3
|
|
|
|
|
(5)
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(2.5
|
)
|
|
$
|
834.5
|
|
|
|
|
|
|
$
|
46.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends accrued on preferred unit
|
|
|
|
|
|
|
6.3
|
|
|
|
(6.3
|
)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to common
unit/share
|
|
$
|
(2.5
|
)
|
|
$
|
828.2
|
|
|
$
|
|
|
|
$
|
46.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common unit / share data:(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations per common unit /
shareBasic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
15.65
|
|
|
|
|
|
|
$
|
1.24
|
|
Weighted average number of common units/shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37.608
|
|
|
|
52.923
|
|
|
|
|
|
|
|
37.520
|
|
Diluted
|
|
|
37.608
|
|
|
|
52.923
|
|
|
|
|
|
|
|
37.521
|
|
Notes to
Unaudited Pro Forma Consolidated Financial Information for the
Twelve Month Period Ended December 31, 2009
(1) To reflect the net change in historical cost of sales
and selling, general and administrative expenses and research
and development expenses of the predecessor company due to the
application of fresh-start accounting as of January 1, 2009
which resulted in a reduction of $13.9 million of tangible
assets and an increase of $28.3 million in intangible
assets. The corresponding change in depreciation and
amortization would have been a decrease in depreciation expense
for tangible assets by $7.4 million for the ten-month
period ended October 25, 2009 and an increase in
amortization expense
54
for intangible assets by $9.1 million for the same period.
The useful lives were determined for each tangible asset, which
are depreciated on a straight-line basis and range from two to
35 years with a weighted average useful life of 14 years.
Technology and customer relationships are amortized on a
straight-line basis over one-half to five years based on
expected benefit periods. Patents, trademarks and property use
rights are amortized on a straight-line basis over the periods
of benefits for four years. The estimated useful life of
tangibles and intangibles were determined based on expected
benefits
and/or
economic availability for service periods. The aggregate
depreciation and amortization expense was allocated to cost of
sales and selling, general and administrative expenses and
research and development expenses by ($5.4) million,
$0.8 million, and $6.4 million, respectively, in
respect of the purpose of property, plant and equipment and
intangible assets.
The adjustments referred to above are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Depreciation
|
|
|
Total
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Cost of sales
|
|
$
|
|
|
|
$
|
(5.4
|
)
|
|
$
|
(5.4
|
)
|
Selling, general and administrative expenses
|
|
|
1.3
|
|
|
|
(0.5
|
)
|
|
|
0.8
|
|
Research and development expenses
|
|
|
7.9
|
|
|
|
(1.4
|
)
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9.1
|
|
|
$
|
(7.4
|
)
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) To eliminate the one-time impact on cost of sales
associated with the step up of our inventory of
$17.9 million, of which $17.2 million was charged to
cost of sales in the historical statement of operations for the
two-month period ended December 31, 2009, applying the
first in, first out method, or FIFO. This adjustment is
considered a material non-recurring charge which is directly
attributable to the reorganization proceedings and fresh-start
accounting and as such is being eliminated from the historical
statement of operations in presenting the unaudited pro forma
statement of operations.
(3) To eliminate interest expense of $30.8 million of
which $29.6 million was incurred on our indebtedness
outstanding prior to our reorganization proceedings which was
recognized in the ten-month period ended October 25, 2009
and $1.2 million was incurred on our new term loan which
was recognized in the two-month period ended December 31,
2009. The $29.6 million incurred on our indebtedness
outstanding prior to our reorganization proceedings was
comprised of $21.6 million incurred on notes of
$750.0 million and $8.0 million incurred under the
senior secured credit facility of $95.0 million which was
recognized in the ten-month period ended October 25, 2009.
In addition, the pro forma adjustment assumes the
10.500% senior notes in the aggregate principal amount of
$250.0 million, issued on April 9, 2010, were
outstanding as of January 1, 2009. The resulting additional
interest expense from our 10.500% senior notes would have
been $27.2 million using the effective interest rate method.
(4) To reflect the elimination of the impact of the
reorganization items, net recorded in the predecessor period in
accordance with ASC 852 upon emergence from the
reorganization proceedings, assumed to have occurred
January 1, 2009 for the unaudited pro forma statement of
operations. As such no adjustment for reorganization items
should be reflected.
(5) We believe that the pro forma adjustments related to
the reorganization proceedings and adoption of fresh-start
reporting and the issuance of $250 million aggregate
principal amount of senior notes and the application of the net
proceeds should not have an impact on income tax expense for
2009. Those pro forma adjustments which would have income tax
impacts, such as increase or decrease in depreciation and
amortization expenses and decrease in interest expenses, net are
primarily related to our foreign subsidiaries that have
sufficient amounts of operating loss carry forwards and,
accordingly, such pro forma adjustments will have no income tax
impact.
In addition, we believe that there would be no income tax impact
from the corporate conversion and the change in tax status to a
corporation. The corporate conversion does not impact MagnaChip
Semiconductor LLCs operating structure which is a holding
company without its own revenue or income generating activities
with a history of consecutive losses. Accordingly, the converted
55
MagnaChip Semiconductor Corporation is expected to have minimal
net taxable income or loss in 2009 and in subsequent years and
therefore any tax consequences would be immaterial.
Consequently, even if the corporate conversion had occurred as
of January 1, 2009, we would expect that any tax consequences
would have been immaterial.
(6) To eliminate dividends accrued on preferred units,
cancelled in connection with our emergence from reorganization
proceedings, in the amount of $6.3 million as of
October 25, 2009.
