# MAGNACHIP SEMICONDUCTOR Corp: Form 10-Q for the period ended Sep 30, 2018

- Company: [MAGNACHIP SEMICONDUCTOR Corp](/companies/mx.md) (CIK 1325702)
- Form: 10-Q
- Filed: 2018-11-07
- Accepted by EDGAR: Nov 7, 2018, 16:17 ET
- Period: 2018-09-30
- Accession: 0001193125-18-320929
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1325702/000119312518320929/d628972d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1325702/000119312518320929/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $206.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $571.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $150.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-01-01 to 2018-09-30 | $417.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-07-01 to 2018-09-30 | $55.7m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-01-01 to 2018-09-30 | $154.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2018-07-01 to 2018-09-30 | $18.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2018-01-01 to 2018-09-30 | $59.5m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2018-07-01 to 2018-09-30 | $18.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-01-01 to 2018-09-30 | $55.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | $18.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | $39.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2018-07-01 to 2018-09-30 | $1.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-01-01 to 2018-09-30 | $4.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | $17.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | −$1.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.41 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | −$0.04 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.50 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-01-01 to 2018-09-30 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-07-01 to 2018-09-30 | 46,021,610 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-01-01 to 2018-09-30 | 34,416,887 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | $25.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $18.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2018-01-01 to 2018-09-30 | $199.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-09-30 | $133.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $384.7m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $612.7m | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $160.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $630.2m | us-gaap:Liabilities |
| Long-term debt | at 2018-09-30 | $305.0m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2018-09-30 | −$17.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 100,157 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 designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, IoT, consumer, industrial and automotive applications. We provide technology platforms for analog, mixed-signal, power, high voltage, non-volatile memory, and RF applications. We have a proven record with over 30 years of operating history, a portfolio of approximately 3,000 registered patents and pending 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 communications, IoT, consumer, industrial and automotive 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 rigid and flexible panel displays, and mobile, automotive applications and home appliances. Our Power Solutions products include discrete and integrated circuit solutions for power management in communications, consumer, computing 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 communications, IoT, consumer, industrial and automotive 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 worldwide customer base, 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 completely fabless semiconductor companies, our internal manufacturing capacity provides us with greater control over manufacturing costs and the ability to implement process and production improvements for our internally manufactured products, 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 on these products. 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. Many of 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 for those products, allowing us to utilize our facilities and equipment over an extended period of time with moderate required capital investments. In addition, 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. In addition, we outsource manufacturing of those products which do require advanced technology and 12-inch wafer capacity. We believe this capital investment strategy enables us to optimize our capital investments and facilitates more diversified product and service offerings.

Since 2007, we have designed and manufactured organic light emitting diodes (OLED) display driver ICs in our internal manufacturing facilities. As we expanded our design capabilities to products that require lower geometries unavailable at our existing manufacturing facilities, we began outsourcing manufacturing of certain OLED display driver ICs to an external foundry from the second half of 2015. This additional source of manufacturing is an increasingly important part of our supply chain management. By outsourcing manufacturing of advanced OLED products to external foundries, we are able to dynamically adapt to the changing customer requirements and address growing markets without substantial capital investments by us. Both at the internal manufacturing facilities and external foundries, we apply our unique OLED process patents as well as other intellectual property, proprietary process design kits and custom design-flow methodologies.

In our previous public filings, we had used a term “active matrix organic light emitting diodes (AMOLED)” that described a display technology used in certain display driver ICs that we had designed and manufactured in our internal and external foundries. Beginning in the second quarter of 2017, we have used the term “OLED” instead of the term “AMOLED” in our public filings in order to be consistent with commonly accepted industry naming practices for this product category. There is no change to the products that we previously referred to as AMOLED display driver ICs.

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.

