# MAGNACHIP SEMICONDUCTOR Corp: Form 10-Q for the period ended Mar 31, 2016

- Company: [MAGNACHIP SEMICONDUCTOR Corp](/companies/mx.md) (CIK 1325702)
- Form: 10-Q
- Filed: 2016-05-06
- Accepted by EDGAR: May 6, 2016, 06:22 ET
- Period: 2016-03-31
- Accession: 0001193125-16-580819
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1325702/000119312516580819/d184718d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1325702/000119312516580819/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-01-01 to 2016-03-31 | $148.1m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2016-01-01 to 2016-03-31 | $113.9m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2016-01-01 to 2016-03-31 | $34.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2016-01-01 to 2016-03-31 | $17.8m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2016-01-01 to 2016-03-31 | $20.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-01-01 to 2016-03-31 | $4.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2016-01-01 to 2016-03-31 | $815.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-01-01 to 2016-03-31 | $8.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-01-01 to 2016-03-31 | $0.23 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-01-01 to 2016-03-31 | $0.23 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-01-01 to 2016-03-31 | 34,918,568 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2016-01-01 to 2016-03-31 | −$18.2m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2016-01-01 to 2016-03-31 | $4.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-03-31 | $73.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-03-31 | $247.4m | us-gaap:AssetsCurrent |
| Total assets | at 2016-03-31 | $458.8m | us-gaap:Assets |
| Current liabilities | at 2016-03-31 | $147.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-03-31 | $518.5m | us-gaap:Liabilities |
| Long-term debt | at 2016-03-31 | $220.5m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2016-03-31 | −$59.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 65,653 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.*

### Overview

We are a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products for consumer, computing, communication, industrial, automotive and IoT applications. We provide technology platforms for analog, mixed-signal, power, high voltage, non-volatile memory, and RF applications. We have a proven record with a 30-year operating history, large portfolio of 2,350 registered novel patents and 159 pending novel patent applications and extensive engineering and manufacturing process expertise.

Our Foundry Services Group provides specialty analog and mixed-signal foundry services mainly for fabless and IDM semiconductor companies that primarily serve consumer, computing, communication, industrial, automotive and IoT applications. Our Standard Products Group includes our Display Solutions and Power Solutions business lines. Our Display Solutions products provide flat panel display solutions to major suppliers of large and small flat panel displays and include our sensor products for mobile applications, industrial applications and home appliances. Our Power Solutions products include discrete and integrated circuit solutions for power management in consumer, computing, communication and industrial applications.

Our wide variety of analog and mixed-signal semiconductor products and manufacturing services combined with our mature 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 electronics device 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 electronics devices 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 by overall demand for consumer, computing, communication, industrial, automotive and IoT products and can be adversely affected by periods of weak consumer and enterprise spending or by market share losses by our customers. In order to mitigate the impact of market volatility on our business, we are diversifying our portfolio of products, customers, and target applications. 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 Foundry Services Group, net sales are driven by customers’ decisions on which manufacturing services provider to use for a particular product. Most of our Foundry Services Group customers are fabless, while some are IDM customers. A customer will often have more than one supplier of manufacturing services. 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.

Within our Standard Products Group, net sales are driven by design wins in which we are selected by an electronics original equipment manufacturer (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 we have design wins and the products enter into mass production, 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.

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. 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 of the market result in more moderate industry capacity expansion as compared to leading edge processes. As a result, we 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 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 awareness of new product opportunities, market and technology trends and improve our ability to adapt and grow successfully. In our Foundry Services Group, we strive to maintain competitiveness by offering high-value added processes, high-flexibility and excellent service by tailoring existing standard processes to meet customers’ design needs and porting customers’ own process technologies into our fabrication facilities.

### Recent Developments

In December 2014, we announced that our Board of Directors had adopted a plan to close our 6-inch fab. According to this plan, the 6-inch fab was closed on February 29, 2016. On April 4, 2016, we commenced a voluntary resignation program (the “Program”), which was available to certain manufacturing employees, including our 6-inch fab employees, through April 29, 2016.

As of April 29, 2016, 169 employees elected to resign under the terms of the Program, from which we expect to save approximately $8 million in spending per year. We will pay approximately $8 million for severance benefits, which are required by law and have already been fully accrued in our financial statements, in a lump sum during the second quarter of 2016. We will also pay other termination benefits under the Program of approximately $4 million in the aggregate, payable in equal monthly installments over the next twelve months. We expect to record a $4 million charge related to the other termination benefits payable under the Program during the second quarter of 2016.

