sv4
As filed with
the Securities and Exchange Commission on August 4,
2010
Registration
No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF
1933
MAGNACHIP SEMICONDUCTOR
S.A.
(Exact name of Registrant as
specified in its charter)
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Luxembourg
(State or other jurisdiction of
incorporation or organization)
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3674
(Primary Standard Industrial
Classification Code Number)
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Not Applicable
(I.R.S. Employer
Identification No.)
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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)
MAGNACHIP SEMICONDUCTOR FINANCE
COMPANY
(Exact name of Registrant as
specified in its charter)
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Delaware
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3674
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84-1664144
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(State or other jurisdiction of
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(Primary Standard Industrial
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(I.R.S. Employer
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incorporation or organization)
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Classification Code Number)
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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)
See Table of Additional
Registrants Below
Copies to:
Micheal J. Reagan
Khoa D. Do
W. Stuart Ogg
Jones Day
1755 Embarcadero Road
Palo Alto, California
94303
Telephone: (650)
739-3939
Fax: (650) 739-3900
Approximate date of commencement of proposed sale of the
securities to the public: As soon as practicable
after this registration statement becomes effective.
If the securities being registered on this Form are to be
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, 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(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)
If applicable, place an X in the box to designate the
appropriate rule provision relied upon in conducting this
transaction:
Exchange Act
Rule 13e-4(i)
(Cross-Border Issuer Tender Offer)
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Exchange Act
Rule 14d-1(d)
(Cross-Border Third-Party Tender Offer)
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CALCULATION OF
REGISTRATION FEE
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Proposed
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Maximum Offering
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Aggregate
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Registration
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Securities to be Registered
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Registered
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Price per Unit(1)
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Offering Price(1)
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Fee
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10.500% Senior Notes due 2018
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$250,000,000
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100%
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$250,000,000
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$17,825
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Guarantees of 10.500% Senior Notes due 2018(2)
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N/A
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N/A
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N/A
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N/A
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(1)
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Estimated solely for purposes of calculating the registration
fee pursuant to Rule 457(f) under the Securities Act of
1933, as amended (the Securities Act).
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(2)
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Represents the guarantees of the 10.500% Senior Notes due
2018, to be issued by the additional registrants. Pursuant to
Rule 457(n) under the Securities Act, no additional
registration fee is being paid in respect of the guarantees.
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The Registrants hereby amend this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrants 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, as amended, or until the
Registration Statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
Table of
Additional Registrants
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State or Other Jurisdiction of
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Incorporation or
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I.R.S. Employer Identification
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Exact Name of Additional Registrants
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Organization
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Number
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MagnaChip Semiconductor LLC
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Delaware
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83-0406195
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MagnaChip Semiconductor B.V.
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The Netherlands
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Not Applicable
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MagnaChip Semiconductor, Inc.
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California
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77-0478632
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MagnaChip Semiconductor SA Holdings LLC
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Delaware
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Not Applicable
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MagnaChip Semiconductor Limited
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United Kingdom
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98-0439386
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MagnaChip Semiconductor Limited
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Taiwan
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98-0439388
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MagnaChip Semiconductor Limited
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Hong Kong
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98-0439389
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MagnaChip Semiconductor Inc.
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Japan
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Not Applicable
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MagnaChip Semiconductor Holding Company Limited
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British Virgin Islands
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Not Applicable
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The principal executive office address for each of the
additional registrants is
c/o MagnaChip
Semiconductor S.A., 74, rue de Merl, B.P. 709 L-2146 Luxembourg
R.C.S., Luxembourg, B97483, telephone
(352) 45-62-62.
The primary standard industrial classification code number for
each of the additional registrants is 3674.
The address, including zip code, and telephone number, including
area code, of each of the additional registrants is
c/o MagnaChip
Semiconductor, LLC, 20400 Stevens Creek Boulevard,
Suite 370, Cupertino, CA 95014, telephone
(408) 625-5999,
fax
(408) 625-5990
and the name of each of the additional registrants agent
for service is John McFarland, Senior Vice President, General
Counsel and Secretary, MagnaChip Semiconductor LLC.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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Subject to Completion, Dated
August 4, 2010
PROSPECTUS
MagnaChip Semiconductor
S.A.
MagnaChip Semiconductor Finance
Company
Offer to Exchange Up
To
$250,000,000
10.500% Senior Notes due
2018 and related Guarantees
which have been registered
under the Securities Act of 1933
for any and all outstanding
10.500% Senior Notes due 2018 and related
Guarantees
We are offering, upon the terms and subject to the conditions
set forth in this prospectus and the accompanying letter of
transmittal, to exchange up to $250,000,000 aggregate principal
amount of our new 10.500% Senior Notes due 2018 that we
have registered under the Securities Act of 1933, as amended,
for an equal principal amount of our outstanding unregistered
10.500% Senior Notes due 2018. We refer to the new notes
you will receive in this exchange offer as the new
notes, and we refer to the old notes you will tender in
this exchange offer as the old notes. The new notes
will represent the same debt as the old notes, and we will issue
the new notes under the same indenture.
The exchange offer expires at 5:00 p.m., New York City
time,
on ,
2010, unless extended by us.
Terms of the
Exchange Offer
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We will exchange all old notes that are validly tendered and not
validly withdrawn prior to the expiration of the exchange offer.
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You may withdraw tendered old notes at any time prior to the
expiration of the exchange offer.
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You are required to make the representations described on
pages 9 and 213 to us.
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The terms of the new notes will be substantially identical to
the terms of the old notes (including principal amount, interest
rate, maturity and redemption rights), except that the new notes
are registered under the Securities Act and will bear a separate
CUSIP number, and the transfer restrictions, registration rights
and related special interest terms applicable to the old notes
will not apply to the new notes.
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We will not receive any proceeds from the exchange offer.
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There is no existing market for the new notes to be issued, and
we do not intend to apply for their listing or quotation on any
securities exchange or market.
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See Risk Factors beginning on page 25 for
a discussion of risks that should be considered by holders prior
to tendering their old notes.
Neither the Securities and Exchange Commission nor any state
securities commission nor any other regulatory body has approved
or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The date of this prospectus
is ,
2010.
TABLE OF
CONTENTS
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 securities 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.
Each broker-dealer that receives new notes for its own account
pursuant to the exchange offer must acknowledge that it will
deliver a prospectus in connection with any resale of new notes.
The letter of transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an underwriter within the meaning
of the Securities Act of 1933, as amended, which we refer to as
the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer
in connection with resales of new notes received in exchange for
old notes where the old notes were acquired by the broker-dealer
as a result of market-making activities or other trading
activities. We have agreed that, for a period of 180 days
after the consummation of the exchange offer, we will make this
prospectus available to any broker-dealer for use in connection
with any such resale. See Plan of Distribution.
This prospectus is part of a registration statement on
Form S-4 filed with the Securities and Exchange Commission,
or the SEC, under the Securities Act and does not contain all of
the information contained in the registration statement. This
information is available without charge upon written or oral
request. See Where you can find more information. To
obtain this information in a timely fashion, you must request
such information no later than five business days
before ,
2010, which is the date on which the exchange offer expires
(unless we extend the exchange offer as described herein).
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 selected information from this
prospectus. The following summary is qualified in its entirety
by the information contained elsewhere in this prospectus. This
summary is not complete and may not contain all of the
information that you should consider before exchanging your old
notes for new notes. You should read the 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.
In this prospectus, unless the context otherwise requires:
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MagnaChip, we, us,
our and Our Company refer collectively
to MagnaChip Semiconductor LLC, the parent company of our
consolidated group, MagnaChip Semiconductor S.A. and MagnaChip
Semiconductor Finance Company, the co-issuers of the old notes
and the new notes being offered hereby, and their respective
subsidiaries on a consolidated basis, and such terms refer
collectively to MagnaChip Semiconductor LLC, the parent company
of our consolidated group, MagnaChip Semiconductor S.A. and
MagnaChip Semiconductor Finance Company, and their respective
subsidiaries on a consolidated basis.
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MagnaChip Corporation refers to MagnaChip
Semiconductor Corporation (the expected corporate successor to
MagnaChip Semiconductor LLC pursuant to the corporate conversion
described below that will occur if and when MagnaChip
Semiconductor LLC consummates an initial public offering of its
equity securities).