(7) Basic and diluted pro forma income per common share
from continuing operations reflects the impact from the
implementation of our plan of reorganization which represents
the cancellation of our old common units and issuance of new
common stock. The following table sets forth the computation of
unaudited pro forma basic and diluted income per common share
from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
Weighted Average
|
|
|
per Common
|
|
|
|
Common Units/
|
|
|
Unit/Share from
|
|
|
|
Shares
|
|
|
Continuing Operations
|
|
|
Historical ten-month period ended October 25, 2009
|
|
|
52,923,483
|
|
|
$
|
15.65
|
|
Historical two-month period ended December 31, 2009
|
|
|
37,607,846
|
|
|
|
(0.07
|
)
|
Pro forma adjustment for the ten-month period ended
October 25, 2009 in conjunction with the implementation of
the Plan of Reorganization
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(53,011,533
|
)
|
|
|
|
|
Diluted
|
|
|
(53,010,585
|
)
|
|
|
|
|
Pro forma for the combined twelve-month period ended
December 31, 2009
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,519,796
|
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
37,520,744
|
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
|
56
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the Selected Historical Consolidated
Financial and Operating Data and our consolidated
financial statements and the related notes included elsewhere in
this prospectus. This discussion and analysis contains, in
addition to historical information, forward-looking statements
that include risks and uncertainties. Our actual results may
differ materially from those anticipated in these
forward-looking statements as a result of certain factors,
including those set forth under the heading Risk
Factors and elsewhere in this prospectus.
Overview
We are a Korea-based designer and manufacturer of analog and
mixed-signal semiconductor products for high-volume consumer
applications. We believe we have one of the broadest and deepest
analog and mixed-signal semiconductor technology platforms in
the industry, supported by our
30-year
operating history, large portfolio of approximately 2,600 novel
registered patents and 1,000 pending novel patent applications
and extensive engineering and manufacturing process expertise.
Our business is comprised of three key segments: Display
Solutions, Power Solutions and Semiconductor Manufacturing
Services. Our Display Solutions products include display drivers
that cover a wide range of flat panel displays and multimedia
devices. Our Power Solutions products include discrete and
integrated circuit solutions for power management in high-volume
consumer applications. Our Semiconductor Manufacturing Services
segment provides specialty analog and mixed-signal foundry
services for fabless semiconductor companies that serve the
consumer, computing and wireless end markets.
Our wide variety of analog and mixed-signal semiconductor
products and manufacturing services combined with our deep
technology platform allows us to address multiple high-growth
end markets and to rapidly develop and introduce new products
and services in response to market demands. Our substantial
manufacturing operations in Korea and design centers in Korea
and Japan place us at the core of the global consumer
electronics supply chain. We believe this enables us to quickly
and efficiently respond to our customers needs and allows
us to better service and capture additional demand from existing
and new customers.
To maintain and increase our profitability, we must accurately
forecast trends in demand for consumer electronics products that
incorporate semiconductor products we produce. We must
understand our customers needs as well the likely end
market trends and demand in the markets they serve. We must
balance the likely manufacturing utilization demand of our
product businesses and foundry business to optimize our
facilities utilization. We must also invest in relevant research
and development activities and manufacturing capacity and
purchase necessary materials on a timely basis to meet our
customers demand while maintaining our target margins and
cash flow.
The semiconductor markets in which we participate are highly
competitive. The prices of our products tend to decrease
regularly over their useful lives, and such price decreases can
be significant as new generations of products are introduced by
us or our competitors. We strive to offset the impact of
declining selling prices for existing products through cost
reductions and the introduction of new products that command
selling prices above the average selling price of our existing
products. In addition, we seek to manage our inventories and
manufacturing capacity so as to mitigate the risk of losses from
product obsolescence.
Demand for our products and services is driven primarily by
overall demand for consumer electronics products and can be
adversely affected by periods of weak consumer spending or by
market share losses by our customers. To mitigate the impact of
market volatility on our business, we seek to address market
segments and geographies with higher growth rates than the
overall consumer electronics industry. For example, in recent
years, we have experienced increasing demand
57
from OEMs and consumers in China and Taiwan relative to overall
demand for our products and services. We expect to derive a
meaningful portion of our growth from growing demand in such
markets. We also expect that new competitors will emerge in
these markets that may place increased pressure on the pricing
for our products and services, but we believe that we will be
able to successfully compete based upon our higher quality
products and services and that the impact from the increased
competition will be more than offset by increased demand arising
from such markets. Further, we believe we are well-positioned
competitively as a result of our long operating history,
existing manufacturing capacity and our Korea-based operations.
Within our Display Solutions and Power Solutions segments, net
sales are driven by design wins in which we or another company
is selected by an electronics OEM or other potential customer to
supply its demand for a particular product. A customer will
often have more than one supplier designed in to multi-source
components for a particular product line. Once designed in, we
often specify the pricing of a particular product for a set
period of time, with periodic discussions and renegotiations of
pricing with our customers. In any given period, our net sales
depend heavily upon the end-market demand for the goods in which
our products are used, the inventory levels maintained by our
customers and in some cases, allocation of demand for components
for a particular product among selected qualified suppliers.
Within the Semiconductor Manufacturing Services business, net
sales are driven by customers decisions on which
manufacturing services provider to use for a particular product.