### Restatement

In January 2014, our Audit Committee commenced an independent investigation that resulted in the restatement of certain financial statements for prior periods. As a result of the restatement, we have incurred substantial external accounting, legal and other related costs associated with the restatement and certain litigation and other regulatory investigations and actions related thereto. We incurred restatement related costs of $3.6 million, primarily attributable to those relate to certain litigation, for the three months ended March 31, 2016, compared to $7.1 million in the three months ended March 31, 2015. On December 10, 2015, we entered into a Memorandum of Understanding with the plaintiffs’ representatives to settle the Class Action Litigation, as defined and detailed in “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 17. Commitments and Contingencies” in this Report, for an aggregate settlement payment of $23.5 million. This settlement payment is expected to be fully funded by insurance proceeds.

### Segments

We had previously reported our results of operations under one operating segment. During the second quarter of 2015, organizational changes were made to (i) realign our businesses and organizational structure and (ii) streamline and consolidate certain business processes to achieve greater operating efficiencies. Accordingly, we combined our business lines of Display Solutions and Power Solutions into a new segment called Standard Products Group. Beginning in the second quarter of 2015, we began to report our financial results in two operating segments: Semiconductor Manufacturing Services and Standard Products Group. We identified these segments based on how we allocate resources and assess our performance.

During the third quarter of 2015, we changed the name of our Semiconductor Manufacturing Services segment to Foundry Services Group. We believe that this new name provides greater clarity on the identity of this segment. There is no change to the composition of this reportable segment from what we previously reported for the Semiconductor Manufacturing Services segment.

- ***Foundry Services Group:*** Our Foundry Services Group provides specialty analog and mixed-signal foundry services to fabless semiconductor companies and IDMs that serve consumer, computing, communication, industrial, automotive and IoT applications. 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 461 process flows to our foundry 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 foundry services target customers who require differentiated, specialty analog and mixed-signal process technologies such as high voltage complementary metal-oxide-semiconductor (CMOS), embedded memory or bipolar-CMOS-DMOS (BCD). These customers typically serve the consumer, computing, communication, industrial, automotive and IoT applications. Our Foundry Services Group business represented 40.5% and 45.2% of our net sales for the three months ended March 31, 2016 and March 31, 2015, respectively. Gross profit from our Foundry Services Group business was $14.3 million and $15.4 million for the three months ended March 31, 2016 and March 31, 2015, respectively.
- ***Standard Products Group:*** Our Standard Products Group includes our Display Solutions and Power Solutions business lines. Our Display Solutions products include source and gate drivers and timing controllers that cover a wide range of flat panel displays used in ultra high definition (UHD), high definition (HD), light emitting diode (LED), 3D and OLED televisions and displays, notebooks and mobile communications and entertainment devices. Our Display Solutions products support the industry’s most advanced display technologies, such as active matrix organic light emitting diodes (AMOLEDs), and low temperature polysilicons (LTPS), as well as high-volume display technologies such as thin film transistors (TFT). We provide a full range of intelligent sensor product families featuring 0.18 micron analog and mixed-signal technology with low power consumption. Our sensor families target the growing market for applications ranging from smartphone, tablet PC and other consumer electronics to industrial devices. Our Power Solutions business line produces power management semiconductor products including discrete and integrated circuit solutions for power management in high-volume consumer applications. These products include metal oxide semiconductor field effect transistors (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 Standard Products Group, which includes our Display Solutions and Power Solutions business lines, represented 59.4% and 54.7% of our net sales for the three months ended March 31, 2016 and March 31, 2015, respectively. Gross profit from our Standard Products Group was $20.8 million and $19.4 million for the three months ended March 31, 2016 and March 31, 2015, respectively.

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

### Adjusted EBITDA and Adjusted Net Loss

We use the terms Adjusted EBITDA and Adjusted Net Loss 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 other (gain), net, (v) equity-based compensation expense, (vi) foreign currency loss (gain), net, (vii) derivative valuation loss (gain), net and (viii) 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 of Directors 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 March 31, 2016 | Three Months Ended March 31, 2015 |
| --- | ---: | ---: |
| Net income (loss) | $8.1 | $(20.0) |
| Adjustments: |  |  |
| Depreciation and amortization | 6.0 | 6.9 |
| Interest expense, net | 4.0 | 4.1 |
| Income tax expenses | 0.8 | 1.1 |
| Restructuring and other (gain), net(a) | (6.8) | — |
| Equity-based compensation expense(b) | 0.5 | 0.2 |
| Foreign currency loss (gain), net(c) | (8.2) | 3.2 |
| Derivative valuation gain, net(d) | (0.0) | — |
| Restatement related expenses(e) | 3.6 | 7.1 |
| Adjusted EBITDA | $8.0 | $2.5 |

(a) This adjustment eliminates the $7.8 million restructuring gain on sale of machinery in connection with the closure of our 6-inch fab, net of $1.0 million training and transition costs related to our 6-inch fab employees.