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MagnaChip Korea refers to MagnaChip
Semiconductor, Ltd., our principal operating subsidiary.
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Korea refers to the Republic of Korea or South
Korea.
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We filed a registration statement on
Form S-1
with the SEC on March 15, 2010, as amended, with respect to
the initial public offering of the common stock of MagnaChip
Corporation, which we refer to as the MagnaChip Corporation IPO.
If and when we decide to proceed with the MagnaChip Corporation
IPO, prior to the effectiveness of the registration statement
filed with the SEC for the MagnaChip Corporation IPO, we will
complete a number of transactions pursuant to which MagnaChip
Corporation will succeed to the business of MagnaChip
Semiconductor LLC, the members of MagnaChip Semiconductor LLC
will become stockholders of MagnaChip Semiconductor Corporation
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 MagnaChip Corporations common stock. In this
prospectus, we refer to such transactions as the corporate
conversion.
Neither of the co-issuers has any material operations and the
financial statements and other financial information, as well as
Managements Discussion and Analysis of Financial Condition
and Results of Operations, contained in this prospectus relate
to the consolidated financial statements and other consolidated
information of MagnaChip. For this reason, the description of
our business operations elsewhere relates to the operations of
our consolidated group.
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 2,620 novel
registered patents and 950 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-
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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.
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 59 for an explanation regarding our pro forma
presentation and Prospectus Summary Summary
Historical and Unaudited Pro Forma Consolidated Financial
Data, beginning on page 16 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
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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 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.
On June 30, 2010, we announced that we elected not to
proceed with our planned MagnaChip Corporation IPO and corporate
conversion at such time due to adverse market conditions. We
intend to complete the MagnaChip Corporation IPO as soon as
market conditions permit us to do so. We, however, cannot assure
you when or if we will be able to complete the MagnaChip
Corporation IPO, even if market conditions improve. If we are
unable to complete the MagnaChip Corporation IPO, it could
adversely impact the value of the notes.
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 25 of this prospectus before deciding whether to
exchange your old notes in the exchange offer.
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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; and
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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.
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Corporate
Information
MagnaChip Semiconductor LLC is a Delaware limited liability
company and parent guarantor of the notes. MagnaChip
Semiconductor LLC functions as a holding and financing company
for other MagnaChip entities. On a stand-alone basis, MagnaChip
Semiconductor LLC does not have any independent operations.
5
If and when we complete the MagnaChip Corporation IPO and prior
to the effectiveness of the registration statement filed in
connection with the MagnaChip Corporation IPO, 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 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.
MagnaChip Semiconductor S.A., our Luxembourg subsidiary and one
of the two co-issuers of the notes, is a Luxembourg public
limited liability company (société anonyme). It
functions as a financing company. On a stand-alone basis,
MagnaChip Semiconductor S.A. does not have any independent
operations.
MagnaChip Semiconductor Finance Company, a wholly-owned
subsidiary of MagnaChip Semiconductor S.A. and one of the two
co-issuers of the notes, is a Delaware corporation. On a
stand-alone basis, MagnaChip Semiconductor Finance Company does
not have any independent operations.
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 B97483, 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.
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.
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 and warrants to purchase
15 million common units 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 old 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 and if and when we
complete the MagnaChip Corporation IPO, Avenue will have the
right to appoint 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
Organizational
Structure
The following chart shows a summary of our organizational
structure.
MagnaChip Semiconductor S. A. and MagnaChip Semiconductor
Finance Company are the co-issuer of the old notes and the new
notes offered hereby. MagnaChip Semiconductor LLC and each of
its subsidiaries (other than MagnaChip Korea, the MagnaChip
China Subsidiaries and certain Immaterial Subsidiaries (each as
defined under the caption Description of New
Notes)), guarantee the notes.
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(1) |
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Assuming completion of the corporate conversion, MagnaChip
Corporation will succeed to the business of MagnaChip
Semiconductor LLC. |
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(2) |
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Does not guarantee the notes offered hereby. |
7
Summary of the
Exchange Offer
On April 9, 2010, we completed the private offering of
$250 million aggregate principal amount of
10.500% Senior Notes due 2018, which we refer to in this
prospectus as the old notes. We entered into an
exchange and registration rights agreement, which we refer to in
this prospectus as the notes registration rights
agreement, with the initial purchasers of the old notes in
which we agreed to deliver to you this prospectus and to use all
commercially reasonable efforts to complete an exchange offer
within the time period specified in the notes registration
rights agreement. Below is a summary of the exchange offer. For
a more detailed description of the exchange offer, see
Exchange offer.
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The Exchange Offer |
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We are offering to exchange up to $250,000,000 aggregate
principal amount of 10.500% Senior Notes due 2018, which
have been registered under the Securities Act and which we refer
to as the new notes, for our outstanding,
unregistered 10.500% Senior Notes due 2018, which we issued
on April 9, 2010 and which we refer to as the old
notes, in denominations of $2,000 and integral multiples
of $1,000 in excess thereof. Unless we specify otherwise or the
context indicates otherwise, we refer to the new notes and the
old notes together as the notes. |
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The terms of the new notes will be substantially identical to
the terms of the old notes (including principal amount, interest
rate, maturity and redemption rights), except that the new notes
are registered under the Securities Act and will bear a separate
CUSIP number, and the transfer restrictions, registration rights
and related special interest terms applicable to the old notes
will not apply to the new notes. The old notes may be exchanged
only in denominations of $2,000 and integral multiples of
$1,000. We intend by the issuance of the new notes to satisfy
our obligations under the notes registration rights agreement. |
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Expiration of the Exchange Offer; Acceptance and Issuance of New
Notes |
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The exchange offer will expire at 5:00 p.m., New York City
time, on , 2010, or such later date and time to which we may
extend it in our sole discretion. Subject to the conditions
stated in Exchange offer Terms of the Exchange
Offer Conditions to the Exchange Offer, we
will accept for exchange any and all outstanding old notes that
are validly tendered and not validly withdrawn before the
expiration of the exchange offer. The new notes will be
delivered promptly after the expiration of the exchange offer.
Any old notes not accepted for exchange for any reason will be
returned without expense to you promptly after the expiration or
termination of the exchange offer. |
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Withdrawal Rights |
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You may withdraw your tender of old notes in the exchange offer
at any time before the expiration of the exchange offer. |
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Conditions to the Exchange Offer |
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The exchange offer is not conditioned upon any minimum aggregate
principal amount of old notes being tendered for exchange. The
exchange offer is subject to customary conditions, which we may
waive. Please read Exchange offer Terms of the
Exchange Offer Conditions to the Exchange
Offer for more information regarding the conditions to the
exchange offer. |
8
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Procedures for Tendering Notes |
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To tender old notes held in book-entry form through the
Depository Trust Company, or DTC, you must transfer your
old notes into the exchange agents account in accordance
with DTCs Automated Tender Offer Program, or ATOP, system.
In lieu of delivering a letter of transmittal to the exchange
agent, a computer-generated message, in which the holder of the
old notes acknowledges and agrees to be bound by the terms of
the letter of transmittal (an agents message),
must be transmitted by DTC on behalf of a holder of old notes
and received by the exchange agent before 5:00 p.m., New
York City time, on the expiration date. In all other cases, a
letter of transmittal must be manually executed and received by
the exchange agent before 5:00 p.m., New York City time, on
the expiration date. By signing, or agreeing to be bound by, the
letter of transmittal, you will represent to us that, among
other things: |
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you are not our affiliate as defined in
Rule 405 of the Securities Act, or if you are such an
affiliate, you will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent
applicable;
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you are not engaged in and do not intend to engage
in, and have no arrangement or understanding with any person to
participate in, a distribution of the new notes;
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you are acquiring the new notes in your ordinary
course of business;
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if you are a broker-dealer that holds old notes that
were acquired for your own account as a result of market-making
activities or other trading activities (other than old notes
acquired directly from us or our affiliates), you will deliver a
prospectus meeting the requirements of the Securities Act in
connection with any resales of the new notes;
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if you are a broker-dealer, you did not purchase the
old notes to be exchanged in the exchange offer from us or our
affiliates;
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you are not acting on behalf of any person who could
not truthfully and completely make the representations contained
in the foregoing clauses.