Most of our semiconductor manufacturing services customers are
fabless and depend upon service providers like us to manufacture
their products. A customer will often have more than one
supplier of manufacturing services; however, they tend to
allocate a majority of manufacturing volume to one of their
suppliers. We strive to be the primary supplier of manufacturing
services to our customers. Once selected as a primary supplier,
we often specify the pricing of a particular service on a per
wafer basis for a set period of time, with periodic discussions
and renegotiations of pricing with our customers. In any given
period, our net sales depend heavily upon the end-market demand
for the goods in which the products we manufacture for customers
are used, the inventory levels maintained by our customers and
in some cases, allocation of demand for manufacturing services
among selected qualified suppliers.
In contrast to fabless semiconductor companies, our internal
manufacturing capacity provides us with greater control over
manufacturing costs and the ability to implement process and
production improvements which can favorably impact gross profit
margins. Our internal manufacturing capacity also allows for
better control over delivery schedules, improved consistency
over product quality and reliability and improved ability to
protect intellectual property from misappropriation. However,
having internal manufacturing capacity exposes us to the risk of
under-utilization of manufacturing capacity which results in
lower gross profit margins, particularly during downturns in the
semiconductor industry.
Our products and services require investments in capital
equipment. Analog and mixed-signal manufacturing facilities and
processes are typically distinguished by the design and process
implementation expertise rather than the use of the most
advanced equipment. These processes also tend to migrate more
slowly to smaller geometries due to technological barriers and
increased costs. For example, some of our products use
high-voltage technology that requires larger geometries and that
may not migrate to smaller geometries for several years, if at
all. Additionally, the performance of many of our products is
not necessarily dependent on geometry. As a result, our
manufacturing base and strategy does not require substantial
investment in leading edge process equipment, allowing us to
utilize our facilities and equipment over an extended period of
time with moderate required capital investments. Generally,
incremental capacity expansions in our segment of the market
result in more moderate industry capacity expansion as compared
to leading edge processes. As a result, this market, and we,
specifically, are less likely to experience significant industry
overcapacity, which can cause product prices to plunge
dramatically. In general, we seek to invest in manufacturing
capacity that can be used for multiple high-value applications
over an extended period of time. We believe this
58
capital investment strategy enables us to optimize our capital
investments and facilitates deeper and more diversified product
and service offerings.
Our success going forward will depend upon our ability to adapt
to future challenges such as the emergence of new competitors
for our products and services or the consolidation of current
competitors. Additionally, we must innovate to remain ahead of,
or at least rapidly adapt to, technological breakthroughs that
may lead to a significant change in the technology necessary to
deliver our products and services. We believe that our
established relationships and close collaboration with leading
customers enhance our visibility into new product opportunities,
market and technology trends and improve our ability to meet
these challenges successfully. In our Semiconductor
Manufacturing Services business, we strive to maintain
competitiveness and our position as a primary manufacturing
services provider to our customers by offering high value added,
unique processes, high flexibility and excellent service.
In connection with the audits of our consolidated financial
statements for the ten-month period ended October 25, 2009
and two-month period ended December 31, 2009, our
independent registered public accounting firm has reported two
control deficiencies which represent a material weakness in our
internal control over financial reporting. The two control
deficiencies that our independent registered public accounting
firm reported to our board of directors (as we then did not have
a separate audit committee), are that we do not have a
sufficient number of financial personnel with requisite
financial accounting experience, and that our internal controls
over non-routine transactions are not effective to ensure that
accounting considerations are identified and appropriately
recorded.
Recent Changes
to Our Business
Beginning in the second half of 2008, we began to take steps to
refocus our business strategy, enhance our operating efficiency
and improve our cash flow and profitability. We restructured our
continuing operations by reducing our cost structure, increasing
our focus on our core, profitable technologies, products and
customers, and implemented various initiatives to lower our
manufacturing costs and improve our gross margins. In connection
with these initiatives, we closed our Imaging Solutions business
segment, which had been a source of substantial ongoing
operating losses amounting to $91.5 million and
$51.7 million in 2008 and 2007, respectively, and which
required substantial ongoing capital investment. Our employee
headcount has declined from 3,648 as of the end of July 2008 to
3,156 at the end of 2009. As a result of these actions, we were
able to reduce our costs and improve our margins. Although our
goal is to continue to focus on lower costs and improved margins
on an ongoing basis, we expect that the financial benefits
derived from our ongoing efforts will be incremental and any
such benefits may be offset by other negative factors affecting
our operations.
On June 12, 2009, we filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code in
order to address the growing demands on our cash flow resulting
from our long-term indebtedness. Our plan of reorganization went
effective and we emerged from the reorganization proceeding on
November 9, 2009. As a result of the plan of
reorganization, our indebtedness was reduced from
$845.0 million immediately prior to the effectiveness of
our plan of reorganization to $61.8 million as of
December 31, 2009.
During the first half of 2009, we instituted company-wide
voluntary salary reductions, which resulted in one-time savings
for our continuing operations during 2009 and which in turn
contributed to the decrease in salaries and related expenses in
2009 relative to 2008. In June, we returned to our employees
one-third of the amount by which their salaries had been
reduced. We reinstated salaries to prior levels in July 2009.
In connection with our emergence from reorganization
proceedings, we implemented fresh-start accounting in accordance
with ASC 852 governing reorganizations. We elected to adopt
a
59
convenience date of October 25, 2009 (a month end for our
financial reporting purposes) for application of fresh-start
accounting. In accordance with ASC 852 governing
reorganizations, we recorded largely non-cash reorganization
income and expense items directly associated with our
reorganization proceedings including professional fees, the
revaluation of assets, the effects of our reorganization plan
and fresh-start accounting, and write-off of debt issuance costs.
In implementing fresh-start accounting, we re-measured our asset
values and stated all liabilities, other than deferred taxes and
severance benefits, at fair value or at the present values of
the amounts to be paid using appropriate market interest rates.
