# MAGNACHIP SEMICONDUCTOR Corp: Form 10-Q for the period ended Sep 30, 2014

- Company: [MAGNACHIP SEMICONDUCTOR Corp](/companies/mx.md) (CIK 1325702)
- Form: 10-Q
- Filed: 2015-02-12
- Accepted by EDGAR: Feb 12, 2015, 16:20 ET
- Period: 2014-09-30
- Accession: 0001193125-15-046779
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1325702/000119312515046779/d834271d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1325702/000119312515046779/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-07-01 to 2014-09-30 | $194.3m | us-gaap:Revenues |
| Revenue | 9 months, 2014-01-01 to 2014-09-30 | $530.6m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2014-07-01 to 2014-09-30 | $151.7m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2014-01-01 to 2014-09-30 | $412.2m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2014-07-01 to 2014-09-30 | $42.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2014-01-01 to 2014-09-30 | $118.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2014-07-01 to 2014-09-30 | $23.4m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2014-01-01 to 2014-09-30 | $70.6m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2014-07-01 to 2014-09-30 | $38.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2014-01-01 to 2014-09-30 | $94.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-07-01 to 2014-09-30 | −$19.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2014-01-01 to 2014-09-30 | −$46.7m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2014-07-01 to 2014-09-30 | $311.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2014-01-01 to 2014-09-30 | $1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-07-01 to 2014-09-30 | −$46.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2014-01-01 to 2014-09-30 | −$53.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-07-01 to 2014-09-30 | −$1.37 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2014-01-01 to 2014-09-30 | −$1.57 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-07-01 to 2014-09-30 | −$1.37 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2014-01-01 to 2014-09-30 | −$1.57 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-07-01 to 2014-09-30 | 34,056,359 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2014-01-01 to 2014-09-30 | 34,055,210 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2014-01-01 to 2014-09-30 | −$10.3m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2014-01-01 to 2014-09-30 | $15.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2014-09-30 | $125.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-09-30 | $305.0m | us-gaap:AssetsCurrent |
| Total assets | at 2014-09-30 | $584.9m | us-gaap:Assets |
| Current liabilities | at 2014-09-30 | $173.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-09-30 | $561.0m | us-gaap:Liabilities |
| Long-term debt | at 2014-09-30 | $224.0m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2014-09-30 | $23.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 90,739 characters.

*The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the related notes included elsewhere in this report. 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 report.*

### Overview

We are a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer, computer and communication 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 3,062 registered novel patents and 134 pending novel patent applications and extensive engineering and manufacturing process expertise. Our business is comprised of three key business lines: 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, computer, communication and industrial applications. Our Semiconductor Manufacturing Services provide 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 allow us to address multiple high-growth end markets and to rapidly develop and introduce new products and services in response to market demands. Our design center and substantial manufacturing operations in Korea 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 serve 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 capacity 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 markets and geographies with higher growth rates than the overall consumer electronics industry. We also expect that new competitors will emerge in these markets that may place increased pressure on the pricing for our products and services. While we believe we are well positioned competitively to compete in these markets and against these new competitors as a result of our long operating history, existing manufacturing capacity and our Korea-based operations, if we are not effective in competing in these markets our operating results may be adversely affected.

Within our Display Solutions and Power Solutions lines, net sales are driven by design wins in which we are 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 that 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 do 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 business line 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 decline significantly. 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 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 processes, high-flexibility and excellent service.

### Other Significant Events

In March 2011, we completed our initial public offering of 9,500,000 shares of common stock, which we listed on the NYSE. All shares were sold in the form of depositary shares and each depositary share represented an ownership interest in one share of common stock. Of the 9,500,000 shares, 950,000 shares were newly issued by us and 8,550,000 shares were sold by selling stockholders. All outstanding depositary shares were automatically cancelled on April 24, 2011 and the underlying shares of common stock were issued to the holders of such cancelled depositary shares. We received $12.4 million of proceeds from the issuance of the new shares of common stock after deducting underwriters’ discounts and commissions, and we did not receive any proceeds from the sale of shares of common stock offered by the selling stockholders. We incurred $10.8 million of expenses in our initial public offering that were recorded as decrease of additional paid-in capital in our consolidated balance sheets.

Prior to our initial public offering, MagnaChip Semiconductor LLC, a Delaware limited liability company, was converted to MagnaChip Semiconductor Corporation, a Delaware corporation. In connection with the corporate conversion, outstanding common units of MagnaChip Semiconductor LLC were automatically converted into shares of common stock of MagnaChip Semiconductor Corporation, outstanding options to purchase common units of MagnaChip Semiconductor LLC were automatically converted into options to purchase shares of common stock of MagnaChip Semiconductor Corporation and outstanding warrants to purchase common units of MagnaChip Semiconductor LLC were automatically converted into warrants to purchase shares of common stock of MagnaChip Semiconductor Corporation, all at a ratio of one share of common stock for eight common units.

On May 16, 2011, two of our wholly owned subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, repurchased $35.0 million out of $250.0 million aggregate principal amount of our senior notes then outstanding at a price of 109.0% from funds affiliated with Avenue Capital Management II, L.P., one of our stockholders. In connection with the May 2011 repurchase of the senior notes, the Company recognized $4.1 million of loss on early extinguishment of senior notes, which consisted of $3.2 million from repurchase premium, $0.4 million from write-off of discounts, $0.2 million from write-off of debt issuance costs and $0.3 million from incurrence of direct legal and advisory service fees.

On September 19, 2011, two of our wholly owned subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, repurchased $11.3 million out of $215 million aggregate principal amount of our senior notes then outstanding at a price of 107.5%. In connection with the September 2011 repurchase of the senior notes, we recognized $1.4 million of loss on early extinguishment of senior notes, which consisted of $0.9 million from repurchase premium, $0.1 million from write-off of discounts, $0.4 million from write-off of debt issuance costs.

On October 7, 2011, our Board adopted a stock repurchase program whereby we may, subject to prevailing market conditions and other factors, repurchase up to $35.0 million of our outstanding common stock. Our Board extended and increased the program by an additional $25.0 million in August 2012, for a maximum aggregate repurchase amount under the original program of up to $60.0 million. On July 30, 2013, we announced that the Board approved a new stock repurchase program under which we are authorized to repurchase up to $100.0 million of our common stock. The new stock repurchase program was effective August 5, 2013 through December 15, 2014, and replaced the original stock repurchase program. The stock repurchase program did not require that we purchase a minimum amount of shares of our common stock and may be commenced, suspended, resumed or terminated at any time without notice. The timing and extent of any repurchases were dependent upon prevailing market conditions, the trading price of the Company’s common stock and other factors, and subject to contractual restrictions and restrictions under applicable law and regulations. As of December 31, 2013, we had repurchased 6,578,765 shares of our common stock in the open market under these programs at an aggregate cost of $90.9 million. In March 2014, the Board suspended the stock repurchase program indefinitely pending the completion of the Independent Investigation, and the stock repurchase program expired by its terms on December 15, 2014. Subsequent to December 31, 2013, we did not repurchase any shares under the stock repurchase program.

On May 1, 2012, we closed an underwritten registered public offering of 7,000,000 shares of our common stock owned by certain of our stockholders at a price per share of $11.40. We did not receive any proceeds from the sale of our common stock by the selling stockholders but paid certain expenses in connection with such secondary offering.