We believe we are heading into a period of weaker demand from our foundry customers in part as a result of recent softening global market conditions, including macroeconomic uncertainties. This, together with lower than expected utilization and rising wafer and other costs, among other factors, may adversely impact our Foundry Services Group gross margin and other operating results, and such impact could potentially be material. We are also currently evaluating a number of options to optimize our foundry operations and expense structure with an intent toward maximizing shareholder value.

### Recent Developments

### Water Treatment Facility Arrangement

As of June 29, 2018, we entered into an arrangement whereby we acquired a water treatment facility to support our fab in Gumi, Korea from SK Hynix for $4.2 million, and sold it for $4.2 million to a third party management company that we have engaged to run the facility for a 10-year term. This arrangement is accounted for as a financing due to the Company’s Korean subsidiary’s continuing involvement with the facility. As a result, on an acquisition date, we recorded the water treatment facility of $4.2 million as property, plant and equipment, net, which is depreciated over its useful life. We also recorded the related liabilities of $0.6 million as other current liabilities and $3.6 million as other non-current liabilities, which relates to the financing and service portion of the arrangement and is amortized using the effective interest method over the contract period.

### Segment Change

In January 2018, as part of our ongoing portfolio optimization effort to realign business processes and streamline our organizational structure, we transferred a portion of our non-OLED display solutions business from our Standards Products Group to our Foundry Services Group. The transferred non-OLED display business has technical and business characteristics more closely aligned with our Foundry Services business than with our Standard Products business, which resided within our Display solutions business line primarily as a result of a long standing customer relationship established many years ago. The transferred non-OLED display business represented $11.5 million and $19.6 million of net sales for the three and nine months ended September 30, 2018, respectively. The corresponding non-OLED display business represented $8.6 million and $20.6 million of net sales for the three and nine months ended September 30, 2017, respectively

### Tax Audit

In September 2017, MagnaChip Semiconductor Ltd. (“MSK”), our Korean operating subsidiary, was notified that the Korean National Tax Service (the “KNTS”) would be examining the income- and non-income-based taxes of MSK for its 2012 to 2014 tax years. The KNTS had conducted its audit, primarily focusing on non-income-based value added tax (“VAT”) transactions associated with the periods with respect to which we previously restated our financial statements as a result of the independent investigation commenced by our Audit Committee in January 2014 (the “Restatement”).

As a result, the aggregate tax and penalty assessment by the KNTS was $6.0 million, of which $3.3 million had already been accrued by us in our financial statements in connection with the Restatement filed in 2015. Such amount also included approximately $0.5 million related to employee withholding amounts and associated penalties, and to the extent any such tax obligation was that of MSK’s employees. In addition, KNTS assessed an administrative fine of $2.0 million in connection with the above-described tax audit.

In December 2017, the KNTS concluded that no criminal charges would be brought against any current officers or directors of MSK or MSK itself. As a result, we took a charge of $4.2 million in the fourth quarter of 2017 related to this additional tax assessment and associated penalties and administrative fine. We recorded the $0.5 million related to employee withholding amounts as other receivables in our consolidated balance sheets as of December 31, 2017, as we expected to obtain reimbursement of the applicable amounts from those employees. Of the $0.5 million, based on our diligent efforts, we have collected $0.1 million and established an allowance of $0.4 million and recorded it as selling, general and administrative expense for the three months ended September 30, 2018.

### Secondary offering

On August 15, 2017, certain of our stockholders that are affiliates of Avenue Capital Management II, L.P. (the “Selling Stockholders”) closed an underwritten registered public offering of 4,088,978 shares of our common stock at a price per share of $11.10. 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 pursuant to an existing contractual arrangement with the Selling Stockholders.