(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 in connection with the Audit Committee’s independent investigation and related restatement and litigation, primarily comprised of legal, audit and consulting fees. This amount does not include any allocation of internal costs related to the restatement.

There was no tax impact from the adjustments to net income (loss) to calculate our Adjusted EBITDA for the three months ended March 31, 2016 and 2015 due to net operating loss carry-forwards available to offset taxable income and full allowance for deferred tax assets.

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 Loss as a further supplemental measure of our performance. We prepare Adjusted Net Loss 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 Loss is particularly useful because it reflects the impact of our asset base and capital structure on our operating performance. We present Adjusted Net Loss for a number of reasons, including:

- we use Adjusted Net Loss in communications with our Board of Directors concerning our consolidated financial performance;
- we believe that Adjusted Net Loss is an enterprise level performance measure commonly reported and widely used by analysts and investors in our industry; and
- our investor and analyst presentations may include Adjusted Net Loss.

Adjusted Net Loss 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 Loss differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Net Loss, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Net Loss for the periods indicated as net income (loss), adjusted to exclude (i) restructuring and other (gain), net , (ii) equity-based compensation expense, (iii) foreign currency loss (gain), net, (iv) derivative valuation loss (gain), net and (v) restatement related expenses.

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

*(In millions)*

|  | Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 |
| --- | ---: | ---: |
| Net income (loss) | $8.1 | $(20.0) |
| Adjustments: |  |  |
| Restructuring and other (gain), net(a) | (6.8) | — |
| Equity-based compensation expense(b) | 0.5 | 0.2 |
| Foreign currency loss (gain), net(c) | (8.2) | 3.2 |
| Derivative valuation gain, net(d) | (0.0) | — |
| Restatement related expenses(e) | 3.6 | 7.1 |
| Adjusted Net Loss | $(2.8) | $(9.6) |

(a) This adjustment eliminates the $7.8 million restructuring gain on sale of machinery in conjunction with the closure of our 6-inch fab, net of $1.0 million training and transition costs related to our 6-inch fab employees.

(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 in connection with the Audit Committee’s independent investigation and related restatement and litigation, primarily comprised of legal, audit and consulting fees. This amount does not include any allocation of internal costs related to the restatement.

There was no tax impact from the adjustments to net income (loss) to calculate our Adjusted Net Loss for the three months ended March 31, 2016 and 2015 due to net operating loss carry-forwards available to offset taxable income and full allowance for deferred tax assets.

Adjusted Net Loss 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 Loss does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
- Adjusted Net Loss does not reflect changes in, or cash requirements for, our working capital needs;
- Adjusted Net Loss does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees;
- Adjusted Net Loss does not reflect the costs of holding certain assets and liabilities in foreign currencies; and
- other companies in our industry may calculate Adjusted Net Loss differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted Net Loss 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 Loss only supplementally.

### Factors Affecting Our Results of Operations

***Net Sales.*** We derive virtually all of our sales (net of sales returns and allowances) from two segments: Foundry Services Group and Standard Products Group. 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 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 three months ended March 31, 2016 and 2015, we sold products to 238 and 220 customers, respectively, and our net sales to our ten largest customers represented 64% and 60% of our net sales, respectively. We have a combined production capacity of over 121,000 eight-inch equivalent semiconductor wafers per month. We believe our large-scale, cost-effective fabrication facilities enable us to rapidly adjust our production levels to meet shifts in demand by our end customers.

***Gross Profit.*** Our overall gross profit generally fluctuates as a result of changes in overall sales volumes and in the average selling prices of our products and services. Other factors that influence our gross profit include changes in product mix, the introduction of new products and services and subsequent generations of existing products and services, shifts in the utilization of our manufacturing facilities and the yields achieved by our manufacturing operations, changes in material, labor and other manufacturing costs 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 material consists of costs of raw materials, such as silicon wafers, chemicals, gases and tape and packaging supplies. 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 March 31, 2016, 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.