On February 8, 2013, we closed an underwritten registered public offering of 5,750,000 shares of our common stock owned by certain of our stockholders at a price per share of $14.50. We did not receive any proceeds from the sale of our common stock by the selling stockholders but paid certain expenses in connection with such secondary offering.

On July 18, 2013, we issued the 2021 Notes, at a price of 99.5%. Interest on the 2021 Notes accrues at a rate of 6.625% per annum, payable semi-annually on January 15 and July 15 of each year, beginning on January 15, 2014. We used net proceeds of the 2021 Notes, together with cash on hand, to repay all of our then outstanding 10.500% senior notes due April 15, 2018 (the “2018 Notes”), including applicable premium and accrued interest, and to pay related fees and expenses of the 2021 Notes offering.

On September 13, 2013, we closed an underwritten registered public offering of 1,700,000 shares of our common stock owned by certain of our stockholders at a price per share of $21.20. We did not receive any proceeds from the sale of our common stock by the selling stockholders but paid certain expenses in connection with such secondary offering.

### Business Lines

We operate three separate business lines within one segment: Display Solutions, Power Solutions and Semiconductor Manufacturing Services.

- ***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, light emitting diode (LED), 3D and OLED televisions, notebooks, mobile communications and entertainment devices. Our Display Solutions support the industry’s most advanced display technologies, such as AMOLEDs, and LTPS, as well as high-volume display technologies such as TFTs. Our Display Solutions business represented 27.2% and 28.7% of our net sales for the nine months ended September 30, 2014 and September 30, 2013, respectively.
- ***Power Solutions:*** Our Power Solutions line produces power management semiconductor products including discrete and integrated circuit solutions for power management in high-volume consumer applications. These products include MOSFETs, insulated-gate bipolar transistors (IGBTs), power modules, AC-DC converters, DC-DC converters, LED drivers, switching regulators and linear regulators for a range of devices, including televisions, smartphones, mobile phones, desktop PCs, notebooks, tablet PCs, other consumer electronics, and industrial applications such as power suppliers, LED lighting, motor control and home appliances. Our Power Solutions business represented 19.6% and 16.7% of our net sales for the nine months ended September 30, 2014 and September 30, 2013, respectively.
- ***Semiconductor Manufacturing Services:*** Our Semiconductor Manufacturing Services line 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 442 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 53.1% and 54.5% of our net sales for the nine months ended September 30, 2014 and September 30, 2013, respectively.

### Explanation and Reconciliation of Non-US GAAP Measures

### Adjusted EBITDA and Adjusted Net Income

We use the terms Adjusted EBITDA and Adjusted Net Income throughout this Report. Adjusted EBITDA, as we define it, is a non-US GAAP measure. We define Adjusted EBITDA for the periods indicated as net income (loss), adjusted to exclude (i) depreciation and amortization, (ii) interest expense, net, (iii) income tax expenses (benefits), (iv) restructuring and impairment charges, (v) equity-based compensation expense, (vi) foreign currency loss (gain), net, (vii) derivative valuation loss (gain), net, (viii) secondary offering and others, (ix) loss on early extinguishment of senior notes and (x) restatement related expenses.

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;
- our investor and analyst presentations 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 concerning our consolidated financial performance; and
- in certain of our compensation plans as a performance measure for determining incentive compensation payments.

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 US 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 US GAAP. A reconciliation of net income (loss) to Adjusted EBITDA is as follows:

*(In millions)*

|  | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2014 | Three Months Ended September 30, 2013 As Restated | Nine Months Ended September 30, 2013 As Restated |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $(46.8) | $(53.4) | $0.3 | $(42.0) |
| Adjustments: |  |  |  |  |
| Depreciation and amortization | 7.8 | 22.9 | 8.4 | 25.0 |
| Interest expense, net | 4.1 | 12.2 | 4.5 | 16.3 |
| Income tax expenses | 0.3 | 1.8 | 0.5 | 2.7 |
| Restructuring and impairment charges(a) | — | — | — | 2.4 |
| Equity-based compensation expense(b) | 0.6 | 1.7 | 0.5 | 1.6 |
| Foreign currency loss (gain), net(c) | 23.5 | (5.5) | (47.1) | (1.5) |
| Derivative valuation loss (gain), net(d) | — | 0.1 | (0.7) | (0.2) |
| Secondary offering and others(e) | — | — | 0.5 | 1.4 |
| Loss on early extinguishment of senior notes(f) | — | — | 32.8 | 32.8 |
| Restatement related expenses(g) | 15.5 | 28.8 | — | — |
| Adjusted EBITDA | $5.0 | $8.4 | $(0.2) | $38.5 |

(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 charges of $1.8 million related to the restructuring of our six-inch fabrication facilities, and the impact of impairment charges of $0.6 million related to the impairment of certain existing technology for the nine months ended September 30, 2013.

(b) 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.

(c) 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.

(d) This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents hedge ineffectiveness or derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in U.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance.

(e) This adjustment eliminates expenses incurred for our secondary offerings in September 2013 and February 2013.

(f) This adjustment eliminates the impact of loss on repayment of $203.7 million aggregate principal amount of our 2018 Notes for the three months and the nine months ended September 30, 2013, respectively.

(g) This adjustment eliminates non-recurring expenses incurred in connection with the Audit Committee’s independent investigation and related restatement, which are primarily comprised of legal and consulting fees.

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 US GAAP. Some of these limitations are:

- Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
- Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
- Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
- although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
- Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees;
- Adjusted EBITDA does not reflect the costs of holding certain assets and liabilities in foreign currencies; and
- other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our US GAAP results and using Adjusted EBITDA only supplementally.

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 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
- our investor and analyst presentations will include Adjusted Net Income.

Adjusted Net Income is not a measure defined in accordance with US 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 US 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 for the periods indicated as net income (loss), adjusted to exclude (i) restructuring and impairment charges, (ii) equity-based compensation expense, (iii) amortization of intangibles, (iv) foreign currency loss (gain), net, (v) derivative valuation loss (gain), net, (vi) secondary offering and others, (vii) loss on early extinguishment of senior notes and (viii) restatement related expenses.

The following table summarizes the adjustments to net income (loss) that we make in order to calculate Adjusted Net Income for the periods indicated:

*(In millions)*

|  | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2014 | Three Months Ended September 30, 2013 As Restated | Nine Months Ended September 30, 2013 As Restated |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $(46.8) | $(53.4) | $0.3 | $(42.0) |
| Adjustments: |  |  |  |  |
| Restructuring and impairment charges(a) | — | — | — | 2.4 |
| Equity-based compensation expense(b) | 0.6 | 1.7 | 0.5 | 1.6 |
| Amortization of intangibles(c) | 0.4 | 1.1 | 1.5 | 4.7 |
| Foreign currency loss (gain), net(d) | 23.5 | (5.5) | (47.1) | (1.5) |
| Derivative valuation loss (gain), net(e) | — | 0.1 | (0.7) | (0.2) |
| Secondary offering and others(f) | — | — | 0.5 | 1.4 |
| Loss on early extinguishment of senior notes(g) | — | — | 32.8 | 32.8 |
| Restatement related expenses(h) | 15.5 | 28.8 | — | — |
| Adjusted Net Loss | $(6.8) | $(27.3) | $(12.1) | $(0.7) |

(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 charges of $1.8 million related to the restructuring of our six-inch fabrication facilities, and the impact of impairment charges of $0.6 million related to the impairment of certain existing technology for the nine months ended September 30, 2013.