Our reorganization value was determined based on consideration
of numerous factors and various valuation methodologies,
including discounted cash flows, believed by management and our
financial advisors to be representative of our business and
industry. Information regarding the determination of the
reorganization value and application of fresh-start accounting
is included in note 3 to the consolidated financial
statements of MagnaChip Semiconductor LLC for the ten-month
period ended October 25, 2009 and the two-month period
ended December 31, 2009 included elsewhere in this
prospectus. In addition, under fresh-start accounting,
accumulated deficit and accumulated other comprehensive income
were eliminated.
Under fresh-start accounting, our inventory, net, and intangible
assets, net, increased by $17.9 million and
$28.3 million, respectively, and property, plant and
equipment decreased by $13.9 million, in each case to
reflect the estimated fair value as of our emergence from our
reorganization proceedings. As a result, our cost of sales for
the two-month period ended December 31, 2009 included
$17.2 million of additional costs from the inventory
step-up. This resulted in our gross margin for the two-month
period ended December 31, 2009 being significantly lower
than for the ten-month period ended October 25, 2009 and
prior periods. The increase in intangible assets results in
higher amortization expenses following our emergence from our
reorganization proceedings which are included in cost of sales,
selling general and administrative expenses and research and
development expenses. The decrease in property and plant and
equipment results in lower depreciation expenses, which are
included in cost of sales, selling general and administrative
expenses and research and development expenses following our
emergence from our reorganization proceedings.
As a result of the application of fresh-start accounting, our
consolidated financial statements prior to and including
October 25, 2009 represent the operations of our
pre-reorganization predecessor company and are presented
separately from the consolidated financial statements of our
post-reorganization successor company. For the purposes of our
discussion and analysis of our results of operations, we often
refer to results of operations for 2009 on a combined basis,
including both the period before (predecessor company) and after
(successor company) effectiveness of the plan of reorganization.
We believe this comparison provides useful information as the
principal impact of the plan of reorganization was on our debt
and capital structure and not on our core operations; and many
of the steps taken to improve our core operations had commenced
prior to the commencement of our reorganization proceedings.
On April 9, 2010, we completed the sale of $250 million in
aggregate principal amount of 10.500% senior notes due 2018. Of
the $238.4 million of net proceeds, $130.7 million was used
to make a distribution to our unitholders and $61.6 million
was used to repay all outstanding borrowings under our term
loan. The remaining proceeds were retained to fund working
capital and for general corporate purposes. As a result of the
higher level of indebtedness from our senior note offering, our
quarterly interest expense will increase above that which was
reported for the two-month period ended December 31, 2009
and the three months ended March 31, 2010 to approximately
$6.8 million per quarter.
60
Business
Segments
We report in three separate business segments because we derive
our revenues from three principal business lines: Display
Solutions, Power Solutions, and Semiconductor Manufacturing
Services. We have identified these segments based on how we
allocate resources and assess our performance.
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Display Solutions: Our Display
Solutions products include source and gate drivers and timing
controllers that cover a wide range of flat panel displays used
in LCD televisions and LED televisions and displays, mobile PCs
and mobile communications and entertainment devices. Our display
solutions support the industrys most advanced display
technologies, such as LTPS and AMOLED, as well as high-volume
display technologies such as TFT. Our Display Solutions business
represented 50.5%, 50.5% and 46.7% of our net sales for the
fiscal years ended December 31, 2009 (on a combined basis), 2008
and 2007, respectively and 42.8% and 58.8% of our net sales for
the three months ended March 31, 2010 and March 29,
2009, respectively.
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Power Solutions: Our Power Solutions
segment produces power management semiconductor products
including discrete and integrated circuit solutions for power
management in high-volume consumer applications. These products
include MOSFETs, LED drivers, DC-DC converters, analog switches
and linear regulators, such as low-dropout regulators, or LDOs.
Our power solutions products are designed for applications such
as mobile phones, LCD televisions, and desktop computers, and
allow electronics manufacturers to achieve specific design goals
of high efficiency and low standby power consumption. Going
forward, we expect to continue to expand our power management
product portfolio. Our Power Solutions business represented 2.2%
and 0.9% of our net sales for the fiscal years ended December
31, 2009 (on a combined basis) and 2008, respectively and 5.0%
and 0.9% of our net sales for three months ended March 31,
2010 and March 29, 2009, respectively.
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Semiconductor Manufacturing
Services: Our Semiconductor Manufacturing
Services segment provides specialty analog and mixed-signal
foundry services to fabless semiconductor companies that serve
the consumer, computing and wireless end markets. We manufacture
wafers based on our customers product designs. We do not
market these products directly to end customers but rather
supply manufactured wafers and products to our customers to
market to their end customers. We offer approximately 200
process flows to our manufacturing services customers. We also
often partner with key customers to jointly develop or customize
specialized processes that enable our customers to improve their
products and allow us to develop unique manufacturing expertise.
Our manufacturing services are targeted at customers who require
differentiated, specialty analog and mixed-signal process
technologies such as high voltage CMOS, embedded memory and
power. These customers typically serve high-growth and
high-volume applications in the consumer, computing and wireless
end markets. Our Semiconductor Manufacturing Services business
represented 46.7%, 47.7% and 45.2% of our net sales for the
fiscal years ended December 31, 2009 (on a combined basis), 2008
and 2007, respectively and 51.9% and 39.6% of our net sales for
the three months ended March 31, 2010 and March 29,
2009, respectively.