***Interest Expense.*** Our interest expense was incurred primarily under 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. Moreover, our foreign currency gain or loss would be affected by changes in the exchange rate between the Korean won and the U.S. dollar as a substantial portion of non-cash translation gain or loss is associated with the intercompany long-term loans to our Korean subsidiary, which is denominated in U.S. dollars. As of March 31, 2016, the outstanding intercompany loan balance including accrued interests between our Korean subsidiary and our Dutch subsidiary was $590 million. 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 enters into foreign currency 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 forward and zero cost collar contracts must be cash collateralized if our exposure exceeds certain specified thresholds. These forward and zero cost collar contracts may be terminated by the counterparty in a number of circumstances, including if our total cash and cash equivalents is less than $30.0 million at the end of a fiscal quarter unless a waiver is obtained from the counterparty. 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 March 31, 2016 and 2015

The following table sets forth consolidated results of operations for the three months ended March 31, 2016 and 2015:

*(In millions)*

|  | Three Months Ended March 31, 2016 Amount | % of Net Sales | Three Months Ended March 31, 2015 Amount | % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $148.1 | 100.0% | $164.9 | 100.0% | $(16.8) |
| Cost of sales | 113.9 | 76.9 | 129.9 | 78.8 | (16.1) |
| Gross profit | 34.2 | 23.1 | 35.0 | 21.2 | (0.7) |
| Selling, general and administrative expenses | 20.0 | 13.5 | 25.0 | 15.2 | (5.1) |
| Research and development expenses | 17.8 | 12.0 | 22.2 | 13.4 | (4.3) |
| Restructuring gain | (7.8) | (5.3) | — | — | (7.8) |
| Operating income (loss) | 4.3 | 2.9 | (12.2) | (7.4) | 16.5 |
| Interest expense | (4.1) | (2.7) | (4.1) | (2.5) | 0.1 |
| Foreign currency gain (loss), net | 8.2 | 5.5 | (3.2) | (1.9) | 11.4 |
| Others, net | 0.5 | 0.4 | 0.6 | 0.4 | (0.1) |
|  | 4.7 | 3.2 | (6.7) | (4.1) | 11.4 |
| Income (loss) before income taxes | 8.9 | 6.0 | (18.9) | (11.5) | 27.8 |
| Income tax expenses | 0.8 | 0.6 | 1.1 | 0.7 | (0.3) |
| Net income (loss) | $8.1 | 5.5 | $(20.0) | (12.1) | $28.2 |

### Results by segment

*(In millions)*

| Net Sales | Three Months Ended March 31, 2016 Amount % of Net Sales | Three Months Ended March 31, 2015 Amount % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: |
| Foundry Services Group | $60.0 40.5% | $74.5 45.2% | $(14.5) |
| Standard Products Group |  |  |  |
| Display Solutions | 58.1 39.2 | 56.4 34.2 | 1.7 |
| Power Solutions | 29.9 20.2 | 33.8 20.5 | (3.9) |
| Total Standard Products Group | 88.0 59.4 | 90.2 54.7 | (2.2) |
| All other | 0.1 0.1 | 0.2 0.1 | — |
| Total net sales | $148.1 100.0% | $164.9 100.0% | $(16.8) |
|  | **Three Months Ended March 31, 2016** | **Three Months Ended March 31, 2015** |  |
|  | **Amount** **% of Net Sales** | **Amount** **% of Net Sales** | **Change Amount** |
|  | **(In millions)** |  |  |
| **Gross Profit** |  |  |  |
| Foundry Services Group | $14.3 23.8% | $15.4 20.6% | $(1.1) |
| Standard Products Group | 20.8 23.6 | 19.4 21.5 | 1.3 |
| All other | (0.8) (540.0) | 0.2 100.0 | (1.0) |
| Total gross profit | $34.2 23.1% | $35.0 21.2% | $(0.7) |

32

### Net Sales

Net sales were $148.1 million for the three months ended March 31, 2016, a $16.8 million, or 10.2%, decrease compared to $164.9 million for the three months ended March 31, 2015. This decrease was primarily due to decrease in revenue related to our Foundry Services Group as described below.

***Foundry Services Group.*** Net sales from our Foundry Services Group segment were $60.0 million for the three months ended March 31, 2016, a $14.5 million, or 19.5%, decrease compared to $74.5 million for the three months ended March 31, 2015. The $9.2 million decrease was primarily attributable to reduced levels of demand of our foundry services from customers serving the high-end and mid-range smartphone markets. The remaining decrease was due to the expected revenue declines related to our closed 6-inch fab.

***Standard Products Group.*** Net sales from our Standard Products Group segment were $88.0 million for the three months ended March 31, 2016, a $2.2 million, or 2.4%, decrease compared to $90.2 million for the three months ended March 31, 2015. This decrease was due to a $3.9 million decrease in revenue related to our Power Solutions products primarily for TVs and reduction of low margins MOSFETs as part of our product portfolio optimization process. Such decrease was partially offset by a $1.7 million increase in revenue related to our Display Solutions business line. This increase in sales was primarily attributable to higher sales of mobile display products, which was partially offset by reduced demand of source drivers among large display products, primarily for TVs and notebooks.