(b) 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.

(c) 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.

(d) 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.

(e) This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents hedge ineffectiveness or derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in U.S. dollars, and we do not enter into derivative transactions for trading or speculative purposes, we do not believe that these charges or gains are indicative of our core operating performance.

(f) This adjustment eliminates expenses incurred for our secondary offerings in September 2013 and February 2013.

(g) This adjustment eliminates the impact of loss on repayment of $203.7 million aggregate principal amount of our 2018 Notes for the three months and the nine months ended September 30, 2013, respectively.

(h) This adjustment eliminates non-recurring expenses incurred in connection with the Audit Committee’s independent investigation and related restatement, which are primarily comprised of legal and consulting fees.

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 US 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 US GAAP results and using Adjusted Net Income only supplementally.

### Factors Affecting Our Results of Operations

***Net Sales.*** We derive virtually all of our sales (net of sales returns and allowances) from three business lines: 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 Korea, the United States, Japan and Greater China. 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 the disposal of waste materials.

We recognize revenue when risk and reward of ownership pass to the customer either upon shipment, upon product delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement. For the nine months ended September 30, 2014 and 2013, we sold products to over 258 and 263 customers, respectively, and our net sales to our ten largest customers represented 60% and 61% of our net sales, respectively. We have a combined production capacity of over 131,467 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 including outsourced manufacturing expenses, and variation in depreciation expense.

***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 September 30, 2014, approximately 98% of our employees were eligible for severance benefits.

***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. 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 5 to 12 years for certain equipment and assets. Our evaluation of carrying values is based on various analyses including cash flow and profitability projections. If our projections indicate that future undiscounted cash flows are not sufficient to recover the carrying values of the related long-lived assets, the carrying value of the assets is impaired and will be reduced, with the reduction charged to expense so that the carrying value is equal to fair value.

***Selling Expenses.*** We sell our products worldwide through a direct sales force as well as a network of sales agents and representatives to OEMs, including major branded customers and contract manufacturers, and indirectly through distributors. Selling expenses consist primarily of the personnel costs for the members of our direct sales force, a network of sales representatives and other costs of distribution. Personnel costs include base salary, benefits and incentive compensation.

***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.

***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 lines. Consequently, we do not allocate these expenses to individual lines.

***Restructuring and Impairment Charges.*** We evaluate the recoverability of certain long-lived assets and in-process research and development 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.

***Interest Expense, Net.*** Our interest expense was incurred primarily under the 2018 Notes and the 2021 Notes.

***Impact of Foreign Currency Exchange Rates on Reported Results of Operations.*** Historically, a portion of our revenues and greater than the majority of our operating expenses and costs of sales have been denominated in non-U.S. currencies, principally the Korean won, and we expect that this will remain true in the future. Because we report our results of operations in U.S. dollars converted from our non-U.S. revenues and expenses based on monthly average exchange rates, 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) to appear to decline materially, particularly relative to prior periods. The converse is true if the U.S. dollar were to appreciate relative to the Korean won. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our stock could be adversely affected.

From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. Our Korean subsidiary periodically enters into foreign currency option, forward and zero cost collar contracts in order to mitigate a portion of the impact of U.S. dollar-Korean won exchange rate fluctuations on our operating results. Obligations under these foreign currency option, forward and zero cost collar contracts must be cash collateralized if our exposure exceeds certain specified thresholds. We cannot assure 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.

***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 balances 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 assess whether it is more likely than not that the deferred tax assets existing at the period-end will be realized in future periods. In such assessment, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent results of operations. In the event we were to determine that we would be able to realize the deferred income tax assets in the future in excess of their net recorded amount, we would adjust the valuation allowance, which would reduce the provision for income taxes.

Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions, including Korea. 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 increases in demand. We typically pay for capital expenditures in partial installments with portions due on order, delivery and final acceptance. Our capital expenditures include our payments for the purchase of property, plant and equipment as well as payments for the registration of intellectual property rights.

***Inventories.*** We monitor our inventory levels in light of product development changes and market expectations. We may be required to take additional charges for quantities in excess of demand, cost in excess of market value and product age. Our analysis may take into consideration historical usage, expected demand, anticipated sales price, new product development schedules, the effect new products might have on the sales of existing products, product age, customer design activity, customer concentration and other factors. These forecasts require us to estimate our ability to predict demand for current and future products and compare those estimates with our current inventory levels and inventory purchase commitments. Our forecasts for our inventory may differ from actual inventory use.

### Results of Operations – Comparison of Three Months Ended September 30, 2014 and 2013

The following table sets forth consolidated results of operations for the three months ended September 30, 2014 and 2013:

*(In millions)*

|  | Three Months Ended September 30, 2014 Amount | % of Net Sales | Three Months Ended September 30, 2013 As Restated Amount | % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $194.3 | 100.0% | $170.8 | 100.0% | $23.5 |
| Cost of sales | 151.7 | 78.1 | 136.4 | 79.9 | 15.3 |
| Gross profit | 42.6 | 21.9 | 34.4 | 20.1 | 8.2 |
| Selling, general and administrative expenses | 38.7 | 19.9 | 22.2 | 13.0 | 16.5 |
| Research and development expenses | 23.4 | 12.1 | 22.5 | 13.2 | 0.9 |
| Operating loss | (19.5) | (9.9) | (10.2) | (6.0) | (9.3) |
| Interest expense, net | (4.1) | (2.1) | (4.5) | (2.7) | 0.5 |
| Foreign currency gain (loss), net | (23.5) | (12.1) | 47.1 | 27.6 | (70.6) |
| Loss on early extinguishment of senior notes | — | — | (32.8) | (19.2) | 32.8 |
| Others | 0.6 | 0.3 | 1.2 | 0.8 | (0.6) |
|  | (27.0) | (13.9) | 10.9 | 6.4 | (38.0) |
| Loss before income taxes | (46.5) | (23.9) | 0.7 | 0.5 | (47.2) |
| Income tax expenses | 0.3 | 0.2 | 0.5 | 0.3 | (0.2) |
| Net loss | $(46.8) | (24.1)% | $0.3 | 0.1% | $(47.1) |

### Net Sales

*(In millions)*

|  | Three Months Ended September 30, 2014 Amount | % of Net Sales | Three Months Ended September 30, 2013 As Restated Amount | % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Display Solutions | $58.7 | 30.2% | $44.1 | 25.8% | $14.6 |
| Power Solutions | 36.1 | 18.6 | 36.4 | 21.3 | (0.3) |
| Semiconductor Manufacturing Services | 99.3 | 51.1 | 90.3 | 52.8 | 9.1 |
| All other | 0.2 | — | 0.1 | 0.1 | 0.1 |
|  | $194.3 | 100.0% | $170.8 | 100.0% | $23.5 |

Net sales were $194.3 million for the three months ended September 30, 2014, a $23.5 million, or 13.8%, increase, compared to $170.8 million for the three months ended September 30, 2013. Net sales increased primarily due to the increase in net sales from our Display Solutions line and Semiconductor Manufacturing Services line.