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Additional
Business Metrics Evaluated by Management
Adjusted
EBITDA and Adjusted Net Income
We use the terms Adjusted EBITDA and Adjusted Net Income
throughout this prospectus. Adjusted EBITDA, as we define it, is
a non-GAAP measure. We define Adjusted EBITDA as net income
(loss) less income (loss) from discontinued operations, net of
taxes excluding (i) depreciation and amortization
associated with continuing operations, (ii) interest
expense, net, (iii) income tax expense,
(iv) restructuring and impairment charges, (v) other
restructuring charges, (vi) abandoned
61
IPO expenses, (vii) subcontractor claim settlement,
(viii) reorganization items, net, (ix) the increase in
cost of sales resulting from the fresh-start inventory
accounting
step-up,
(x) equity-based compensation expense, and
(xi) foreign currency gain (loss), net.
We define Adjusted Net Income as net income (loss) less income
(loss) from discontinued operations, net of taxes excluding
(i) restructuring and impairment charges, (ii) other
restructuring charges, (iii) reorganization items, net,
(iv) the increase in cost of sales resulting from the
fresh-start inventory accounting
step-up,
(v) equity-based compensation expense,
(vi) amortization of intangibles, and (vii) foreign
currency gain (loss), net.
We present Adjusted EBITDA as a supplemental measure of our
performance because:
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Adjusted EBITDA eliminates the impact of a number of items that
may be either one time or recurring that we do not consider to
be indicative of our core ongoing operating performance;
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we believe that Adjusted EBITDA is an enterprise level
performance measure commonly reported and widely used by
analysts and investors in our industry;
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we anticipate that our investor and analyst presentations after
we are public will include Adjusted EBITDA; and
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we believe that Adjusted EBITDA provides investors with a more
consistent measurement of period to period performance of our
core operations, as well as a comparison of our operating
performance to companies in our industry.
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We use Adjusted EBITDA in a number of ways, including:
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for planning purposes, including the preparation of our annual
operating budget;
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to evaluate the effectiveness of our enterprise level business
strategies;
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in communications with our board of directors concerning our
consolidated financial performance; and
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in certain of our compensation plans as a performance measure
for determining incentive compensation payments.
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In evaluating Adjusted EBITDA and Adjusted Net Income, you
should be aware that in the future we may incur expenses similar
to the adjustments in our presentation of Adjusted EBITDA. Our
presentation of Adjusted EBITDA and Adjusted Net Income should
not be construed as an inference that our future results will be
unaffected by unusual or non-recurring items. Adjusted EBITDA
and Adjusted Net Income are not measures defined in accordance
with GAAP and should not be construed as an alternative to
operating income, cash flows from operating activities or net
income (loss), as determined in accordance with GAAP. For
additional information regarding how we calculate Adjusted
EBITDA and Adjusted Net Income, please see Prospectus
Summary Summary Historical and Unaudited Pro Forma
Consolidated Financial Data.
On a pro forma basis, our Adjusted EBITDA and Adjusted Net
Income for the three months ended March 31, 2010 were
$28.7 million and $15.0 million, respectively. On a
pro forma basis, our Adjusted EBITDA and Adjusted Net Income for
the combined twelve-month period ended December 31, 2009
were $98.7 million and $33.7 million, respectively.
Our Adjusted EBITDA and Adjusted Net Income for the year ended
December 31, 2008 were $59.8 million and a loss of
$71.7 million, respectively. This improvement resulted from
the appreciation of the Korean won against the U.S. dollar as
described below, our restructuring efforts and improvements in
market conditions.
62
Factors Affecting
Our Results of Operations
Net Sales. We derive a majority of our
sales (net of sales returns and allowances) from three
reportable segments: Display Solutions, Power Solutions and
Semiconductor Manufacturing Services. Our product inventory is
primarily located in Korea and is available for drop shipment
globally. Outside of Korea, we maintain limited product
inventory, and our sales representatives generally relay orders
to our factories in Korea for fulfillment. We have strategically
located our sales and technical support offices near
concentrations of major customers. Our sales offices are located
in Hong Kong, Japan, Korea, Taiwan, China, the United Kingdom
and the United States. Our network of authorized agents and
distributors consists of agents in the United States and Europe
and distributors and agents in the Asia Pacific region. Our net
sales from All other consist principally of rental income and,
for 2007 and to a limited extent in 2008, semiconductor
processing services for one customer where we completed a
limited number of process steps, rather than the entire
production process, which we refer to as unit processing.
We recognize revenue when risk and reward of ownership passes to
the customer either upon shipment, upon product delivery at the
customers location or upon customer acceptance, depending
on the terms of the arrangement. For the three months ended
March 31, 2010 and the combined twelve-month period ended
December 31, 2009, we sold products to over 210 and 185
customers, respectively, and our net sales to our ten largest
customers represented 64% and 69% of our net sales for the
three months ended March 31, 2010 and the combined
twelve-month period ended December 31, 2009, respectively.
We have a combined production capacity of over 131,000
eight-inch equivalent semiconductor wafers per month. We believe
our large-scale, cost-effective fabrication facilities enable us
to rapidly adjust our production levels to meet shifts in demand
by our end customers.
Gross Profit. Our overall gross profit
generally fluctuates as a result of changes in overall sales
volumes and in the average selling prices of our products and
services. Other factors that influence our gross profit include
changes in product mix, the introduction of new products and
services and subsequent generations of existing products and
services, shifts in the utilization of our manufacturing
facilities and the yields achieved by our manufacturing
operations, changes in material, labor and other manufacturing
costs and variation in depreciation expense. Gross profit varies
by our operating segments. For both the three months ended
March 31, 2010 and the combined
twelve-month
period ended December 31, 2009, our Semiconductor
Manufacturing Services segment utilized approximately 60% of our
manufacturing capacity.