***All Other.*** All other net sales were $0.1 million for the three months ended March 31, 2016 and $0.2 million for the three months ended March 31, 2015, respectively.

### Gross Profit

Total gross profit was $34.2 million for the three months ended March 31, 2016 compared to $35.0 million for the three months ended March 31, 2015, a $0.7 million, or 2.1%, decrease. Gross profit as a percentage of net sales for the three months ended March 31, 2016 increased to 23.1% compared to 21.2% for the three months ended March 31, 2015. The increase in gross profit as a percentage of net sales was primarily attributable to the positive impact of lower unit costs due to our cost reduction efforts, partially offset by the negative impact of a lower utilization rate.

***Foundry Services Group.*** Gross profit from our Foundry Services Group segment was $14.3 million for the three months ended March 31, 2016, a $1.1 million, or 7.1%, decrease compared to $15.4 million for the three months ended March 31, 2015. Gross profit as a percentage of net sales for the three months ended March 31, 2016 increased to 23.8% compared to 20.6% for the three months ended March 31, 2015. The increase in gross profit as a percentage of net sales was mainly attributable to the positive impact of lower unit costs resulting from our continuing cost reduction effort. This increase was partially offset by the negative impact of a lower utilization rate and an increase in cost of end-of-life inventory produced in our 6-inch fab.

***Standard Products Group.*** Gross profit from our Standard Products Group segment was $20.8 million for the three months ended March 31, 2016, a $1.3 million, or 6.9%, increase from $19.4 million for the three months ended March 31, 2015. Gross profit as a percentage of net sales for the three months ended March 31, 2016 increased to 23.6% compared to 21.5% for the three months ended March 31, 2015. The increase in gross profit as a percentage of net sales was mainly attributable to the positive impact of lower unit costs resulting from our continuing cost reduction effort. This increase was mainly offset by an unfavorable impact resulting from a lower utilization rate.

***All Other.*** All other gross profit for the three months ended March 31, 2016 was a negative $0.8 million mainly attributable to training and transition costs related to our 6-inch fab employees, which was partially offset by revenue from the disposal of waste materials. All other gross profit for the three months ended March 31, 2015 was $0.2 million related to the disposal of waste materials.

### Net Sales by Geographic Region

We report net sales by geographic region based on the location to which the products are billed. 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 March 31, 2016 and 2015:

*(In millions)*

|  | Three Months Ended March 31, 2016 Amount | % of Net Sales | Three Months Ended March 31, 2015 Amount | % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Korea | $50.6 | 34.2% | $62.5 | 37.9% | $(11.8) |
| Asia Pacific (other than Korea) | 81.8 | 55.2 | 79.2 | 48.0 | 2.6 |
| United States | 4.8 | 3.2 | 19.4 | 11.7 | (14.6) |
| Europe | 10.5 | 7.1 | 3.7 | 2.2 | 6.9 |
| Others | 0.4 | 0.3 | 0.2 | 0.1 | 0.2 |
|  | $148.1 | 100.0% | $164.9 | 100.0% | $(16.8) |

Net sales in Korea for the three months ended March 31, 2016 decreased from $62.5 million to $50.6 million compared to the three months ended March 31, 2015, or by $11.8 million, or 19.0%, primarily due to reduced demand of large display applications primarily for TVs and notebooks and our foundry services from a customer serving the mid-range smartphone market. The decrease in sales of MOSFETs primarily for TVs also resulted in a decrease in sales.

Net sales in the United States for the three months ended March 31, 2016 decreased from $19.4 million to $4.8 million compared to the three months ended March 31, 2015, or by $14.6 million, or 75.3%, due to the change in billing location from the United States to Europe by a foundry customer serving the high-end smartphone market.

Net sales in the Europe for the three months ended March 31, 2016 increased from $3.7 million to $10.5 million compared to the three months ended March 31, 2015, or by $6.9 million, or 187.9%, primarily due to the change in billing location from the United States to Europe by a foundry customer serving the high-end smartphone market, which was partially offset by the decrease in sales to the customer.

### Operating Expenses

***Selling, General and Administrative Expenses.*** Selling, general and administrative expenses were $20.0 million, or 13.5% of net sales, for the three months ended March 31, 2016, compared to $25.0 million, or 15.2% of net sales, for the three months ended March 31, 2015. The decrease of $5.1 million, or 20.3%, was primarily attributable to a decrease in professional services costs related to the restatement of approximately $3.5 million

***Research and Development Expenses.*** Research and development expenses were $17.8 million, or 12.0% of net sales, for the three months ended March 31, 2016, compared to $22.2 million, or 13.4% of net sales, for the three months ended March 31, 2015. The decrease of $4.3 million, or 19.6%, was primarily due to the decrease in material and personnel costs.