***Display Solutions.*** Net sales from our Display Solutions line were $58.7 million for the three months ended September 30, 2014, a $14.6 million, or 33.1%, increase from $44.1 million for the three months ended September 30, 2013. The increase in sales volume contributed 10% increase in revenue, and the increase in average selling prices contributed 21% increase in revenue. The significant increase in sales volume of mobile display products positively impacted our overall revenue and sales volume. The sales volume of large display products was approximately flat.

***Power Solutions.*** Net sales from our Power Solutions line were $36.1 million for the three months ended September 30, 2014, a $0.3 million, or 0.8%, decrease from $36.4 million for the three months ended September 30, 2013. The decrease in sales volume led to 16% decline in revenue, partially offset by the increase in average selling prices, which contributed 12% increase in revenue. The revenue for MOSFET products declined, nearly offset by the increase in revenue for premium products.

***Semiconductor Manufacturing Services.*** Net sales from our Semiconductor Manufacturing Services line were $99.3 million for the three months ended September 30, 2014, a $9.1 million, or 10.0%, increase compared to $90.3 million for the three months ended September 30, 2013. The increase in sales volume contributed 12% increase in revenue, but the decrease in average selling prices led to 4% decline in revenue. This increase was primarily due to an increase in sales volume of eight-inch equivalent wafers driven by higher market demand.

***All Other.*** All other net sales were $0.2 million for the three months ended September 30, 2014 and $0.1 million for the three months ended September 30, 2013.

### Net Sales by Geographic Region

The following table sets forth our net sales by geographic region and the percentage of total net sales represented by each geographic region for the three months ended September 30, 2014 and 2013:

*(In millions)*

|  | Three Months Ended September 30, 2014 Amount | % of Net Sales | Three Months Ended September 30, 2013 Amount | % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Korea | $84.8 | 43.6% | $74.1 | 43.4% | $10.7 |
| Asia Pacific (other than Korea) | 80.1 | 41.2 | 68.5 | 40.1 | 11.6 |
| United States | 25.1 | 12.9 | 22.8 | 13.3 | 2.3 |
| Europe | 3.8 | 2.0 | 4.5 | 2.6 | (0.7) |
| Others | 0.5 | 0.3 | 1.0 | 0.6 | (0.4) |
|  | $194.3 | 100.0% | $170.8 | 100.0% | $23.5 |

Net sales in Korea increased from $74.1 million for the three months ended September 30, 2013 to $84.8 million for the three months ended September 30, 2014, or by $10.7 million, or 14.5%, due to the increase in demand for our products for mobile devices and stabilization of demand for our products for large display applications. Net sales in Asia Pacific increased from $68.5 million for the three months ended September 30, 2013 to $80.1 million for the three months ended September 30, 2014, or by $11.6 million, or 17.0%, primarily due to increases in net sales of our Semiconductor Manufacturing Services division. Net sales in the United States increased from $22.8 million for the three months ended September 30, 2013 to $25.1 million for the three months ended September 30, 2014, or by $2.3 million, or 10.1%, due to the increase in demand for our products for mobile devices.

### Gross Profit

Total gross profit was $42.6 million for the three months ended September 30, 2014 compared to $34.4 million for the three months ended September 30, 2013, a $8.2 million, or 23.9%, increase. Gross profit as a percentage of net sales for the three months ended September 30, 2014 increased to 21.9% compared to 20.1% for the three months ended September 30, 2013.

The increase in gross profit was primarily due to the positive impact on the gross profit for the three months ended September 30, 2014 from the change in inventory reserve and write off, compared to the prior year period. The decrease in inventory reserve was $0.4 million for the three months ended September 30, 2014, compared to the increase of $17.5 million for the three months ended September 30, 2013. An increase in inventory reserve reduces gross profit. The inventory write-off, which is recognized only when the related inventory has been disposed or scrapped, was $8.0 million, for the three months ended September 30, 2014, compared to $0.6 million for the three months ended September 30, 2013.

The factors described above were offset by the negative impact of a lower utilization rate and increases in our labor and electricity costs on the gross profit for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. Reduced levels of customer orders experienced by the Semiconductor Manufacturing Services division resulted in the low utilization rates. The labor and benefits costs increased as a result of an increase in the average salary. Increases in the electricity tariffs by Korea Electric Power Corporation resulted in higher electricity costs.

### Operating Expenses

***Selling, General and Administrative Expenses.*** Selling, general and administrative expenses were $38.7 million, or 19.9% of net sales, for the three months ended September 30, 2014, compared to $22.2 million, or 13.0% of net sales, for the three months ended September 30, 2013. The increase of $16.5 million, or 74.6%, was primarily attributable the increase in outside service fees related to the Audit Committee’s independent investigation and related restatement.

***Research and Development Expenses.*** Research and development expenses were $23.4 million, or 12.1% of net sales, for the three months ended September 30, 2014, compared to $22.5 million, or 13.2% of net sales, for the three months ended September 30, 2013. The increase of $0.9 million, or 4.2%, was primarily due to an increase in direct material costs related to ongoing research and development activities.

### Operating Loss

As a result of the foregoing, operating loss increased by $9.3 million, or 90.6%, in the three months ended September 30, 2014 compared to the three months ended September 30, 2013. As discussed above, the increase in operating loss resulted from a $16.5 million increase in selling, general and administrative expenses and a $0.9 million increase in research and development expenses, which were partially offset by a $8.2 million increase in gross profit.

### Other Income (Expense)

***Interest Expense, Net.*** Net interest expense was $4.1 million for the three months ended September 30, 2014, a decrease of $0.5 million compared to $4.5 million for the three months ended September 30, 2013. The decrease of $0.5 million was primarily due to the repayment of our 2018 Notes and the issuance of our 2021 Notes.

***Foreign Currency Gain, Net.*** Net foreign currency loss for the three months ended September 30, 2014 was $23.5 million compared to net foreign currency gain of $47.1 million for the three months ended September 30, 2013. A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss associated with intercompany balances at our Korean subsidiary and is affected by changes in the exchange rate between the Korean won and the U.S. dollar. Foreign currency translation gain from intercompany balances was included in determining our consolidated net income since the intercompany balances were not considered long-term investments in nature because management intended to settle these intercompany balances at their respective maturity dates.

***Loss on Early Extinguishment of Senior Notes.*** In August 2013, we repaid $203.7 million aggregate principal amount of our 2018 Notes. In relation with this repayment, we recognized $32.8 million of loss on the early extinguishment of senior notes.

***Others.*** Others were comprised of gains and losses on valuation of derivatives which were designated as hedging instruments. Net gain on valuation of derivatives for the nine months ended September 30, 2014 represents either hedge ineffectiveness or components of changes in fair value of derivatives excluded from the assessments of hedge effectiveness.

### Income Tax Expenses

Income tax expenses for the three months ended September 30, 2014 and 2013 were $0.3 million and $0.5 million, respectively, primarily attributable to withholding taxes related to the intercompany balances and net operating loss carry-back in the parent company and a domestic subsidiary.

### Net Loss

As a result of the foregoing, net loss increased by $47.1 million in the three months ended September 30, 2014 compared to the three months ended September 30, 2013. As discussed above, the decrease primarily resulted from a $70.6 million increase in foreign currency loss, partially offset by a $32.8 million loss on early extinguishment of senior notes.