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Special Procedures for Beneficial Owners |
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If you are a beneficial owner whose old notes are registered in
the name of a broker, dealer, commercial bank, trust company or
other nominee, and you want to tender old notes in the exchange
offer, you should contact the registered holder promptly and
instruct the registered holder to tender on your behalf. If you
wish to tender on your own behalf, you must, before completing
and executing the letter of transmittal and delivering your old
notes, either make appropriate arrangements to register
ownership of the old notes in your name or obtain a properly
completed bond power from the registered holder. |
9
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Guaranteed Delivery Procedures |
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If you wish to tender your old notes, and time will not permit
your required documents to reach the exchange agent by the
expiration date, or the procedure for book-entry transfer cannot
be completed on time, you may tender your old notes under the
procedures described in Exchange offer
Guaranteed Delivery Procedures. |
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Failure to Exchange Your Old Notes |
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All untendered old notes will remain subject to the restrictions
on transfer provided for in the old notes and in the indenture.
Generally, the old notes that are not exchanged for new notes in
the exchange offer will remain restricted securities, and may
not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state
securities laws. Following the exchange offer, we will have no
obligation to register outstanding old notes under the
Securities Act or to pay contingent increases in interest based
on our original registration obligation, except in the limited
circumstances provided under the notes registration rights
agreement. |
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Resales |
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Based on interpretations by the staff of the Securities and
Exchange Commission, or SEC, in no action letters issued to
third parties, we believe that new notes issued in exchange for
old notes in the exchange offer may be offered for resale,
resold or otherwise transferred by you after the exchange offer
without further compliance with the registration and prospectus
delivery requirements of the Securities Act (subject to certain
representations required to be made by each holder of old notes,
as set forth under Exchange Offer Procedures
for Tendering), unless you are a broker-dealer receiving
securities for your own account, so long as: |
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you are not one of our affiliates, which
is defined in Rule 405 of the Securities Act;
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you acquire the new notes in the ordinary course of
your business;
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you do not have any arrangement or understanding
with any person to participate in the distribution of the new
notes; and
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you are not engaged in, and do not intend to engage
in, a distribution of the new notes.
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If you are our affiliate, or you are engaged in,
intend to engage in or have any arrangement or understanding
with respect to, the distribution of new notes acquired in the
exchange offer, you (1) should not rely on our
interpretations of the position of the SECs staff and
(2) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with
any resale transaction.
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If you are a broker-dealer and receive new notes for your own
account in the exchange offer: |
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you must represent that you do not have any
arrangement with us or any of our affiliates to distribute the
new notes;
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you must acknowledge that you will deliver a
prospectus in connection with any resale of the new notes you
receive from us in the exchange offer (the letter of transmittal
states that by so acknowledging and by delivering a prospectus,
you will not be deemed to admit that you are an
underwriter within the meaning of the Securities
Act); and
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you may use this prospectus, as it may be amended or
supplemented from time to time, in connection with the resale of
new notes received in exchange for old notes acquired by you as
a result of market making or other trading activities.
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For a period of up to 180 days after the
consummation of the exchange offer, we will make this prospectus
available to any broker-dealer for use in connection with any
resale described above. See Plan of distribution.
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Federal Income Tax Considerations |
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The exchange of notes pursuant to the exchange offer should not
be a taxable event for U.S. federal income tax purposes. See
Certain United States Federal Income Tax
Considerations. |
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Use of Proceeds |
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We will not receive any proceeds from the issuance of the new
notes in the exchange offer. |
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Exchange Agent |
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Wilmington Trust FSB is the exchange agent for the exchange
offer. The address and telephone number of the exchange agent
are set forth in Exchange Offer Exchange
Agent. |
11
Summary of the
Terms of New Notes
The exchange offer relates to the exchange of up to $250,000,000
in aggregate principal amount of old notes for an equal
aggregate principal amount of new notes. The terms of the new
notes will be substantially identical to the terms of the old
notes, except the new notes are registered under the Securities
Act, the new notes will bear a separate CUSIP number, and the
transfer restrictions, registration rights and related
additional interest terms applicable to the old notes will not
apply to the new notes. The new notes will evidence the same
indebtedness as the old notes which they will replace. Both the
old notes and the new notes are governed by the same indenture.
The following summary contains some basic information about the
new notes. For a more complete description of the new notes, see
Description of New Notes.
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Issuers |
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MagnaChip Semiconductor S.A., a société anonyme with a
registered office at 74, rue de Merl, B.P. 709 L-2146 Luxembourg
registered with the register of commerce and companies of
Luxembourg under number B97483, and MagnaChip Semiconductor
Finance Company. |
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Notes Offered |
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$250 million in aggregate principal amount of
10.500% Senior Notes due 2018. |
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Maturity |
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April 15, 2018. |
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Interest Rate |
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Interest on the notes will accrue at a rate of 10.500% per
annum. Interest will be computed on the basis of a
360-day year
comprised of twelve
30-day
months. |
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Interest Payment Dates |
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Interest on the notes will be payable semi-annually on April 15
and October 15 of each year, beginning on October 15, 2010. |
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Guarantees |
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The notes will be fully and unconditionally guaranteed by
MagnaChip Semiconductor LLC and each of its current and future
subsidiaries (other than certain Immaterial Subsidiaries,
MagnaChip Korea and the MagnaChip China Subsidiaries).
See Description of New Notes The Note
Guarantees. |
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Ranking |
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The notes will be the issuers general unsecured
obligations. The notes will rank pari passu in right of payment
with all of the issuers existing and future unsecured
indebtedness and other liabilities (including trade payables)
and senior in right of payment to all future debt of the issuers
that is expressly subordinated in right of payment to the notes
(if any). |
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The notes will be effectively subordinated in right of payment
to all borrowings under future secured credit facilities (to the
extent of the value of the collateral securing those facilities)
and to all indebtedness and other liabilities (including trade
payables) of any non-guarantor subsidiaries. Our non-guarantor
subsidiaries generated approximately 69.2% of our aggregate
consolidated revenues for the ten-month period ended
October 25, 2009 and the two-month period ended
December 31, 2009, and as of December 31, 2009 held
approximately 87.3% of our consolidated assets and had
$166.2 million in total outstanding indebtedness and other
liabilities, excluding intercompany liabilities (of which
$61.8 million related to a guarantee by MagnaChip Korea of
the then-existing senior secured credit facility, which was
repaid |
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with a portion of the net proceeds from the offering of the old
notes). |
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The note guarantees will be the guarantors general
unsecured obligations. Each guarantee will be effectively
subordinated in right of payment to all future secured debt of
the guarantor, will be pari passu in right of payment with all
existing and future unsecured indebtedness and other liabilities
(including trade payables) of the guarantor and senior in right
of payment to any future subordinated indebtedness of the
guarantor (if any). |
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Optional Redemption |
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On or after April 15, 2014, we may on one or more occasions
redeem some or all of the notes at any time at the redemption
prices set forth under Description of New
Notes Optional Redemption, plus accrued and
unpaid interest and special interest, if any, to the applicable
redemption date. |
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In addition, at any time prior to April 15, 2013, we may on
one or more occasions redeem up to 35% of the aggregate
principal amount of the notes with the net cash proceeds of
certain qualified equity offerings, at a redemption price equal
to 110.500% of the principal amount of the notes to be redeemed
plus accrued and unpaid interest and special interest, if any,
to the redemption date. |
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Also, at any time prior to April 15, 2014, we may, on one
or more occasions, redeem some or all of the notes at a
redemption price equal to 100% of the principal amount of the
notes redeemed, plus accrued and unpaid interest and special
interest, if any, to the redemption date and a
make-whole premium. |
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See Description of New Notes Optional
Redemption. |
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Additional Amounts; Tax Redemption |
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Payments on the notes will be made without withholding or
deduction for any current or future taxes, unless required by
law. If withholding is required, we will pay such additional
amounts as may be necessary in order that the net amounts
received by holders of the notes will equal the amounts that
would have been received if taxes had not been withheld, subject
to the limitations set forth under Description of New
Notes Additional Amounts. |
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We may redeem the notes in whole but not in part, at our
discretion, at a redemption price equal to the principal amount
of the notes outstanding plus accrued and unpaid interest,
special interest and additional amounts due, if any, to the
redemption date, if we are or would be required to pay any such
additional amounts as a result of specified changes in laws,
treaties, regulations or rulings, or specified changes in
application, administration or interpretation of such laws,
treaties, regulations or rulings, subject to certain
limitations. See Description of New Notes
Redemption Upon Changes in Withholding Taxes. |
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Change of Control Offer |
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If we experience certain change of control events, we must offer
to repurchase the notes at 101% of their principal amount, plus
accrued and unpaid interest and special interest, if any, to the
applicable repurchase date. See Description of New
Notes Repurchase at the Option of
Holders Change of Control. |
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Asset Sale Offer |
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Under certain circumstances, if we sell assets and do not use
the proceeds from the sale as specified in the indenture, we
must apply the proceeds therefrom to an offer to repurchase,
prepay or redeem the notes at 100% of their principal amount,
plus accrued and unpaid interest and special interest, if any,
to the applicable repurchase date. See Description of New
Notes Repurchase at the Option of
Holders Asset Sales. |
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Restrictive Covenants |
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The notes will be issued under an indenture containing covenants
that, among other things, will restrict the ability of MagnaChip
Semiconductor LLC and its restricted subsidiaries (including the
issuers) to: |
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pay dividends, redeem units, make payments with
respect to subordinated indebtedness, or make other restricted
payments;
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incur additional indebtedness or issue preferred
units;
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create liens;
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make certain investments;
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consolidate, merge or dispose of all or
substantially all of our assets, taken as a whole;
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sell or otherwise transfer or dispose of assets,
including equity interests of subsidiaries;
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enter into sale-leaseback transactions;
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enter into transactions with our affiliates; and
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designate our subsidiaries as unrestricted
subsidiaries.