### Events associated with the closure of our 6-inch fab and reduction of workforce

In December 2014, we announced that our Board of Directors had adopted a plan to close our 6-inch fab. During the fourth quarter of 2015, we received an $8.2 million deposit for sale of machinery in conjunction with the planned closure of our 6-inch fab. According to this plan, the 6-inch fab was closed on February 29, 2016. During the first quarter of 2016, we completed all procedures necessary to sell all machineries in our closed 6-inch fab and recognized a $7.8 million restructuring gain from the related deposit of $8.2 million, net of certain direct selling costs. 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. We paid approximately $8 million for severance benefits, which are required by law and had already been fully accrued in our financial statements, in a lump sum during the second quarter of 2016. Beginning in May 2016, we also began to pay a portion of the $4.2 million other termination benefits under the Program, which were paid in equal monthly installments over twelve months. We recorded the $4.2 million charge related to the full amount of these other termination benefits payable under the Program during the second quarter of 2016.

As of December 21, 2016, we entered into a purchase and sale agreement to sell a building located in Cheongju, South Korea. The building has historically been used to house the 6-inch fab and became vacant upon the closure of the fabrication facility. As of December 31, 2015, the building was fully impaired. We received proceeds of $18.2 million, including a $1.7 million value-added tax, for the sale of the building on December 26, 2016. We recorded the $18.2 million as restricted cash in our consolidated balance sheets as of December 31, 2016 as we were obligated to perform certain removal construction work that was expected to be completed by the end of March 2017. During the first quarter of 2017, we completed all removal construction work necessary to transfer the title of the building, and the $18.2 million of restricted cash was fully released.

As of February 22, 2017, our Board of Directors approved the implementation of a headcount reduction plan (the “Headcount Reduction Plan”). As of June 30, 2017, 352 employees elected to resign from the Company during the period in which the Headcount Reduction Plan was offered. The Headcount Reduction Plan is expected to result in estimated annual cost savings of approximately $24 million. The total cash cost of approximately $31 million has been fully paid. We recorded in our consolidated statement of operations $11.1 million and $2.3 million termination related charges as “early termination charges” for the three months ended March 31, 2017 and June 30, 2017, respectively. The remaining total cost relates to statutory severance benefits, which are required by law and had already been fully accrued in our financial statements.

### Issuance of Exchangeable Senior Notes and Stock Repurchase

As of January 17, 2017, we closed the offering (the “Exchangeable Notes Offering”) by our Luxembourg subsidiary, MagnaChip Semiconductor S.A., of $86.25 million aggregate principal amount of its 5.00% Exchangeable Senior Notes due 2021 (the “Exchangeable Notes”), reflecting the full exercise of the initial purchasers’ option to purchase additional Exchangeable Notes. We used a portion of the net proceeds from the Exchangeable Notes Offering to repurchase 1,795,444 shares of our common stock under our stock repurchase program, which was authorized by our board of directors on January 10, 2017, at an aggregate cost of $11.4 million.

### Sale of Sensor Business

In March 2017, we sold our sensor product business, which was included in and reported as part of the Display Solutions line of our Standard Products Group, to a third party for proceeds of $1.3 million, in an effort to improving our overall profitability. We recorded a $0.4 million gain from this sale after deducting the book values of certain assets transferred to the buyer.

### Restatement

In January 2014, our Audit Committee commenced an independent investigation that resulted in the Restatement. In March, 2014, we voluntarily reported to the SEC that our Audit Committee had determined that we incorrectly recognized revenue on certain transactions and as a result would restate our financial statements, and that our Audit Committee had commenced an independent investigation.

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. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 18. Commitments and Contingencies” in this Report, for an aggregate settlement payment of $23.5 million. This settlement payment was fully funded by insurance proceeds that were received in the first quarter of 2016 and disbursed from the escrow account, previously recorded as restricted cash, in the third quarter of 2016.

On January 22, 2016, we entered into a stipulation of settlement with the plaintiffs in the shareholder derivative actions, as described in “Item 1. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 18. Commitments and Contingencies” in this Report, for an aggregate payment of $3.0 million from our insurance proceeds that were received in the first quarter of 2016 and recorded in the escrow account. In October 2016, the court approved the settlement of the shareholder derivative actions for $3.0 million, which included $0.75 million awarded to plaintiffs’ counsel. Upon the expiration of the appeals period, $2.25 million was disbursed from the escrow account, previously recorded as restricted cash, in December 2016. The remaining restricted cash related to insurance proceeds of $3.1 million was also released in December 2016.