### Results of Operations – Comparison of Nine Months Ended September 30, 2014 and 2013

The following table sets forth consolidated results of operations for the nine months ended September 30, 2014 and 2013:

*(In millions)*

|  | Nine Months Ended September 30, 2014 Amount | % of Net Sales | Nine Months Ended September 30, 2013 As Restated Amount | % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $530.6 | 100.0% | $558.7 | 100.0% | $(28.1) |
| Cost of sales | 412.2 | 77.7 | 420.8 | 75.3 | (8.6) |
| Gross profit | 118.4 | 22.3 | 137.9 | 24.7 | (19.5) |
| Selling, general and administrative expenses | 94.5 | 17.8 | 63.9 | 11.4 | 30.5 |
| Research and development expenses | 70.6 | 13.3 | 65.1 | 11.7 | 5.5 |
| Restructuring and impairment charges | — | — | 2.4 | 0.4 | (2.4) |
| Operating income (loss) | (46.7) | (8.8) | 6.4 | 1.1 | (53.1) |
| Interest expense, net | (12.2) | (2.3) | (16.3) | (2.9) | 4.1 |
| Foreign currency gain, net | 5.5 | 1.0 | 1.5 | 0.3 | 4.0 |
| Loss on early extinguishment of senior notes | — | — | (32.8) | (5.9) | 32.8 |
| Others | 1.7 | 0.3 | 1.9 | 0.3 | (0.1) |
|  | (4.9) | (0.9) | (45.7) | (8.2) | 40.8 |
| Loss before income taxes | (51.6) | (9.7) | (39.3) | (7.0) | (12.3) |
| Income tax expenses | 1.8 | 0.3 | 2.7 | 0.5 | (0.9) |
| Net loss | $(53.4) | (10.1)% | $(42.0) | (7.5)% | $(11.4) |

### Net Sales

*(In millions)*

|  | Nine Months Ended September 30, 2014 Amount | % of Net Sales | Nine Months Ended September 30, 2013 Amount | % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Display Solutions | $144.4 | 27.2% | $160.1 | 28.7% | $(15.7) |
| Power Solutions | 104.1 | 19.6 | 93.6 | 16.7 | 10.6 |
| Semiconductor Manufacturing Services | 281.6 | 53.1 | 304.7 | 54.5 | (23.1) |
| All other | 0.4 | 0.1 | 0.3 | 0.1 | 0.1 |
|  | $530.6 | 100.0% | $558.7 | 100.0% | $(28.1) |

Net sales were $530.6 million for the nine months ended September 30, 2014, a $28.1 million, or 5.0%, decrease, compared to $558.7 million for the nine months ended September 30, 2013. Net sales decreased primarily due to the decrease in net sales from our Display Solutions line and Semiconductor Manufacturing Services line, as described below, offset by an increase in net sales from our Power Solutions line.

***Display Solutions.*** Net sales from our Display Solutions line were $144.4 million for the nine months ended September 30, 2014, a $15.7 million, or 9.8%, decrease from $160.1 million for the nine months ended September 30, 2013. The decrease in sales volume contributed 23% decrease in revenue, and the increase in average selling prices contributed 12% increase in revenue. The increase in sales volume of mobile display products positively impacted our overall revenue and sales volume. The sales volume of large display products declined significantly during the first six months of 2014, before recovering during the third quarter of 2014.

***Power Solutions.*** Net sales from our Power Solutions line were $104.1 million for the nine months ended September 30, 2014, a $10.6 million, or 11.3%, increase from $93.6 million for the nine months ended September 30, 2013. The increase in sales volume contributed 11% increase in revenue, and the decrease in average selling prices contributed 2% decrease in revenue. The significant increase in sales volume of premium products positively impacted our overall revenue and sales volume. The sales volume of MOSFET products increased slightly.

***Semiconductor Manufacturing Services.*** Net sales from our Semiconductor Manufacturing Services line were $281.6 million for the nine months ended September 30, 2014, a $23.1 million, or 7.6%, decrease compared to net sales of $304.7 million for the nine months ended September 30, 2013. The decrease in sales volume contributed 6% decrease in revenue, and the decrease in average selling prices contributed 3% decrease in revenue. The sales volume of our six-inch facility declined significantly.

***All Other.*** All other net sales were $0.4 million for the nine months ended September 30, 2014 and $0.3 million for the nine months ended September 30, 2013.

### Net Sales by Geographic Region

The following table sets forth our net sales by geographic region and the percentage of total net sales represented by each geographic region for the nine months ended September 30, 2014 and 2013:

*(In millions)*

|  | Nine Months Ended September 30, 2014 Amount | % of Net Sales | Nine Months Ended September 30, 2013 Amount | % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Korea | $219.1 | 41.3% | $239.1 | 42.8% | $(20.0) |
| Asia Pacific (other than Korea) | 224.7 | 42.3 | 209.2 | 37.4 | 15.5 |
| United States | 69.4 | 13.1 | 78.5 | 14.1 | (9.1) |
| Europe | 16.3 | 3.1 | 29.1 | 5.2 | (12.8) |
| Others | 1.0 | 0.2 | 2.7 | 0.5 | (1.7) |
|  | $530.6 | 100.0% | $558.7 | 100.0% | $(28.1) |

Net sales in Korea declined from $239.1 million for the nine months ended September 30, 2013 to $219.1 million for the nine months ended September 30, 2014, or by $20.0 million, or 8.4%, primarily due to the decline in demand for our products for large display applications. Net sales in Asia Pacific increased from $209.2 million for the nine months ended September 30, 2013 to $224.7 million for the nine months ended September 30, 2014, or by $15.5 million, or 7.4%, primarily due to increases in net sales of Semiconductor Manufacturing Services and Power Solutions divisions. Net sales in the United States declined from $78.5 million for the nine months ended September 30, 2013 to $69.4 million for the nine months ended September 30, 2014, or by $9.1 million, or 11.6%, due to the decline in demand for our products for mobile devices. Net sales in Europe declined from $29.1 million for the nine months ended September 30, 2013 to $16.3 million for the nine months ended September 30, 2014, or by $12.8 million, or 43.9%, due to the decline in demand for our products for mobile devices.

### Gross Profit

Total gross profit was $118.4 million for the nine months ended September 30, 2014 compared to $137.9 million for the nine months ended September 30, 2013, a $19.5 million, or 14.2%, decrease. Gross profit as a percentage of net sales for the nine months ended September 30, 2014 was 22.3% compared to 24.7% for the nine months ended September 30, 2013.

The decline in the gross profit was primarily attributable to the negative impact of a lower utilization rate and increases in our labor and electricity costs on the gross profit for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. Reduced levels of customer orders experienced by the Semiconductor Manufacturing Services division resulted in the low utilization rates. The labor and benefits costs increased as a result of an increase in the average salary. Increases in the electricity tariffs by Korea Electric Power Corporation resulted in higher electricity costs.

The factors described above were offset by the positive impact on the gross profit for the nine months ended September 30, 2014 from the change in inventory reserve and write off, compared to the prior year period. The increase in inventory reserve was $3.0 million for the nine months ended September 30, 2014, compared to the increase of $31.8 million for the nine months ended September 30, 2013. An increase in inventory reserve reduces gross profit. The inventory write off, which is recognized only when the related inventory has been disposed or scrapped, was $20.7 million for the nine months ended September 30, 2014, compared to $1.1 million for the nine months ended September 30, 2013.