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These covenants are subject to a number of important exceptions
and qualifications. See Description of New
Notes Certain Covenants. Certain of these
restrictive covenants will terminate if the notes are rated
investment-grade. |
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Risk Factors |
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See Risk Factors for a description of certain risks
you should consider before deciding to tender your old notes in
the exchange offer. |
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Ratio of Earnings to Fixed Charges |
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The following table sets forth our ratio of earnings to fixed
charges for each of the periods indicated: |
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Successor
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Predecessor
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Three Months
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Two- Month
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Ten- Month
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Three Months
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Ended
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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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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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2006
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2005
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10.2
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21.2
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14
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Where a dash appears, our earnings were negative and were
insufficient to cover fixed charges during the period. Our
deficiencies to cover fixed charges in each period presented
were as follows: |
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Successor
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Predecessor
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Two- Month
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Three Months
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Period Ended
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Ended
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December 31,
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March 29,
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Years Ended December 31,
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2009
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2009
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2008
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2007
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2006
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2005
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(In millions)
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Deficiencies
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$
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0.5
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$
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69.6
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$
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327.5
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$
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132.0
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$
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78.8
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$
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119.2
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|
See Ratio of Earnings to Fixed Charges for
additional information. |
|
No Established Trading Market |
|
There is no established trading market for the new notes. The
new notes are not listed on any securities exchange or on any
automated dealer quotation system. We cannot assure you that an
active or liquid trading market for the new notes will develop.
If an active or liquid trading market for the new notes does not
develop, the market price and liquidity of the new notes may be
adversely affected. |
15
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 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
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 and the issuance of $250 million old
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 and the issuance of $250 million old 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.
16
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Pro Forma(1)
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Historical
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Successor
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Predecessor
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Three
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Three
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Three
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Months
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Months
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Two- Month
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Ten- Month
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Months
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Ended
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Year Ended
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Ended
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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*
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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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(In millions, except per common unit data)
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Statements of Operations Data:
|
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|
|
|
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|
|
|
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|
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|
|
|
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Net sales
|
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$
|
179.5
|
|
|
$
|
560.1
|
|
|
$
|
179.5
|
|
|
$
|
111.1
|
|
|
|
$
|
449.0
|
|
|
$
|
101.5
|
|
|
$
|
601.7
|
|
|
$
|
709.5
|
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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
|
|
|
|
|
|
|
|
|
|
|
|
|
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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
|
|
|
|
|
|
$
|
46.6
|
|
|
$
|
31.1
|
|
|
$
|
(2.5
|
)
|
|
|
$
|
828.2
|
|
|
$
|
(72.3
|
)
|
|
$
|
(339.1
|
)
|
|
$
|
(140.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common unit data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations per common
unit Basic and diluted
|
|
$
|
0.09
|
|
|
$
|
0.16
|
|
|
$
|
0.10
|
|
|
$
|
(0.01
|
)
|
|
|
$
|
15.65
|
|
|
$
|
(1.37
|
)
|
|
$
|
(6.43
|
)
|
|
$
|
(2.69
|
)
|
Weighted average number of common units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
302.444
|
|
|
|
300.158
|
|
|
|
302.444
|
|
|
|
300.863
|
|
|
|
|
52.923
|
|
|
|
52.923
|
|
|
|
52.769
|
|
|
|
52.297
|
|
Diluted
|
|
|
307.536
|
|
|
|
300.166
|
|
|
|
307.536
|
|
|
|
300.863
|
|
|
|
|
52.923
|
|
|
|
52.923
|
|
|
|
52.769
|
|
|
|
52.297
|
|
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(2)
|
|
|
246.7
|
|
|
|
|
|
|
|
61.6
|
|
|
|
61.8
|
|
|
|
|
|
|
|
|
845.0
|
|
|
|
845.0
|
|
|
|
830.0
|
|
Long-term obligations(3)
|
|
|
247.0
|
|
|
|
|
|
|
|
61.3
|
|
|
|
61.5
|
|
|
|
|
|
|
|
|
146.5
|
|
|
|
143.2
|
|
|
|
879.4
|
|
Total unitholders equity (deficit)
|
|
|
100.5
|
|
|
|
|
|
|
|
231.4
|
|
|
|
215.7
|
|
|
|
|
|
|
|
|
(835.1
|
)
|
|
|
(787.8
|
)
|
|
|
(477.5
|
)
|
Supplemental Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(4)
|
|
$
|
28.7
|
|
|
$
|
98.7
|
|
|
$
|
28.7
|
|
|
$
|
22.1
|
|
|
|
$
|
76.6
|
|
|
$
|
2.3
|
|
|
$
|
59.8
|
|
|
$
|
111.2
|
|
Adjusted Net Income (Loss)(5)
|
|
|
15.0
|
|
|
|
33.7
|
|
|
|
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. |
|
|
|
(1) |
|
Gives effect to the reorganization proceedings and related
events and the issuance of $250 million old 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) |
|
Total indebtedness is calculated as long and short-term
borrowings, including the current portion of long-term
borrowings. |
|
(3) |
|
Long-term obligations include long-term borrowings, capital
leases and redeemable convertible preferred units. |
17
|
|
|
(4) |
|
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 when and if 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.
|
18
|
|
|
|
|
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
|
|
|
|
Three
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
Months
|
|
|
|
Months
|
|
Two- Month
|
|
|
Ten- Month
|
|
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 |
19
|
|
|
|
|
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
have incurred similar costs in connection with the MagnaChip
Corporation IPO. |
|
(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 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;
|
20
|
|
|
|
|
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.
|
|
|
(5) |
|
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 when and if 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).
21
The following table summarizes the adjustments to net income
(loss) that we make in order to calculate Adjusted Net Income
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Historical
|
|
|
|
Three
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
22
|
|
|
(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
have incurred similar costs in connection with the MagnaChip
Corporation IPO. |
|
(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;
|
23
|
|
|
|
|
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.
24
RISK
FACTORS
You should carefully consider the risk factors set forth
below as well as the other information contained in this
prospectus before deciding whether to exchange your old notes in
the exchange offer. The risks described below are not the only
risks facing us. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial
may also materially and adversely affect our business
operations. Any of the following risks could materially
adversely affect our business, financial condition or results of
operations. In such case, there could be a material adverse
effect on our ability to satisfy our obligations under the new
notes and you may lose all or part of your original
investment.
Risks Related to
the Exchange Offer
Failure to
Tender Your Old Notes for New Notes could Limit Your Ability to
Resell the Old Notes.