Average Selling Prices. Average selling
prices for our products tend to be highest at the time of
introduction of new products which utilize the latest technology
and tend to decrease over time as such products mature in the
market and are replaced by next generation products. We strive
to offset the impact of declining selling prices for existing
products through our product development activities and by
introducing new products that command selling prices above the
average selling price of our existing products. In addition, we
seek to manage our inventories and manufacturing capacity so as
to preclude losses from product and productive capacity
obsolescence.
Material Costs. Our cost of sales
consists of costs of raw materials, such as silicon wafers,
chemicals, gases and tape, packaging supplies, equipment
maintenance and depreciation expenses. We use processes that
require specialized raw materials, such as silicon wafers, that
are generally available from a limited number of suppliers. If
demand increases or supplies decrease, the costs of our raw
materials could significantly increase.
Labor Costs. A significant portion of
our employees are located in Korea. Under Korean labor laws,
most employees and certain executive officers with one or more
years of service are entitled to severance benefits upon the
termination of their employment based on their length of service
and rate of pay. As of December 31, 2009, approximately 98%
of our employees were eligible for severance benefits. We have
in the past implemented temporary reductions in salaries to
manage through
63
downturns in the industry. We expect to and have reversed such
temporary reductions when business conditions improve.
Depreciation Expense. We periodically
evaluate the carrying values of long-lived assets, including
property, plant and equipment and intangible assets, as well as
the related depreciation periods. At March 31, 2010, we
depreciated our property, plant and equipment using the
straight-line method over the estimated useful lives of our
assets. Depreciation rates vary from
30-40 years
on buildings to five years for certain equipment and assets. Our
evaluation of carrying values is based on various analyses
including cash flow and profitability projections. If our
projections indicate that future undiscounted cash flows are not
sufficient to recover the carrying values of the related
long-lived assets, the carrying value of the assets is impaired
and will be reduced, with the reduction charged to expense so
that the carrying value is equal to fair value.
Selling Expenses. We sell our products
worldwide through a direct sales force as well as a network of
sales agents and representatives to OEMs, including major
branded customers and contract manufacturers, and indirectly
through distributors. Selling expenses consist primarily of the
personnel costs for the members of our direct sales force, a
network of sales representatives and other costs of
distribution. Personnel costs include base salary, benefits and
incentive compensation. As incentive compensation is tied to
various net sales goals, it will increase or decrease with net
sales.
General and Administrative
Expenses. General and administrative expenses
consist of the costs of various corporate operations, including
finance, legal, human resources and other administrative
functions. These expenses primarily consist of payroll-related
expenses, consulting and other professional fees and office
facility-related expenses. Historically, our selling, general
and administrative expenses have remained relatively constant as
a percentage of net sales, and we expect this trend to continue
in the future.
Research and Development. The rapid
technological change and product obsolescence that characterize
our industry require us to make continuous investments in
research and development. Product development time frames vary
but, in general, we incur research and development costs one to
two years before generating sales from the associated new
products. These expenses include personnel costs for members of
our engineering workforce, cost of photomasks, silicon wafers
and other non-recurring engineering charges related to product
design. Additionally, we develop base-line process technology
through experimentation and through the design and use of
characterization wafers that help achieve commercially feasible
yields for new products. The majority of research and
development expenses are for process development that serves as
a common technology platform for all of our product segments.
Consequently, we do not allocate these expenses to individual
segments. Although our research and development expenses
declined significantly from 2008 to 2009, we expect such
expenses to increase in 2010 and future periods and to remain a
relatively constant percentage of our net sales as we continue
to increase our investments in research and development to
develop additional products and expand our business.
Restructuring and Impairment
Charges. We evaluate the recoverability of
certain long-lived assets on a periodic basis or whenever events
or changes in circumstances indicate that the carrying value may
not be recoverable. In our efforts to improve our overall
profitability in future periods, we have closed or otherwise
impaired, and may in the future close or impair, facilities that
are underutilized and that are no longer aligned with our
long-term business goals. For example, in 2007 we closed our
five-inch fabrication facilities in Gumi, Korea and in 2008 we
discontinued our Imaging Solutions business segment.
Interest Expense, Net. Our interest
expense was incurred under the Predecessor Companys senior
secured credit facility, the Predecessor Companys second
priority senior secured notes and senior subordinated notes and
the Successor Companys new term loan under the Successor
Company. Our new term loan bore interest at six-month LIBOR plus
12%, and was minimally offset by
64
interest income on cash balances. In April 2010, we repaid our
new term loan with a portion of the proceeds from our sale of
$250 million in aggregate principal amount of 10.500%
senior notes due 2018. As a result of our reorganization, we
expect that our interest expense will decrease in amount and as
a percentage of net sales relative to historical periods.
However, as a result of our senior notes offering, our quarterly
interest expense will increase above that which was reported for
the two-month period ended December 31, 2009 and the three
months ended March 31, 2010 to approximately
$6.8 million per quarter.