### Operating Expenses

***Selling, General and Administrative Expenses.*** Selling, general, and administrative expenses were $94.5 million, or 17.8% of net sales, for the nine months ended September 30, 2014, compared to $63.9 million, or 11.4% of net sales, for the nine months ended September 30, 2013. The increase of $30.5 million, or 47.8%, was primarily attributable to the increase in outside service fees related to the Audit Committee’s independent investigation and related restatement.

***Research and Development Expenses.*** Research and development expenses were $70.6 million, or 13.3% of net sales, for the nine months ended September 30, 2014, compared to $65.1 million, or 11.7% of net sales, for the nine months ended September 30, 2013. The increase of $5.5 million, or 8.4%, was due to an increase in direct material costs related to ongoing research and development activities and an increase in personnel costs.

***Restructuring and Impairment Charges.*** We had no restructuring and impairment charges for the nine months ended September 30, 2014 compared to $2.4 million for the nine months ended September 30, 2013. Restructuring charges of $1.8 million recorded for the nine months ended September 30, 2013 were related to the restructuring of one of our fabrication facilities. Impairment charges of $0.6 million for the nine months ended September 30, 2013 consisted of impairments to certain existing technology.

### Operating Income

As a result of the foregoing, operating income decreased by $53.1 million, in the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. As discussed above, the decrease in operating income resulted from a $19.5 million decrease in gross profit, which was offset by a $30.5 million increase in selling, general and administrative expenses and a $5.5 million increase in research and development expenses.

### Other Income (Expense)

***Interest Expense, Net.*** Net interest expense was $12.2 million for the nine months ended September 30, 2014, a decrease of $4.1 million compared to $16.3 million for the nine months ended September 30, 2013. The decrease of $4.1 million was primarily due to the repayment of our 2018 Notes and the issuance of our 2021 Notes in 2013.

***Foreign Currency Gain (Loss), Net.*** Net foreign currency gain for the nine months ended September 30, 2014 was $5.5 million compared to $1.5 million for the nine months ended September 30, 2013. A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss associated with intercompany balances at our Korean subsidiary and is affected by changes in the exchange rate between the Korean won and the U.S. dollar. Foreign currency translation gain from intercompany balances was included in determining our consolidated net income since the intercompany balances were not considered long-term investments in nature because management intended to settle these intercompany balances at their respective maturity dates.

***Loss on Early Extinguishment of Senior Notes.*** In August 2013, we repaid $203.7 million aggregate principal amount of our 2018 Notes. In relation with this repayment, we recognized $32.8 million of loss on the early extinguishment of senior notes.

***Others.*** Others were comprised of gains and losses on valuation of derivatives which were designated as hedging instruments. Net gain on valuation of derivatives for the nine months ended September 30, 2014 represents either hedge ineffectiveness or components of changes in fair value of derivatives excluded from the assessments of hedge effectiveness.

### Income Tax Expenses

Income tax expenses for the nine months ended September 30, 2014 and 2013 were $1.8 million and $2.7 million, respectively, primarily attributable to withholding taxes related to the intercompany balances and net operating loss carry-back in the parent company and a domestic subsidiary.

### Net Loss

As a result of the foregoing, net loss increased by $11.4 million, or 27.1%, in the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. As discussed above, the decrease primarily resulted from a $53.1 increase in operating loss, partially offset by a $32.8 million loss on early extinguishment of senior notes.

### Liquidity and Capital Resources

Our principal capital requirements are to fund sales and marketing, invest in research and development and capital equipment, to make debt service payments and to fund working capital needs. We calculate working capital as current assets less current liabilities.

Our principal sources of liquidity are our cash, cash equivalents and our cash flows from operations and our financing activities. Our ability to manage cash and cash equivalents may be limited as our primary cash flows are dictated by the terms of our sales and supply agreements, contractual obligations, debt instruments and legal and regulatory requirements. From time to time, we may sell accounts receivable to third parties under factoring agreements or engage in accounts receivable discounting to facilitate the collection of cash. In addition, from time to time, we may make payments to our vendors on extended terms with their consent.

### Cash Flows from Operating Activities

Cash outflows used in operating activities totaled $10.3 million for the nine months ended September 30, 2014, compared to $49.4 million of cash provided by operating activities in the nine months ended September 30, 2013. The net operating cash outflow for the nine months ended September 30, 2014 reflects our net loss of $53.4 million and non-cash adjustments of $38.8 million which mainly consisted of depreciation and amortization and provision for severance benefits, and a decrease in net operating assets of $4.2 million.

Our working capital balance as of September 30, 2014 was $131.8 million compared to $172.1 million as of December 31, 2013. The $40.3 million decrease was primarily attributable to a $28.4 million decrease in cash and cash equivalents and a $11.9 million increase in accrued expenses, primarily as a result of accrual of outside service fees related to the Audit Committee’s independent investigation and related restatement.

### Cash Flows from Investing Activities

Cash outflow used in investing activities totaled $14.7 million in the nine months ended September 30, 2014, compared to $41.6 million of cash outflow used in investing activities in the nine months ended September 30, 2013. The decrease was primarily due to a decrease in capital expenditures of $24.6 million.

### Cash Flows from Financing Activities

Cash inflows generated by financing activities totaled $0.1 million for the nine months ended September 30, 2014, compared to $31.8 million of cash outflow used in financing activities in the nine months ended September 30, 2013. The financing cash outflow for the nine months ended September 30, 2013 mainly consists of the repayment of $229.3 million of our 2018 Notes and the repurchase of $31.0 million of our outstanding common stock, which were offset by $9.7 million of proceed received from the issuance of common stock in connection with option and warrant exercises and the net proceeds of $218.8 million from the issuance of our 2021 Notes. We repurchased 1,589,401 shares of common stock at a cost of $31.0 million for the nine months ended September 30, 2013.

### Capital Expenditures

We routinely make capital expenditures to enhance our existing facilities and reinforce our global research and development capability. For the nine months ended September 30, 2014, capital expenditures were $16.4 million, a $24.6 million, or 60.0%, decrease from $41.0 million in the nine months ended September 30, 2013 primarily due to comparatively larger technology upgrade investments in 2013.

### Seasonality

Our net sales and number of distinct products sold are affected by market variations from quarter to quarter due to business cycles, and resulting product demand, of our customers. In our Display Solutions and Power Solutions business lines, consumer products manufacturers generally reduce orders in order to reduce excess inventory remaining from the holiday season. In our Semiconductor Manufacturing Services business, the supply-demand cycle is usually one quarter ahead of the broader semiconductor market due to lead time from wafer input to shipment to our customers, so the demand for these products tends to peak in the third quarter and is slower in the fourth and first quarters.

### Contractual Obligations

The following summarizes our contractual obligations as of September 30, 2014:

*(In millions)*

|  | Payments Due by Period Total | Remainder of 2014 | 2015 | 2016 | 2017 | 2018 | Thereafter |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Senior notes(1) | $329.3 | $— | $14.9 | $14.9 | $14.9 | $14.9 | $269.7 |
| Operating lease(2) | 53.0 | 4.7 | 5.7 | 4.7 | 2.3 | 2.2 | 33.4 |
| Others(3) | 13.0 | 0.9 | 7.6 | 3.9 | 0.5 | — | — |

(1) Interest payments as well as $225.0 million aggregate principal amount of the 2021 Notes outstanding as of September 30, 2014, which bear interest at a rate of 6.625% per annum and are scheduled to mature in 2021.