The old notes were not registered under the Securities Act or
under the securities laws of any state and may not be resold,
offered for resale or otherwise transferred unless they are
subsequently registered or resold under an exemption from the
registration requirements of the Securities Act and applicable
state securities laws. If you do not exchange your old notes for
new notes under the exchange offer, you will not be able to
resell, offer to resell or otherwise transfer the old notes
unless they are registered under the Securities Act and
applicable state securities laws or unless you resell them,
offer to resell or otherwise transfer them under an exemption
from, or in a transaction not subject to, the registration
requirements. In addition, we will no longer be under an
obligation to register the old notes under the Securities Act
except in the limited circumstances provided under the notes
registration rights agreement. To the extent that old notes are
tendered for exchange and accepted in the exchange offer, the
trading market for the untendered and tendered but unaccepted
old notes could be adversely affected.
There is no
Public Trading Market for the New Notes and an Active Trading
Market may not Develop for the New Notes.
The new notes are new securities for which there is no
established trading market. We do not intend to apply for
listing or quotation of the notes on any securities exchange or
stock market. We have been advised by Goldman, Sachs &
Co., Barclays Capital Inc., Deutsche Bank Securities Inc.,
Morgan Stanley & Co. Incorporated, Citigroup Global
Markets Inc., Credit Suisse Securities (USA) LLC and UBS
Securities LLC, which acted as initial purchasers in connection
with the offer and sale of the old notes, that certain of the
initial purchasers intend to make a market in the new notes but
are not obligated to do so and may discontinue market making at
any time without notice. No assurance can be given as to the
liquidity of the trading market for the new notes. In addition,
any liquidity of the trading market in the new notes, and the
market price quoted for the new notes, may be adversely affected
by changes in the overall market for high yield securities and
by changes in our financial performance or prospects or in the
prospects for companies in our industry generally. As a result,
we cannot assure you that an active trading market will develop
for the new notes.
You Must
Comply with the Exchange Offer Procedures in Order to Receive
New Notes.
The new notes will be issued in exchange for the old notes only
after timely receipt by the exchange agent of the old notes or a
book-entry confirmation related thereto, a properly completed
and executed letter of transmittal or an agents message
and all other required documentation. If you want to tender your
old notes in exchange for new notes, you should allow sufficient
time to ensure timely delivery. Neither we nor the exchange
agent are under any duty to give you notification of defects or
irregularities with respect to tenders of old notes for
exchange. Old notes that are not tendered or are tendered but
not accepted will, following the exchange offer, continue to be
subject to
25
the existing transfer restrictions. For additional information,
please refer to the sections entitled Exchange Offer
and Plan of Distribution in this prospectus.
Broker-Dealers
and Others may Need to Comply with the Registration and
Prospectus Delivery Requirements of the Securities
Act.
Any broker-dealer that (1) exchanges its old notes in the
exchange offer for the purpose of participating in a
distribution of the new notes or (2) resells new notes that
were received by it for its own account in the exchange offer
may be deemed to have received restricted securities and will be
required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale
transaction by that broker-dealer. Any profit on the resale of
the new notes and any commission or concessions received by a
broker-dealer may be deemed to be underwriting compensation
under the Securities Act. In addition, other persons that tender
old notes for the purpose of participating in a distribution of
the new notes will be required to comply with the registration
and prospectus delivery requirements of the Securities Act in
connection with any resale of the new notes.
Risks Related to
the Notes
Our
Substantial Level of Debt could Adversely Affect Our Financial
Condition and Prevent us from Fulfilling Our Obligations under
the Notes and Our Other Debt.
We have, and will continue to have, substantial debt. After
giving effect to the offering of the old notes and the repayment
of our term loan, we would have had total indebtedness of
$250.0 million as of December 31, 2009. We will be
permitted under the indenture governing the notes to incur
additional debt under certain conditions, including additional
secured debt. If new debt were to be incurred in the future, the
related risks that we now face could intensify.
Our substantial debt could have important consequences to you
and significant effects on our business. For example, it could:
|
|
|
|
|
result in an event of default if we fail to satisfy our
obligations under the notes or our other debt or fail to comply
with the financial and other restrictive covenants contained in
the indenture governing the notes or agreements governing our
other indebtedness, which event of default could result in all
of our debt becoming immediately due and payable and could
permit our lenders to foreclose on the assets securing any such
debt;
|
|
|
|
require us to dedicate a substantial portion of our cash flow
from our business operations to pay our debt, thereby reducing
the availability of cash flow to fund working capital, capital
expenditures, development projects, general operational
requirements and other purposes;
|
|
|
|
limit our ability to obtain additional financing for working
capital, capital expenditures and other activities;
|
|
|
|
limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
|
|
|
|
increase our vulnerability to general adverse economic and
industry conditions or a downturn in our business;
|
|
|
|
place us at a competitive disadvantage compared to competitors
that are not as highly leveraged; and
|
|
|
|
negatively affect our ability to fund a change of control offer.
|
Any of the above-listed factors could have a material adverse
effect on our business, financial condition and results of
operations and our ability to meet our payment obligations under
the notes and our other debt.
26
The Indenture
Governing the Notes Contain, and our Future Debt Agreements will
Likely Contain, Covenants that Significantly Restrict our
Operations.
The indenture governing the notes contain, and our future debt
agreements will likely contain, numerous covenants imposing
financial and operating restrictions on our business. These
restrictions may affect our ability to operate our business, may
limit our ability to take advantage of potential business
opportunities as they arise and may adversely affect the conduct
of our current business, including by restricting our ability to
finance future operations and capital needs and by limiting our
ability to engage in other business activities. These covenants
will place restrictions on our ability and the ability of our
operating subsidiaries to, among other things:
|
|
|
|
|
pay dividends, redeem units or make other distributions with
respect to equity interests, make payments with respect to
subordinated indebtedness or other restricted payments;
|
|
|
|
incur debt or issue preferred units;
|
|
|
|
create liens;
|
|
|
|
make certain investments;
|
|
|
|
consolidate, merge or dispose of all or substantially all of our
assets, taken as a whole;
|
|
|
|
sell or otherwise transfer or dispose of assets, including
equity interests of our subsidiaries;
|
|
|
|
enter into sale-leaseback transactions;
|
|
|
|
enter into transactions with our affiliates; and
|
|
|
|
designate our subsidiaries as unrestricted subsidiaries.
|
In addition, our future debt agreements will likely contain
financial ratios and other financial conditions tests. Our
ability to meet those financial ratios and tests could be
affected by events beyond our control, and we cannot assure you
that we will meet those ratios and tests. A breach of any of
these covenants could result in a default under such debt
agreements. Upon the occurrence of an event of default under
such debt agreements, our lenders under such agreements could
elect to declare all amounts outstanding under such debt
agreements to be immediately due and payable and terminate all
commitments to extend further credit.
We are a
Holding Company and will Depend on the Business of Our
Subsidiaries to Satisfy Our Obligations Under the
Notes.
Each of MagnaChip Semiconductor LLC, MagnaChip Semiconductor
S.A. and MagnaChip Semiconductor B.V. is a holding company with
no independent operations of its own. Our subsidiaries,
including our principal manufacturing subsidiary, MagnaChip
Korea, own all of our operating businesses. Our subsidiaries
will conduct substantially all of the operations necessary to
fund payments on the notes and our other debt. Our ability to
make payments on the notes and our other debt will depend on our
subsidiaries cash flow and their payment of funds to us.
Our subsidiaries ability to make payments to us will
depend on:
|
|
|
|
|
their earnings;
|
|
|
|
covenants contained in our debt agreements (including the
indenture governing the notes) and the debt agreements of our
subsidiaries;
|
|
|
|
covenants contained in other agreements to which we or our
subsidiaries are or may become subject;
|
|
|
|
business and tax considerations; and
|
|
|
|
applicable law.
|
27
We cannot assure you that the operating results of our
subsidiaries at any given time will be sufficient to make
distributions or other payments to us or that any distributions
or payments will be adequate to pay principal and interest, and
any other payments, on the notes and our other debt when due. If
the issuers are not able to make payments on the notes as they
become due, you may be required to pursue remedies under the
guarantees of the guarantors. These guarantees may be subject to
limitations on their enforceability.