***Restructuring Gain.*** Restructuring gain of $7.8 million recorded for the three months ended March 31, 2016 resulted from the sale of machinery related to the closure of our 6-inch fab.

### Operating Income

As a result of the foregoing, operating income increased by $16.5 million, or 134.9%, in the three months ended March 31, 2016 compared to the three months ended March 31, 2015. As discussed above, the increase in operating income resulted from a $5.1 million decrease in selling, general and administrative expenses, a $4.3 million decrease in research and development expenses and a $7.8 million increase in restructuring gain.

### Other Income

***Interest Expense.*** Interest expense was $4.1 million for the three months ended March 31, 2016 and March 31, 2015.

***Foreign Currency Gains, Net.*** Net foreign currency gain for the three months ended March 31, 2016 was $8.2 million compared to net foreign currency loss of $3.2 million for the three months ended March 31, 2015. 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 or loss 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.

***Others, Net.*** Others were comprised of gains and losses on valuation of derivatives which were designated as hedging instruments, rental income and interest income. Others for the three months ended March 31, 2016 and March 31, 2015 was $0.5 million and $0.6 million, respectively.

### Income Tax Expenses

Income tax expenses for the three months ended March 31, 2016 were $0.8 million and for the three months ended March 31, 2015 were $1.1 million, primarily attributable to interest on intercompany loan balances. The decrease in income tax expenses was attributable to a reversal of deferred tax assets at a foreign subsidiary for the three months ended March 31, 2015.

### Net Income

As a result of the foregoing, net income increased by $28.2 million in the three months ended March 31, 2016 compared to the three months ended March 31, 2015. As discussed above, the increase in net income primarily resulted from a $16.5 million increase in operating income attributable to reduction in certain operating expenses and a $11.4 million increase in foreign currency gain.

### 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, 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. For a description of our factoring arrangements and accounts receivable discounting, please see “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 2. Sales of Accounts Receivable and Receivable Discount Program” included elsewhere in this Report. In addition, from time to time, we may make payments to our vendors on extended terms with their consent. As of March 31, 2016, we have zero balance in our accounts payable on extended terms or payment deferment with our vendors.

In addition to the factoring arrangements and accounts receivable discounting described above, our cash balance at December 31, 2015 compared to that at March 31, 2016 was impacted positively by $10.0 million of customer prepayments for the sale of products produced from our 6-inch fabrication facility closed during the first quarter of 2016. Those customers paid cash prior to risk of loss of products being transferred based on the terms of the arrangements. Our cash balance at December 31, 2015 was also impacted positively by approximately $8.2 million as the result of equipment deposits received with respect to the then-planned closure of our 6-inch fabrication facility.

Since fiscal 2015, we have implemented a comprehensive cost reduction program to reduce spending and improve our cash flows. Our ability to maintain sufficient liquidity for the next twelve months to fund our operations and capital expenditures and implement our business plan and strategy will also be dependent on continuing improvement of the recent negative trends in our operating results. We currently believe that we will have sufficient cash reserves from cash on hand and expected cash from operations to fund our operations and planned capital expenditures for the next twelve months. However, if our operating results do not improve, we may need to seek additional capital. There can be no assurance that any additional equity or debt financing would be available to us, or if available, that such financing would be on favorable terms to us. Accordingly, if we are unable to obtain additional capital or our business does not generate sufficient cash flows from operating activities to fund our working capital needs and planned capital expenditures, and our cash reserves are depleted, we may need to take various actions, such as down-sizing and/or eliminating certain operations, which could include additional exit costs, reducing or delaying capital expenditures, selling assets, or other restructuring actions.

Additionally, many of the aspects of management’s plan, growth strategies and cost reduction initiatives to conserve our liquidity position involve management’s judgments and estimates that include factors that may be beyond our control, and actual results could differ materially from our current expectations. As a result, these and other factors could cause our business plans, strategies and cost reduction initiatives to be unsuccessful, which could have a material adverse effect on our operating results, financial condition and liquidity.

As of March 31, 2016, cash and cash equivalents held by our Korean subsidiary were $68.9 million, which represents 94% of our total cash and cash equivalents of $73.5 million on a consolidated basis. We, as a holding company resident in the United States, issued our 2021 Notes. Payments under our outstanding 2021 Notes are currently funded in part by our Korean subsidiary’s repayment of its existing loans from our Dutch subsidiary, with our Dutch subsidiary using such repayments in turn to repay the loans owed to our Luxembourg subsidiary, which repays loans owed to us. Repatriation of funds could have potential adverse tax consequences.