(2) Assumes constant currency exchange rate for Korean won to U.S. dollars of 1,050.6:1.

(3) Includes license agreements and other contractual obligations.

The Indenture relating to the 2021 Notes contains covenants that limit our ability and our restricted subsidiaries to: (i) declare or pay any dividend or make any payment or distribution on account of or purchase or redeem our capital stock or equity interests of the restricted subsidiaries; (ii) make any principal payment on, or redeem or repurchase, prior to any scheduled repayment or maturity, any subordinated indebtedness; (iii) make certain investments; (iv) incur additional indebtedness and issue certain types of capital stock; (v) create or incur any lien (except for permitted liens) that secures obligations under any indebtedness; (vi) merge with or into or sell all or substantially all of our assets to other companies; (vii) enter into certain types of transactions with affiliates; (viii) guarantee the payment of any indebtedness; (ix) enter into sale-leaseback transactions; (x) enter into agreements that would restrict the ability of the restricted subsidiaries to make distributions with respect to their equity to us or other restricted subsidiaries, to make loans to us or other restricted subsidiaries or to transfer assets to us or other restricted subsidiaries; and (xi) designate unrestricted subsidiaries.

We lease land, office space and equipment under various operating lease agreements that expire through 2034.

We follow ASC guidance on uncertain tax positions. Our unrecognized tax benefits totaled $3.7 million as of September 30, 2014. These unrecognized tax benefits have been excluded from the above table because we cannot estimate the period of cash settlement with the respective taxing authorities.

### Critical Accounting Policies and Estimates

Preparing financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in our consolidated financial statements and accompanying notes.

We believe that our significant accounting policies, which are described in Note 1 to the consolidated financial statements of MagnaChip Semiconductor Corporation for the nine months ended September 30, 2014 included elsewhere in this Report, are critical due to the fact that they involve a high degree of judgment and estimates about the effects of matters that are inherently uncertain. We base these estimates and judgments on historical experience, knowledge of current conditions and other assumptions and information that we believe to be reasonable. Estimates and assumptions about future events and their effects cannot be determined with certainty. Accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the business environment in which we operate changes.

### Revenue Recognition

Revenue is recognized when there is persuasive evidence of an arrangement, the price to the buyer is fixed or determinable, delivery has occurred and collectability of the sales price is reasonably assured. Revenue from the sale of products is recognized when title and risk of loss transfers to the customer, which is generally when the product is shipped to or accepted by the customer depending on the terms of the arrangement.

A portion of our sales are made through distributors for which revenue recognition criteria are usually met when the product is shipped to or accepted by the distributor, consistent with the principles described above. However, the risk of loss may not pass upon shipment of products to the distributors due to a variety of reasons, including the nature of the business arrangement with the distributor. For example, the financial condition of a distributor may indicate that payments by the distributor to us are contingent on resale of products to an end customer. In this situation, we defer recognition of revenue and cost of revenue on transactions with such distributor until we are informed by the distributor that the product has been resold to the end customer.

In accordance with revenue recognition guidance, any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer is presented in the statements of operations on a net basis (excluded from revenues).

We provide a warranty, under which customers can return defective products. We estimate the costs related to those defective product returns and record them as a component of cost of sales.

In addition, we offer sales returns (other than those that relate to defective products under warranty), yield provisions, cash discounts for early payments and certain allowances to our customers, including distributors. We record reserves for those returns, discounts and allowances as a deduction from sales, based on historical experience and other quantitative and qualitative factors.

All amounts billed to a customer related to shipping and handling are classified as sales while all costs incurred by us for shipping and handling are classified as selling, general and administrative expenses.

### Sales of Accounts Receivable

We account for transfers of financial assets under ASC 860, “Transfers and Servicing,” as either sales or financings. Transfers of financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and no condition both constraints the transferee’s right to pledge or exchange the assets and provides more than a trivial benefit to the transferor, and (3) the transferor does not maintain effective control over the transferred assets. If the transfer does not meet these criteria, the transfer is accounted for as a financing. Financial assets that are treated as sales are removed from our accounts with any realized gain or loss reflected in earning during the period of sale.

### Product Warranties

We record, in other current liabilities, warranty liabilities for the estimated costs that may be incurred under our basic limited warranty. The standard limited warranty period is one year for the majority of products. This warranty covers defective products, and related liabilities are accrued when product revenues are recognized. Factors that affect our warranty liability include historical and anticipated rates of warranty claims and repair or replacement costs per claim to satisfy our warranty obligation. As these factors are impacted by actual experience and future expectations, we periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts when necessary.

### Inventories

Inventories are stated at the lower of cost or market, using the average cost method, which approximates the first in, first out method (“FIFO”). If net realizable value is less than cost at the balance sheet date, the carrying amount is reduced to the realizable value, and the difference is recognized as a loss on valuation of inventories within cost of sales. Inventory reserves are established when conditions indicate that the net realizable value is less than costs due to physical deterioration, obsolescence, changes in price levels, or other causes based on individual facts and circumstances. Reserves are also established for excess inventory based on inventory levels in excess of six months of projected demand for each specific product.

In addition, as prescribed in ASC 330, “*Inventory,”* the cost of inventories is determined based on the normal capacity of each fabrication facility. In case the capacity utilization is lower than a certain level that management believes to be normal, the fixed overhead costs per production unit which exceed those under normal capacity are charged to cost of sales rather than capitalized as inventories.

### Impairment of Long-Lived Assets

We review property, plant and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”). Recoverability is measured by comparing its carrying amount with the future net undiscounted cash flows the assets are expected to generate. If such assets are considered to be impaired, the impairment is measured as the difference between the carrying amount of the assets and the fair value of assets using the present value of the future net cash flows generated by the respective long-lived assets.

### Intangible Assets

Intangible assets other than intellectual property include technology and customer relationships which are amortized on a straight-line basis over periods ranging from one to five years. Intellectual property assets acquired represent rights under patents, trademarks and property use rights and are amortized over their respective periods of benefit, ranging up to ten years, on a straight-line basis.

### Income Taxes

Prior to its conversion to a corporation, MagnaChip Semiconductor LLC elected to be treated as a partnership for United States federal income tax purposes and therefore was not subject to income taxes on its income. Taxes on its income were the responsibility of the individual equity owners of MagnaChip Semiconductor LLC. MagnaChip Semiconductor Corporation became a taxable entity according to the corporate conversion in March 2011. We operate a number of subsidiaries that are subject to local income taxes in those territories.

We account for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). ASC 740 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in a company’s financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when it is necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities.

We recognize and measure uncertain tax positions taken or expected to be taken in a tax return utilizing a two-step process. In the first step, recognition, we determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step addresses measurement of a tax position that meets the more-likely-than-not criteria. The tax position is measured at the largest amount of benefit that has a likelihood of greater than 50 percent of being realized upon ultimate settlement.

### Derivative Financial Instruments

We apply the provisions of ASC 815, “Derivatives and Hedging” (“ASC 815”). This Statement requires the recognition of all derivative instruments as either assets or liabilities measured at fair value.