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 the
Notes.
The issuers anticipate that payments under the notes 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.
To Service our
Debt, we will Require a Significant Amount of Cash. If We Fail
to Generate Sufficient Cash Flow from Future Operations, We may
have to Refinance All or a Portion of Our Debt or Seek to Obtain
Additional Financing.
We expect to obtain the funds to pay our expenses and to pay the
amounts due under the notes and our other debt primarily from
the operations of our subsidiaries, including our principal
manufacturing subsidiary, MagnaChip Korea. Our ability to meet
our expenses and make these payments thus depends on the future
performance of our subsidiaries, which will be affected by
financial, business, economic and other factors, many of which
are beyond our control, and their payment of funds to the
issuers. Our business and the business of our subsidiaries may
not generate sufficient cash flow from operations in the future,
our currently anticipated growth in revenue and cash flow may
not be realized, and our subsidiaries, including MagnaChip
Korea, may be restricted in their ability to make payments to
us, any or all of which could result in us being unable to pay
amounts due under our outstanding debt, including the notes, or
to fund other liquidity needs, such as future capital
expenditures. If we do not receive sufficient cash flow from the
operations of our subsidiaries, we may be required to refinance
all or part of our then existing debt (including the notes),
sell assets, reduce or delay capital expenditures or borrow more
money. We cannot assure you that we will be able to accomplish
any of these alternatives on terms acceptable to us or at all.
In addition, the terms of existing or future debt agreements,
including the indenture governing the notes, may restrict us
from adopting any of these alternatives. The failure to generate
sufficient cash flow or to achieve any of these alternatives
could materially adversely affect the value of the notes and our
ability to pay the amounts due under the notes and our other
debt.
We May be
Unable to Repay or Repurchase the Notes.
At maturity, the entire outstanding principal amount of the
notes, together with accrued and unpaid interest, will become
due and payable. We may not have the funds to fulfill these
obligations or the ability to refinance the obligations before
they become due. If the maturity date occurs at a time
28
when other arrangements prohibit us from repaying the notes, we
would try to obtain waivers of such prohibitions from the
lenders and holders under those arrangements, or we could
attempt to refinance the borrowings that contain the
restrictions. If we could not obtain the waivers or refinance
these borrowings, we would be unable to repay the notes when
they become due.
A Financial
Failure by us or any Guarantor may Hinder the Receipt of Payment
on the Notes and Enforcement of Remedies under the
Guarantees.
An investment in the notes, as in any type of security, involves
insolvency and bankruptcy considerations that investors should
carefully consider. If we or any of the guarantors becomes a
debtor subject to insolvency proceedings under the United States
Bankruptcy Code or comparable provisions of other jurisdictions,
it is likely to result in delays in the payment of the notes and
in the exercise of enforcement remedies under the notes or the
guarantees. Provisions under the United States Bankruptcy
Code or general principles of equity that could result in the
impairment of your rights include the automatic stay, avoidance
of preferential transfers by a trustee or
debtor-in-possession,
substantive consolidation, limitations on collectability of
unmatured interest or attorneys fees and forced
restructuring of the notes.
The Notes and
the Guarantees are Effectively Subordinated to all Borrowing
Under our Future Secured Credit Facilities and to All
Indebtedness and Other Liabilities of Our Nonguarantor
Subsidiaries.
The notes and the guarantees are effectively subordinated in
right of payment to claims of our future secured creditors to
the extent of the value of the assets securing such claims. We
currently do not have any secured indebtedness outstanding to
which the notes are effectively subordinated. Holders of our
future secured obligations will have claims that are prior to
the claims of holders of the notes with respect to the assets
securing those obligations. In the event of a liquidation,
dissolution, reorganization, bankruptcy or any similar
proceeding, our assets and those of our subsidiaries will be
available to pay obligations on the notes and the guarantees
only after holders of any senior secured debt outstanding have
been paid the value of the assets securing such obligations.
Accordingly, there may not be sufficient funds remaining to pay
amounts due on any or all of the notes.
In addition, not all of our subsidiaries guarantee the notes.
The notes and the guarantees are effectively subordinated to the
indebtedness and other liabilities (including trade payables) of
any non-guarantor subsidiary and holders of the notes do not
have any claim as a creditor against any nonguarantor
subsidiary. Our non-guarantor subsidiaries generated
approximately 96.6% and 69.2% of our aggregate consolidated
revenues in the three months ended March 31, 2010 and the
combined twelve-month period ended December 31, 2009,
respectively, and as of March 31, 2010 and
December 31, 2009 held approximately 94.5% and 87.3% of our
consolidated assets and had $191.0 million and
$166.2 million in total outstanding indebtedness and other
liabilities as of those dates, excluding intercompany
liabilities.
A Court could
Void the Guarantees of the Notes under Fraudulent Transfer or
Similar Laws, which could Limit Your Ability to Seek Repayment
from the Guarantors.
Although the guarantees provide the noteholders with a direct
claim against the assets of the guarantors, under the United
States Bankruptcy Code and comparable provisions of the
fraudulent transfer and similar laws in other applicable
jurisdictions, a guarantee could be voided, or claims with
respect to a guarantee could be subordinated to all other debts
of that guarantor. In addition, a bankruptcy court could void
(i.e., cancel) any payments by that guarantor pursuant to its
guarantee and require those payments to be returned to the
guarantor or to a fund for the benefit of the other creditors of
the guarantor. A bankruptcy court might take these actions if it
found, among other things,
29
that when a subsidiary guarantor executed its guarantee (or, in
some jurisdictions, when it became obligated to make payments
under its guarantee):
|
|
|
|
|
such subsidiary guarantor received less than reasonably
equivalent value or fair consideration for the incurrence of its
guarantee; and
|
|
|
|
such subsidiary guarantor:
|
|
|
|
|
|
was insolvent at the time of (or was rendered insolvent by) the
incurrence of the guarantee;
|
|
|
|
was engaged or about to engage in a business or transaction for
which its assets constituted unreasonably small capital to carry
on its business; or
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intended to incur, or believed that it would incur, obligations
beyond its ability to pay as those obligations matured.
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A bankruptcy court could find that a guarantor received less
than fair consideration or reasonably equivalent value for its
guarantee to the extent that it did not receive direct or
indirect benefit from the issuance of the notes. A bankruptcy
court could also void a guarantee if it found that the guarantor
issued its guarantee with actual intent to hinder, delay, or
defraud creditors. Although courts in different jurisdictions
measure solvency differently, in general, an entity would be
deemed insolvent if the sum of its debts, including contingent
and unliquidated debts, exceeds the fair value of its assets, or
if the present fair salable value of its assets is less than the
amount that would be required to pay the expected liability on
its debts, including contingent and unliquidated debts, as they
become due. If a court voided a guarantee, it could require that
noteholders return any amounts previously paid under such
guarantee. If any guarantee were voided, noteholders would
retain their rights against us and any other guarantors,
although there is no assurance that those entities assets
would be sufficient to pay the notes in full.
Any Future
Guarantees Provided After the Notes are Issued could also be
Avoided by a Trustee in Bankruptcy.
The indenture governing the notes provides that certain of our
future subsidiaries will guarantee the notes. Any future
guarantee might be avoidable by the grantor or by its trustee in
bankruptcy or other third parties if certain events or
circumstances exist or occur. For instance, if the entity
granting the future guarantee were insolvent at the time of the
grant and if such grant was made within 90 days, or in
certain circumstances, a longer period, before that entity
commenced a bankruptcy proceeding, and the granting of the
future guarantee enabled the noteholders to receive more than
they would than if the grantor were liquidated under
Chapter 7 of the United States Bankruptcy Code, then such
guarantee could be avoided as a preferential transfer.
We may not be
Able to Fulfill Our Repurchase Obligations with Respect to the
Notes Upon a Change of Control or an Asset Sale.