Impact of Foreign Currency Exchange Rates on Reported
Results of Operations. Historically, a
portion of our revenues and greater than the majority of our
operating expenses and costs of sales have been denominated in
non-U.S. currencies,
principally the Korean won, and we expect that this will remain
true in the future. Because we report our results of operations
in U.S. dollars, changes in the exchange rate between the
Korean won and the U.S. dollar could materially impact our
reported results of operations and distort period to period
comparisons. In particular, because of the difference in the
amount of our consolidated revenues and expenses that are in
U.S. dollars relative to Korean won, depreciation in the
U.S. dollar relative to the Korean won could result in a
material increase in reported costs relative to revenues, and
therefore could cause our profit margins and operating income
(loss) from continuing operations to appear to decline
materially, particularly relative to prior periods. The converse
is true if the U.S. dollar were to appreciate relative to
the Korean won. As a result of such foreign currency
fluctuations, it could be more difficult to detect underlying
trends in our business and results of operations. In addition,
to the extent that fluctuations in currency exchange rates cause
our results of operations to differ from our expectations or the
expectations of our investors, the trading price of our stock
could be adversely affected.
For periods ending on or prior to October 25, 2009, we
converted our
non-U.S. revenues
and expenses into U.S. dollars based on cumulative average
exchange rates over the periods presented. Beginning on
October 25, 2009, we convert our
non-U.S. revenues
and expenses into U.S. dollars based on monthly average
exchange rates. The following table provides the cumulative
average exchange rates that we used to convert Korean won into
U.S. dollars for each of the periods ending on our prior to
October 25, 2009, as well as the monthly average exchange
rates used for the
two-month
period ended December 31, 2009 and for the three months
ended March 31, 2010:
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Period
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Rate
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Year ended December 31, 2007
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929:1
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Year ended December 31, 2008
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1,099:1
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Ten-month period ended October 25, 2009
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1,302:1
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Two-month period ended December 31, 2009
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November 2009
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1,172:1
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December 2009
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1,165:1
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Three months ended March 29, 2009
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1,417:1
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Three months ended March 31, 2010
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January 2010
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1,139:1
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February 2010
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1,157:1
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March 2010
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1,138:1
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As a result of the depreciation of the Korean won against the
U.S. dollar from 2007 to 2008 and from 2008 to 2009,
foreign currency fluctuations generally had a materially
beneficial impact on our reported profit margins and operating
income (loss) from continuing operations for such periods. In
contrast, as a result of the appreciation of the Korean won
against the U.S. dollar from the three months ended
March 29, 2009 to the three months ended March 31,
2010, foreign currency fluctuations had an unfavorable impact on
our reported profit margins and operating income (loss) from
continuing operations for the current year period. In order to
provide more detailed information regarding the impact of
foreign currency fluctuations on our results of operations, in
our discussion of period to period comparisons under the heading
Results of Operations, we have included information
65
regarding the impact of the year-to-year and quarter-to-quarter
change in the Korean won/U.S. dollar exchange rate. The
information, which is described below as the impact of the
depreciation or appreciation of the Korean won against the
U.S. dollar, measures the impact in the change in
applicable cumulative average exchange rate for the most recent
period discussed as compared to the applicable cumulative
average exchange rate during the prior period. For net sales
that were originally denominated in Korean won, we have compared
the applicable cumulative average exchange rate in effect for
the prior period against the applicable cumulative average
exchange rate for the period in which the sale took place on a
transaction-by-transaction basis. For cost of sales and other
expenses, we have compared the applicable cumulative average
exchange rate during the prior period to the applicable
cumulative average exchange rate during the current period and
applied that to the amount of our aggregate cost of sales and
other expenses for the period that were originally denominated
in Korean won. A substantial portion of the net sales recorded
at our Korean subsidiary are in U.S. dollars and are
converted into Korean won for reporting purposes at the
subsidiary level. Although this approach does not reflect the
fluctuations of the currency exchange rates for every
transaction on a
day-to-day
basis, we believe that it provides a useful indication of the
magnitude of the exchange rate impact for the periods presented.
From time to time, we may engage in exchange rate hedging
activities in an effort to mitigate the impact of exchange rate
fluctuations. For example, in January 2010 and May 2010 our
Korean subsidiary entered into foreign currency option and
forward contracts in order to mitigate a portion of the impact
of U.S. dollar-Korean won exchange rate fluctuations on our
operating results. The January 2010 option and forward contracts
require us to sell specified notional amounts in
U.S. dollars and provide us the option to sell specified
notional amounts in U.S. dollars during each month of 2010
commencing February 2010 to our counterparty, in each case, in
exchange for Korean won at specified fixed exchange rates. The
May 2010 option and forward contracts require us to sell
specified notional amounts in U.S. dollars and provide us
the option to sell specified notional amounts in
U.S. dollars during the months of January 2011 through June
2011 to our counterparty, in each case, in exchange for Korean
won at specified fixed exchange rates. Obligations under these
foreign currency option and forward contracts must be cash
collateralized if our exposure exceeds certain specified
thresholds. These option and forward contracts may be terminated
by the counterparty in a number of circumstances, including if
our long-term debt rating falls below B-/B3 or if our total cash
and cash equivalents is less than $30 million at the end of
a fiscal quarter. For further information regarding the
derivative financial instruments, see notes 7 and 19 to our
unaudited interim consolidated financial statements for the
three months ended March 31, 2010 elsewhere in this
prospectus.
Foreign Currency Gain or Loss. Foreign
currency translation gains or losses on transactions by us or
our subsidiaries in a currency other than our or our
subsidiaries functional currency are included in our
statements of operations as a component of other income
(expense). A substantial portion of this net foreign currency
gain or loss relates to non-cash translation gain or loss
related to the principal balance of intercompany borrowings at
our Korean subsidiary that are denominated in U.S. dollars.
This gain or loss results from fluctuations in the exchange rate
between the Korean won and U.S. dollar.