Under the provisions of ASC 815, we may designate a derivative instrument as hedging the exposure to variability in expected future cash flows that are attributable to a particular risk (a “cash flow hedge”) or hedging the exposure to changes in the fair value of an asset or a liability (a “fair value hedge”). Special accounting for qualifying hedges allows the effective portion of a derivative instrument’s gains and losses to offset related results on the hedged item in the consolidated statements of operations and requires that a company formally document, designate and assess the effectiveness of the transactions that receive hedge accounting treatment. Both at the inception of a hedge and on an ongoing basis, a hedge must be expected to be highly effective in achieving offsetting changes in cash flows or fair value attributable to the underlying risk being hedged. If we determine that a derivative instrument is no longer highly effective as a hedge, it discontinues hedge accounting prospectively and future changes in the fair value of the derivative are recognized in current earnings. We assess hedge effectiveness at the end of each quarter.

In accordance with ASC 815, changes in the fair value of derivative instruments that are cash flow hedges are recognized in accumulated other comprehensive income (loss) and reclassified into earnings in the period in which the hedged item affects earnings. Ineffective portions of a derivative instrument’s change in fair value are immediately recognized in earnings. Derivative instruments that do not qualify, or cease to qualify, as hedges must be adjusted to fair value and the adjustments are recorded through net income (loss).

The cash flows from derivative instruments receiving hedge accounting treatment are classified in the same categories as the hedged items in the consolidated statements of cash flows.

### Recent Accounting Pronouncements

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Presentation of Financial Statements – Going Concern” (“ASU 2014-15”), which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity will be required to provide certain disclosures if conditions of events raise substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2014-15 on our consolidated financial statements.

In June 2014, the FASB issued Accounting Standards Update No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures” (“ASU 2014-11”). The guidance in this update changes the accounting for repurchase-to-maturity transactions and repurchasing financing arrangements. It also requires enhanced disclosures about repurchase agreements and other similar transactions. The accounting changes in this update are effective for public companies for the first interim or annual period beginning after December 15, 2014. In addition, for public companies, the disclosure for certain transactions accounted for as a sale is effective for the first interim or annual period beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early application is not permitted. We are currently evaluating the impact of the adoption of ASU 2014-11 on our consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers.” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

## Market risk

As filed, 2,772 characters.

We are exposed to the market risk that the value of a financial instrument will fluctuate due to changes in market conditions, primarily from changes in foreign currency exchange rates and interest rates. In the normal course of our business, we are subject to market risks associated with interest rate movements and currency movements on our assets and liabilities.

### Foreign Currency Exposures

We have exposure to foreign currency exchange rate fluctuations on net income from our subsidiaries denominated in currencies other than U.S. dollars, as our foreign subsidiaries in Korea, Taiwan, China, Japan and Hong Kong use local currency as their functional currency. From time to time these subsidiaries have cash and financial instruments in local currency. The amounts held in Japan, Taiwan, Hong Kong and China are not material in regards to foreign currency movements. However, based on the cash and financial instruments balance at September 30, 2014 for our Korean subsidiary, a 10% devaluation of the Korean won against the U.S. dollar would have resulted in a decrease of $3.2 million in our U.S. dollar financial instruments and cash balances. Based on the Japanese yen cash balance at September 30, 2014 for our Korean subsidiary, a 10% devaluation of the Japanese yen against the U.S. dollar would have resulted in a decrease of $0.1 million in our U.S. dollar cash balance.

See “Note 8. Derivative Financial Instruments” to our consolidated financial statements under “Part I: Item 1. Interim Consolidated Financial Statements (Unaudited)” and “Part I: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Impact of Foreign Currency Exchange Rates on Reported Results of Operations” of this Quarterly Report for additional information regarding our foreign exchange hedging activities.

### Interest Rate Exposures

As of September 30, 2014, $225.0 million aggregate principal amount of our 2021 Notes were outstanding. Our outstanding 2021 Notes are subject to changes in fair value due to interest rate changes. If the market interest rate increases by 10% and all other variables were held constant from their levels at September 30, 2014, we estimate that the fair value of this fixed rate note would decrease by $7.9 million and we would have additional interest expense costs over the market rate of $0.9 million (on a 360-day basis). If the market interest rate decreased by 10% and all other variables were held constant from their levels at September 30, 2014, we estimate that the fair value of this fixed rate note would increase by $8.3 million and we would have a reduction in interest expense costs over the market rate of $1.0 million (on a 360-day basis).

## Controls and procedures

As filed, 4,458 characters.

### Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer and Interim Chief Financial Officer, to allow timely decisions regarding required disclosure.

In connection with the preparation of this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision of and with the participation of our management, including our Interim Chief Executive Officer and Interim Chief Financial Officer, as of September 30, 2014, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, our management, including our Interim Chief Executive Officer and Interim Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of September 30, 2014 because of the material weaknesses in internal control over financial reporting described in Part II, Item 9A of the 2013 Form 10-K. As disclosed in the 2013 Form 10-K, our management, including our Interim Chief Executive Officer and Interim Chief Financial Officer, previously concluded that our disclosure controls and procedures were not effective as of December 31, 2013 because of the material weaknesses in internal control over financial reporting described under the subheading “Management’s Annual Report on Internal Control over Financial Reporting” in Part II, Item 9A of the 2013 Form 10-K. Management has concluded that the material weaknesses that were present at December 31, 2013 were also present at September 30, 2014.

To address these material weaknesses, we performed additional analyses and other procedures (as further described under the subheading “Remediation Plan” in Part II, Item 9A of the 2013 Form 10-K) to ensure that the Company’s consolidated financial statements were prepared in accordance with US GAAP.

### Previously Identified Material Weaknesses

As previously disclosed in the 2013 Form 10-K, management concluded that, based on the criteria set forth in *Internal Control - Integrated Framework (1992)* issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), our internal control over financial reporting was not effective as of December 31, 2013 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with US GAAP. For a discussion of the material weaknesses in internal control over financial reporting, please see Part II, Item 9A of the 2013 Form 10-K.

### Remediation Plan

As previously disclosed in the 2013 Form 10-K, to remediate the material weaknesses described under the subheading “Management’s Annual Report on Internal Control over Financial Reporting” in Part II, Item 9A of the 2013 Form 10-K, we have implemented or plan to implement the remediation initiatives described under the subheading “Remediation Plan” in Part II, Item 9A of the 2013 Form 10-K and will continue to evaluate the remediation and may in the future implement additional measures.

The Company’s management believes the remediation measures described in the 2013 Form 10-K will remediate the identified material weaknesses and strengthen the Company’s internal control over financial reporting. As management continues to evaluate and work to improve its internal control over financial reporting, it may be determined that additional measures must be taken to address the material weaknesses identified in Part II, Item 9A of the 2013 Form 10-K, or it may be determined that the Company needs to modify, or in appropriate circumstances not to complete, certain of the remediation measures described in the 2013 Form 10-K.

### Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 676 characters.

The Company is subject to risks and uncertainties, any of which could have a significant or material adverse effect on our business, financial condition, liquidity or consolidated financial statements. You should carefully consider the risk factors disclosed in Part I, Item 1A of our 2013 Form 10-K. The risks described herein and therein are not the only ones we face. This information should be considered carefully together with the other information contained in this report and the other reports and materials the Company files with the SEC.

There are no material changes to the Company’s risk factors disclosed in “Part I: Item 1A. Risk Factors” of our 2013 Form 10-K.

Filed Feb 12, 2015.
Source: SEC EDGAR, the filing index for accession 0001193125-15-046779. Last ingested by Listed: Nov 10, 2026, 16:32 ET. No prices; not investment advice.