If we experience certain change of control events, we are
required by the indenture governing the notes to offer to
repurchase all outstanding notes at a repurchase price equal to
101% of the principal amount of notes repurchased, plus accrued
and unpaid interest and special interest, if any, to the
applicable repurchase date. In addition, under certain
circumstances, if we sell assets and fail to apply the net
proceeds therefrom as provided in the indenture, we must offer
to repurchase the notes at a repurchase price equal to 100% of
the principal amount of the notes repurchased, plus accrued and
unpaid interest and special interest, if any, to the applicable
repurchase date. If a change of control event or an asset sale
were to occur, we cannot assure you that we would have
sufficient funds to repay the notes and all other indebtedness
that we would be required to offer to purchase or that would
become immediately due and payable as a result of such change of
control event or asset sale. We may require additional financing
from third parties to fund any such repurchases, and we cannot
assure you that we would be able to obtain additional financing
on satisfactory terms or at all. Our failure to repay
noteholders who tender notes for repurchase following a change
of control event
30
or asset sale could result in an event of default under the
indenture governing the notes. Any future indebtedness to which
we become a party may also prohibit us from purchasing notes. If
a change of control event or an asset sale occurs at a time when
we are prohibited from purchasing notes, we may have to either
seek the consent of the applicable lenders to the purchase of
notes or attempt to refinance the borrowings that contain such
prohibition. Our failure to obtain such a consent or to
refinance such borrowings may preclude us from purchasing
tendered notes and trigger an event of default under the
indenture governing the notes, which may, in turn, constitute a
default under other indebtedness. Finally, the events that would
constitute a change of control under the indenture may also
result in an event of default under our future secured credit
facilities, in which case we could be required to repay our
secured indebtedness before we repurchase any of the notes.
Unrestricted
Subsidiaries Generally will not be Subject to any of the
Covenants in the Indenture, and we may not be Able to Rely on
the Cash Flow or Assets of Those Unrestricted Subsidiaries to
Pay our Indebtedness.
Unrestricted subsidiaries will generally not be subject to the
covenants under the indenture governing the notes, and their
assets will not be available as security for the notes.
Unrestricted subsidiaries may enter into financing arrangements
that limit their ability to make loans or other payments to fund
payments in respect of the notes. Accordingly, we may not be
able to rely on the cash flow or assets of unrestricted
subsidiaries to pay any of our indebtedness, including the notes.
You may be
Unable to Enforce Judgments Obtained in United States Courts
Against MagnaChip Semiconductor S.A. or Our Subsidiary
Guarantors Organized in Jurisdictions Other than the United
States.
MagnaChip Semiconductor S.A. and most of the guarantors are
organized or incorporated outside of the United States and most
of the assets of these companies are located outside of the
United States. Because most of our assets are located outside of
the United States, any judgment obtained in the United States
against these companies may not be collectible in the United
States. In addition, many of our executive officers and one of
our directors are non-residents of the United States and it may
be difficult to enforce civil liabilities in United States
courts against these non-resident officers and director.
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
31
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.
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 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.
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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.
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.
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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.
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
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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
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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 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.
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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 the MagnaChip Corporation IPO or the
notes could be adversely affected.
From time to time, we may engage in exchange rate hedging
activities in an effort to mitigate the impact of exchange rate
fluctuations. 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
37
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, 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 June 30, 2010, 2,165 employees, or approximately
65.3% 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
38
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.
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.
39
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.
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.
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.
41
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.
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 complementary businesses and
technologies, and respond to competitive pressures and potential
strategic opportunities. Additional capital may not be available
when needed or, if available, may not be available on favorable
terms. If the MagnaChip Corporation IPO is not completed and
MagnaChip Corporation does not become a public company, our
ability to raise additional capital, particularly equity
capital, will be constrained due to our inability to access the
public markets directly. 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.
42
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 Required and
Unable to Comply with Section 404 of the Sarbanes-Oxley Act of
2002, and as a Result, the Price of Our Securities could
Decline.
Beginning with our fiscal year ending December 31, 2011, 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 in our Annual Report on
Form 10-K
our managements report on, and assessment of the
effectiveness of, our internal controls over financial
reporting. In the event we complete the MagnaChip Corporation
IPO, we may also in the future become subject to the requirement
that our independent auditors 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 (assuming the completion of the
MagnaChip Corporation IPO), 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 securities.
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
43
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 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.
44
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.
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.
45
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 exchange offer 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.
46
RATIO OF EARNINGS
TO FIXED CHARGES
The financial information provided in the following table should
be read in conjunction with our consolidated financial
statements and the related notes, appearing elsewhere in this
prospectus. The following table sets forth our ratio of earnings
to fixed charges for each of the periods indicated:
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Successor
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Predecessor
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Three Months
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Two- Month
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Ten- Month
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Three Months
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Ended
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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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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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2006
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2005
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Ratio of earnings to fixed charges
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10.2
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21.2
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The ratio of earnings to fixed charges is computed by dividing
(i) income (loss) from continuing operations before income
taxes plus fixed charges by (ii) fixed charges. Our fixed
charges consist of the portion of operating lease rental expense
that is representative of the appropriate interest factor and
interest expense on indebtedness.
Where a dash appears, our earnings were negative and were
insufficient to cover fixed charges during the period. Our
deficiencies to cover fixed charges in each period presented
were as follows:
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Successor
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Predecessor
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Three Months
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|
|
|
|
|
|
|
|
|
Period Ended
|
|
|
|
Ended
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
March 29,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
Deficiencies
|
|
$
|
0.5
|
|
|
|
$
|
69.6
|
|
|
$
|
327.5
|
|
|
$
|
132.0
|
|
|
$
|
78.8
|
|
|
$
|
119.2
|
|
47
USE OF
PROCEEDS
The exchange offer is intended to satisfy our obligations under
the notes registration rights agreement we entered into with the
initial purchasers of the old notes. We will not receive any
proceeds from the exchange offer. In consideration for issuing
the new notes, we will receive old notes of like principal
amount, the terms of which are identical in all material
respects to the new notes. We will retire and cancel all of the
old notes tendered in the exchange offer. Accordingly, issuance
of the new notes will not result in any increase in our
indebtedness. We have agreed to bear the expenses of the
exchange offer.
DIVIDEND
POLICY
We do not intend to pay any cash dividends or distributions on
our common units in the foreseeable future. We anticipate that
we will retain all of our future earnings for use in the
development of our business and for general corporate purposes.
Any determination to pay cash dividends or distributions in the
future will be at the discretion of our board of directors. The
payment of cash dividends or distributions on our common units
is restricted under the terms of the indenture governing our
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.
48
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 the issuance of $250 million
old notes and the application of the net proceeds therefrom.
|
This table 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 consolidated financial statements and related notes
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
as Adjusted
|
|
|
|
(In millions)
|
|
|
Indebtedness (including current maturities)
|
|
|
|
|
|
|
|
|
Senior secured credit facility
|
|
$
|
61.6
|
|
|
$
|
|
|
10.500% senior notes due 2018(1)
|
|
|
|
|
|
|
246.7
|
|
Unitholders equity:
|
|
|
|
|
|
|
|
|
Common units, no par value; 375,000,000 units authorized,
307,233,996 units issued and outstanding, actual and pro
forma as adjusted
|
|
|
55.5
|
|
|
|
55.5
|
|
Additional paid-in capital
|
|
|
169.3
|
|
|
|
38.6
|
(2)
|
Retained earnings
|
|
|
29.1
|
|
|
|
28.9
|
|
Accumulated other comprehensive loss
|
|
|
(22.4
|
)
|
|
|
(22.4
|
)
|
|
|
|
|
|
|
|
|
|
Total unitholders equity
|
|
|
231.4
|
|
|
|
100.5
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
293.0
|
|
|
$
|
347.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents principal amount of notes net of original issue
discount of $3.3 million. |
|
(2) |
|
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 of old notes. |
49
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following tables set forth selected historical consolidated
financial data of MagnaChip Semiconductor LLC 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 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.