Income Taxes. We record our income
taxes in each of the tax jurisdictions in which we operate. This
process involves using an asset and liability approach whereby
deferred tax assets and liabilities are recorded for differences
in the financial reporting bases and tax bases of our assets and
liabilities. We exercise significant management judgment in
determining our provision for income taxes, deferred tax assets
and liabilities. We periodically evaluate our deferred tax
assets to ascertain whether it is more likely than not that the
deferred tax assets will be realized. Our income tax expense has
been low in absolute dollars and as a percentage of net sales
principally due to the availability of tax loss carry-forwards
and we expect such rate to remain low for at least the next few
years.
66
Our operations are subject to income and transaction taxes in
Korea and in multiple foreign jurisdictions. Significant
estimates and judgments are required in determining our
worldwide provision for income taxes. Some of these estimates
are based on interpretations of existing tax laws or
regulations. The ultimate amount of tax liability may be
uncertain as a result.
Capital Expenditures. We invest in
manufacturing equipment, software design tools and other
tangible and intangible assets for capacity expansion and
technology improvement. Capacity expansions and technology
improvements typically occur in anticipation of seasonal
increases in demand. We typically pay for capital expenditures
in partial installments with portions due on order, delivery and
final acceptance. Our capital expenditures include our payments
for the purchase of property, plant and equipment as well as
payments for the registration of intellectual property rights.
Inventories. We monitor our inventory
levels in light of product development changes and market
expectations. We may be required to take additional charges for
quantities in excess of demand, cost in excess of market value
and product age. Our analysis may take into consideration
historical usage, expected demand, anticipated sales price, new
product development schedules, the effect new products might
have on the sales of existing products, product age, customer
design activity, customer concentration and other factors. These
forecasts require us to estimate our ability to predict demand
for current and future products and compare those estimates with
our current inventory levels and inventory purchase commitments.
Our forecasts for our inventory may differ from actual inventory
use.
Principles of Consolidation. Our
consolidated financial statements include the accounts of our
company and our wholly-owned subsidiaries. All significant
intercompany transactions and balances are eliminated in
consolidation.
Segments. We operate in three segments:
Display Solutions, Power Solutions and Semiconductor
Manufacturing Services. Our Power Solutions segment began to
generate net sales in the second quarter of 2008. Net sales and
gross profit for the All other category primarily relate to
certain business activities that do not constitute operating or
reportable segments.
67
Results of
Operations
The following table sets forth, for the periods indicated,
certain information related to our operations, expressed in
U.S. dollars and as a percentage of our net sales:
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Successor
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Predecessor Company
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Company
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Ten-Month
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Three Months
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Two-Month
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Period
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Three Months
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Ended
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Period
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Ended
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Ended
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Years Ended
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March 31,
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Ended December 31,
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October 25,
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March 29,
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December 31,
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2010
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2009
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2009
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2009
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2008
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2007
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%of
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%of
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%of
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%of
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%of
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%of
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Amount
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net sales
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Amount
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net sales
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Amount
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net sales
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Amount
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net sales
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Amount
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net sales
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Amount
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net sales
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(In millions)
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Consolidated statements of operations data:
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Net sales
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$
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179.5
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100.0
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%
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$
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111.1
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100.0
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%
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$
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449.0
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100.0
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%
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$
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101.5
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100.0
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%
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$
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601.7
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100.0
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%
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$
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709.5
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100.0
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%
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Cost of sales
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130.1
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72.5
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90.4
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81.4
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311.1
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69.3
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80.6
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79.4
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445.3
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74.0
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578.9
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81.6
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Gross profit
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49.4
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27.5
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20.7
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18.6
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137.8
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30.7
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20.9
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20.6
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156.4
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26.0
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130.7
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18.4
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Selling, general and administrative expenses
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17.9
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10.0
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14.5
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13.1
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56.3
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12.5
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15.3
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15.1
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81.3
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13.5
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82.7
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11.7
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Research and development expenses
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20.5
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11.4
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14.7
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13.3
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56.1
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12.5
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17.0
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16.7
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89.5
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14.9
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90.8
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12.8
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Restructuring and impairment charges
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0.3
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0.2
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0.4
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0.1
|
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0.1
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0.1
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13.4
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2.2
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12.1
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1.7
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Operating income (loss) from continuing operations
|
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10.6
|
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5.9
|
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(8.6
|
)
|
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|
(7.7
|
)
|
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|
25.0
|
|
|
|
5.6
|
|
|
|
(11.4
|
)
|
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|
(11.3
|
)
|
|
|
(27.7
|
)
|
|
|
(4.6
|
)
|
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|
(54.9
|
)
|
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|
(7.7
|
)
|
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|
|
Interest expense, net
|
|
|
(2.0
|
)
|
|
|
(1.1
|
)
|
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|
|
(1.3
|
)
|
|
|
(1.1
|
)
|
|
|
|
(31.2
|
)
|
|
|
(6.9
|
)
|
|
|
(14.7
|
)
|
|
|
(14.4
|
)
|
|
|
(76.1
|
)
|
|
|
(12.7
|
)
|
|
|
(60.3
|
)
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
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|
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|
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|
|
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|
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|
|
|
|
|
|
Foreign currency gain (loss), net
|
|
|
21.6
|
|
|
|
12.0
|
|
|
|
|
9.3
|
|
|
|
8.4
|
|
|
|
|
43.4
|
|
|
|
9.7
|
|
|
|
(40.2
|
)
|
|
|
(39.6
|
)
|
|
|
(210.4
|
)
|
|
|
(35.0
|
)
|
|
|
(4.7
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804.6
|
|
|
|
179.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
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|
|
Others
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
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