### Cash Flows from Operating Activities

Cash outflow used in operating activities totaled $18.2 million for the three months ended March 31, 2016, compared to $8.7 million in the three months ended March 31, 2015. The net operating cash outflow for the three months ended March 31, 2016 reflects our net income of $8.1 million and non-cash adjustments of $4.1 million which mainly consisted of depreciation and amortization, provision for severance benefits, foreign currency loss and restructuring gain, and an increase in net operating assets of $22.2 million.

Our working capital balance as of March 31, 2016 was $100.3 million compared to $93.7 million as of December 31, 2015. The $6.5 million increase was primarily attributable to a $13.4 million increase in inventories and a $10.1 million decrease in deferred revenue, which were partially offset by a $17.4 million decrease in cash and cash equivalents.

The level of inventories is increased as of March 31, 2016 in anticipation of sales growth in future periods and the decrease in deferred revenue is due to the recognition of the related revenue during the first quarter of 2016 for the upfront payments received from certain customers for the sale of products prior to risk of loss being transferred based on the terms of the arrangement.

### Cash Flows from Investing Activities

Cash outflow used in investing activities totaled $0.2 million in the three months ended March 31, 2016, compared to $1.0 million in the three months ended March 31, 2015. The decrease was primarily attributable to a collection of hedge collateral of $4.0 million and a $0.8 million net decrease in guarantee deposits, which were partially offset by a $3.9 million net increase in capital expenditures.

### Cash Flows from Financing Activities

We had no cash flows from financing activities for the three months ended March 31, 2016 and March 31, 2015.

### Capital Expenditures

We routinely make capital expenditures to enhance our existing facilities and reinforce our global research and development capability. For the three months ended March 31, 2016, capital expenditures were $4.5 million, a $3.9 million, or 613.7%, increase from $0.6 million in the three months ended March 31, 2015. The increase was due to supporting technology improvements at our fabrication facilities in anticipation of attaining manufacturing efficiency.

### Contractual Obligations

The following summarizes our contractual obligations as of March 31, 2016:

*(In millions)*

|  | Payments Due by Period Total | Remainder of 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Senior notes(1) | $307.0 | $7.5 | $14.9 | $14.9 | $14.9 | $14.9 | $239.9 |
| Operating lease(2) | 44.2 | 5.7 | 5.4 | 2.9 | 1.9 | 1.9 | 26.5 |
| Others(3) | 13.7 | 5.5 | 6.5 | 1.7 | — | — | — |

(1) Interest payments as well as $225.0 million aggregate principal amount of the 2021 Notes outstanding as of March 31, 2016, 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 1,153.5:1, the exchange rate as of March 31, 2016.

(3) Includes license agreements and other contractual obligations.

The Indenture relating to the 2021 Notes contains covenants that limit our ability and the ability of 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.

These covenants are subject to a number of exceptions and qualifications. Certain of these restrictive covenants will terminate if the notes are rated investment grade at any time

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

We follow accounting guidance on uncertain tax positions. Our unrecognized tax benefits totaled $2.2 million as of March 31, 2016. 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.

Although we are obligated to pay severance benefits to eligible employees with one or more years of service upon the termination of their employment based on their length of service and rate pay, we have no obligation to fund the accrued severance benefits. Our accrued severance benefits totaled $138.1 million as of March 31, 2016. Our obligations in connection with severance benefits have been excluded from the above table because we are unable to reasonably estimate the rate of termination and related cash payments for future period.

### 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 further in Note 1 to our consolidated financial statements in the 2015 Form 10-K, 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.

A description of our critical accounting policies that involve significant management judgement appears in the 2015 Form 10-K, under “Management’s Discussion and Analysis of Financial Conditions and Reports of Operations—Critical Accounting Policies and Estimates.” There have been no material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates included in the 2015 Form 10-K.

### Recent Accounting Pronouncements

For a full description of new accounting pronouncements and recently adopted accounting pronouncement, including the respective dates and impact of adoption on our consolidated financial statements, please see “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 1. Business, Basis of Presentation and Significant Accounting Policies” in this Report.

## Market risk

As filed, 1,995 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 March 31, 2016 for our Korean subsidiary, a 10% devaluation of the Korean won against the U.S. dollar would have resulted in a decrease of $1.0 million in our U.S. dollar financial instruments and cash balances.

See “Note 7. Derivative Financial Instruments” to our consolidated financial statements under “Item 1. Interim Consolidated Financial Statements” and “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” for additional information regarding our foreign exchange hedging activities.