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations per common
unit Basic and diluted
|
|
$
|
0.10
|
|
|
$
|
(0.01
|
)
|
|
|
$
|
15.65
|
|
|
$
|
(1.37
|
)
|
|
$
|
$(6.43
|
)
|
|
$
|
(2.69
|
)
|
|
$
|
(1.66
|
)
|
|
$
|
(2.29
|
)
|
Earnings (loss) from discontinued operations per common
unit Basic and diluted
|
|
$
|
|
|
|
$
|
0.00
|
|
|
|
$
|
0.12
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.73
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(2.88
|
)
|
|
$
|
0.19
|
|
Earnings (loss) per common unit Basic and diluted
|
|
$
|
0.10
|
|
|
$
|
(0.01
|
)
|
|
|
$
|
15.77
|
|
|
$
|
(1.38
|
)
|
|
$
|
(8.16
|
)
|
|
$
|
(3.68
|
)
|
|
$
|
(4.54
|
)
|
|
$
|
(2.10
|
)
|
Weighted average number of common units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
302.444
|
|
|
|
300.863
|
|
|
|
|
52.923
|
|
|
|
52.923
|
|
|
|
52.769
|
|
|
|
52.297
|
|
|
|
52.912
|
|
|
|
52.898
|
|
Diluted
|
|
|
307.536
|
|
|
|
300.863
|
|
|
|
|
52.923
|
|
|
|
52.923
|
|
|
|
52.769
|
|
|
|
52.297
|
|
|
|
52.912
|
|
|
|
52.898
|
|
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(2)
|
|
|
61.6
|
|
|
|
61.8
|
|
|
|
|
|
|
|
|
845.0
|
|
|
|
845.0
|
|
|
|
830.0
|
|
|
|
750.0
|
|
|
|
750.0
|
|
Long-term obligations(3)
|
|
|
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(4)
|
|
$
|
28.7
|
|
|
$
|
22.1
|
|
|
|
$
|
76.6
|
|
|
$
|
2.3
|
|
|
$
|
59.8
|
|
|
$
|
111.2
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income (Loss)(5)
|
|
|
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. |
|
(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) |
|
Total indebtedness is calculated as long and short-term
borrowings, including the current portion of long-term
borrowings. |
51
|
|
|
(3) |
|
Long-term obligations include long-term borrowings, capital
leases and redeemable convertible preferred units. |
|
(4) |
|
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 when
and if 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.
|
52
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 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
|
53
|
|
|
|
|
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
have incurred similar costs in connection with the MagnaChip
Corporation IPO.
|
|
|
(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.
|
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;
|
54
|
|
|
|
|
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.
|
|
|
(5) |
|
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 when
and if 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).
55
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.
|
56
|
|
|
|
(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
have incurred similar costs in connection with the MagnaChip
Corporation IPO.
|
|
|
(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.
|
57
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.
58
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; and
|
|
|
|
the issuance of $250 million old 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 issuance of $250 million
senior notes by MagnaChip Semiconductor S.A. and MagnaChip
Semiconductor Finance Company, and the application of the net
proceeds therefrom as if it occurred on March 31, 2010.
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 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.
59
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.
Issuance of $250
Million Old 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
60
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
|
|
Pro Forma
|
|
|
|
Three Months
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
Adjustments
|
|
|
2010
|
|
|
|
(In millions, except per common unit 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 unit data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations per common
unit Basic and diluted
|
|
$
|
0.10
|
|
|
|
|
|
|
$
|
0.09
|
|
Weighted average number of common units
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
302.444
|
|
|
|
|
|
|
|
302.444
|
|
Diluted
|
|
|
307.536
|
|
|
|
|
|
|
|
307.536
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
|
|
Pro Forma
|
|
|
|
As of
|
|
|
|
|
|
As of
|
|
|
|
March 31,
|
|
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
Adjustments
|
|
|
2010
|
|
|
|
(In millions, except common unit 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
|
|
|
|
|
|
|
|
316.8
|
|
Property, plant and equipment, net
|
|
|
154.7
|
|
|
|
|
|
|
|
154.7
|
|
Intangible assets, net
|
|
|
43.5
|
|
|
|
|
|
|
|
43.5
|
|
Other non-current assets
|
|
|
23.1
|
|
|
|
8.1
|
(5)
|
|
|
31.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
492.0
|
|
|
|
|
|
|
$
|
546.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Unitholders 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
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units; 375,000,000 units authorized,
307,233,996 units issued and outstanding at March 31,
2010
|
|
|
55.5
|
|
|
|
|
|
|
|
55.5
|
|
Additional paid-in capital
|
|
|
169.3
|
|
|
|
(130.7
|
)(6)
|
|
|
38.6
|
|
Retained earnings
|
|
|
29.1
|
|
|
|
(0.2
|
)(5)
|
|
|
28.9
|
|
Accumulated other comprehensive (loss)
|
|
|
(22.4
|
)
|
|
|
|
|
|
|
(22.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unitholders equity
|
|
|
231.4
|
|
|
|
|
|
|
|
100.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and unitholders
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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 |
62
|
|
|
|
|
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% old 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% old 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 old
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. |
|
(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 old 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 old 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 old 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. |
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Two-Month
|
|
|
Ten-Month
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
Period
|
|
|
|
|
|
Pro Forma
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
October 25,
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
Adjustments
|
|
|
2009
|
|
|
|
(In millions, except per common unit 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
|
|
$
|
(2.5
|
)
|
|
$
|
828.2
|
|
|
$
|
|
|
|
$
|
46.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common unit data:(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations per common
unit Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
15.65
|
|
|
|
|
|
|
$
|
0.16
|
|
Weighted average number of common units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
300.863
|
|
|
|
52.923
|
|
|
|
|
|
|
|
300.158
|
|
Diluted
|
|
|
300.863
|
|
|
|
52.923
|
|
|
|
|
|
|
|
300.166
|
|
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 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 |
64
|
|
|
|
|
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 old 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. |
|
(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 unit 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 units. The following table sets forth the |
65
|
|
|
|
|
computation of unaudited pro forma basic and diluted income per
common unit from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
|
|
|
|
|
|
|
Common
|
|
|
|
Weighted
|
|
|
Unit from
|
|
|
|
Average
|
|
|
Continuing
|
|
|
|
Common Units
|
|
|
Operations
|
|
|
Historical ten-month period ended October 25, 2009
|
|
|
52,923,483
|
|
|
$
|
15.65
|
|
Historical two-month period ended December 31, 2009
|
|
|
300,862,764
|
|
|
|
(0.01
|
)
|
Pro forma adjustment for the ten-month period ended
October 25, 2009 in conjunction with the implementation of
the Plan of Reorganization
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(53,627,880
|
)
|
|
|
|
|
Diluted
|
|
|
(53,620,300
|
)
|
|
|
|
|
Pro forma for the combined twelve-month period ended
December 31, 2009
|
|
|
|
|
|
|
|
|
Basic
|
|
|
300,158,367
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
300,165,947
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
66
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 2,620 novel
registered patents and 950 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 as 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 from OEMs and
consumers in China and Taiwan relative to overall demand for our
products and
67
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
68
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 convenience date of October 25, 2009 (a month end for our
financial reporting purposes) for
69
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.
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
70
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 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.
71
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 when
and if 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.
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,
72
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 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
73
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 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
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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
following the completion of the MagnaChip Corporation IPO 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
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
75
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.
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.
76
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.
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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Company
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Predecessor Company
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Three Months
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Two-Month
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Ten-Month
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Three Months
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Ended
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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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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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Net
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Net
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Net
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Net
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Net
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Net
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Amount
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Sales
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Amount
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Sales
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Amount
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Sales
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Amount
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Sales
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Amount
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Sales
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Amount
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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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)
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(7.7
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)
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25.0
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5.6
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(11.4
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)
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(11.3
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)
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(27.7
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(4.6
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)
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(54.9
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(7.7
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)
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Interest expense, net
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(2.0
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)
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(1.1
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)
|
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(1.3
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)
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(1.1
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)
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(31.2
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)
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(6.9
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)
|
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(14.7
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)
|
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(14.4
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)
|
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(76.1
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)
|
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|
(12.7
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)
|
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|
(60.3
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)
|
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|
(8.5
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)
|
Foreign currency gain (loss), net
|
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21.6
|
|
|
|
12.0
|
|
|
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9.3
|
|
|
|
8.4
|
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|
|
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43.4
|
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|
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9.7
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|
|
(40.2
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)
|
|
|
(39.6
|
)
|
|
|
(210.4
|
)
|
|
|
(35.0
|
)
|
|
|
(4.7
|
)
|
|
|
(0.7
|
)
|
Reorganization items, net
|
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|
|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
804.6
|
|
|
|
179.2
|
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Others
|
|
|
(0.1
|
)
|
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< |