### Interest Rate Exposures

As of March 31, 2016, $225.0 million aggregate principal amount of our 2021 Notes were outstanding. Interest on the 2021 Notes accrues at a fixed rate of 6.625% per annum and is paid semi-annually every January 15 and July 15 of each year until the 2021 Notes mature on July 15, 2021. Since the interest rate is fixed, we have no market risk related to the 2021 Notes.

## Controls and procedures

As filed, 2,936 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 our periodic reports filed 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, with the participation of our Chief Executive Officer and Chief Financial Officer, as appropriate, 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 Chief Executive Officer and Chief Financial Officer, as of March 31, 2016, 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 Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2016, as we cannot conclude that the material weaknesses in internal control over financial reporting described in Part II, Item 9A of our 2015 Form 10-K have been remediated as of the date of this Report.

### Previously Identified Material Weaknesses

As previously disclosed in our 2015 Form 10-K, management concluded that, based on the criteria set forth in Internal Control—Integrated Framework (2013) 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, 2015 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with US GAAP. For more information on material weaknesses in internal control over financial reporting, see Part II, Item 9A of our 2015 Form 10-K.

### Remediation Efforts

As previously disclosed in Part II, Item 9A of our 2015 Form 10-K, we have enhanced various internal controls that relate to (i) Period End Closing and Financial Reporting and (ii) Income Tax Accounting and Disclosures. However, controls over (i) the completeness and accuracy of non-routine manual journal entries and (ii) the analysis and review of current income taxes will not be considered fully remediated until those controls operate effectively as redesigned for a sufficient period of time by the end of 2016.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 6,497 characters.

We are 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 set forth below as well as the risk factors disclosed in Part I, Item 1A of our 2015 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.

***Our Rights Plan and provisions in our charter documents and Delaware Law may make it difficult for a third party to acquire us and could depress the price of our common stock.***

On March 5, 2015, our Board of Directors adopted a stockholder rights plan (the “Rights Plan”) and declared a dividend of one preferred stock purchase right on each share of the Company’s common stock outstanding at the close of business on March 16, 2015. On March 2, 2016, the Company entered into an amendment to the Rights Agreement. As amended, each right will entitle the holder to purchase one one-thousandth of a share of our Series A Junior Participating Preferred Stock. Under certain circumstances, if a person or group acquires 12.5% (or 20% in the case of a passive institutional investor) or more of our outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will be able to purchase for each share of common stock owned, $12 worth of shares of the Company’s common stock having a market value of twice such price. The rights expire in September 2016 unless extended by our Board of Directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to acquire us without the approval of our Board of Directors, our Rights Plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding such acquisition.

In addition, provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Among other things, our certificate of incorporation and bylaws:

- authorize our Board of Directors to issue, without stockholder approval, preferred stock with such terms as the Board of Directors may determine;
- prohibit action by written consent of our stockholders;
- prohibit any person other than our Board of Directors, the chairman of our Board of Directors, our Chief Executive Officer or holders of at least 25% of the voting power of all then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors to call a special meeting of our stockholders; and
- specify advance notice requirements for stockholder proposals and director nominations.

In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”), regulating corporate takeovers and which has an anti-takeover effect with respect to transactions not approved in advance by our Board of Directors, including discouraging takeover attempts that might result in a premium over the market price for shares of our common stock. In general, those provisions prohibit a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:

- the transaction is approved by the board of directors before the date the interested stockholder attained that status;
- upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or
- on or after such date, the business combination is approved by the board of directors and authorized at a meeting of stockholders, and not by written consent, by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.

In general, DGCL Section 203 defines a business combination to include the following:

- any merger or consolidation involving the corporation and the interested stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;
- any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

In general, DGCL Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any such entity or person.

A Delaware corporation may opt out of this provision by express provision in its original certificate of incorporation or by amendment to its certificate of incorporation or bylaws approved by its stockholders. However, we have not opted out of, and do not currently intend to opt out of, this provision.

***We cooperate with independent foundries to produce certain advanced technology Display Solutions products, and the failure of such independent foundries to satisfy our demand could materially disrupt our business.***

We use independent foundry services for certain of our AMOLED Display Solutions products that require more advanced technology than is available in our fabrication facilities. Silicon wafer production at these facilities is allocated solely by our vendors and beyond our direct control. Therefore, any disruption in wafer supply from these vendors could have a material impact on our revenue and results of operations.

Except for the aforementioned, there are no material changes to the Company’s risk factors disclosed in “Part I: Item 1A. Risk Factors” of our 2015 Form 10-K.

Filed May 6, 2016.
Source: SEC EDGAR, the filing index for accession 0001193125-16-580819. Last ingested by Listed: Nov 11, 2026, 05:29 ET. No prices; not investment advice.