On May 1, 2017, the SEC announced that it had reached a final settlement with us, resolving the SEC’s investigation, as detailed in “Item 1. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 18. Commitments and Contingencies” in this Report. In connection therewith, we have consented, without admitting or denying the SEC’s findings, to the entry of an administrative order by the SEC directing that we cease and desist from committing or causing any violations of certain provisions of the federal securities laws and related SEC regulations. The SEC’s administrative order was entered on May 1, 2017. The SEC imposed a monetary penalty of $3.0 million on us. In the first quarter ended March 31, 2017, we established a reserve in that amount for the potential settlement of this matter and recorded it as selling, general and administrative expense in the consolidated statements of operations for the three months ended March 31, 2017. The reserved monetary penalty of $3.0 million was paid to the SEC during the second quarter of 2017.

As a result of the Restatement, we 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 recorded Restatement related costs of $10.3 million for the year ended December 31, 2017, which included tax assessment, and associated penalties of $4.3 million, primarily related to non-income-based VAT transactions in the Restatement periods, compared to $7.0 million of Restatement related costs for the year ended December 31, 2016. For the three months March 31, 2018, the reversal of a $0.8 million accrual related to certain legal fees, incurred in prior periods and reimbursed by insurers in the current quarter, was recorded as a Restatement related gain.

### Segments

We report our financial results in two operating segments: Foundry Services Group and Standard Products Group. We identified these segments based on how we allocate resources and assess our performance.

In January 2018, as part of our ongoing portfolio optimization effort to realign business processes and streamline our organizational structure, we transferred a portion of our non-OLED display solutions business from our Standards Products Group to our Foundry Services Group. The transferred non-OLED display business has technical and business characteristics more closely aligned with our Foundry Services business than with our Standard Products business, which resided within our Display solutions business line primarily as a result of a long standing customer relationship established many years ago. We recast comparative segment financial information to conform to this current period change.

- ***Foundry Services Group:*** Our Foundry Services Group provides specialty analog and mixed-signal foundry services to fabless semiconductor companies and IDMs that serve communications, IoT, consumer, industrial and automotive 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 508 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), non-volatile memory or bipolar-CMOS-DMOS (BCD). These customers typically serve the consumer, computing, communication, industrial, automotive and IoT applications. For the nine months ended September 30, 2018, our Foundry Services Group business represented 42.4% of our net sales and its gross profit was $63.3 million. For the nine months ended September 30, 2017, our Foundry Services Group business represented, on an adjusted basis, 51.5% of our net sales and its gross profit was $74.3 million, as adjusted for the segment change as described above.
- ***Standard Products Group:*** Our Standard Products Group includes our Display Solutions and Power Solutions business lines. Our Display Solutions products include source, gate drivers, timing controllers, and one-chip integrated solutions that cover a wide range of panel displays used in ultra high definition (UHD), high definition (HD), light emitting diode (LED), 3D and OLED televisions public displays, notebooks, mobile communications, entertainment devices and automotive applications. Our Display Solutions products support the industry’s most advanced display technologies, such as OLEDs, and low temperature polysilicons (LTPS), as well as high-volume display technologies such as thin film transistors (TFT). Since 2007, we have designed and manufactured OLED display driver IC products. Our current portfolio of OLED solutions address a wide range of resolutions ranging from HD to Wide Quad High Definition (WQHD) for applications including smartphones, TVs, and other mobile devices. We believe we have a unique intellectual property portfolio and mixed-signal design and manufacturing expertise in the OLED industry. 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), 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. For the nine months ended September 30, 2018, our Standard Products Group, which includes our Display Solutions and Power Solutions business lines, represented 57.6% of our net sales and its gross profit was $90.9 million. For the nine months ended September 30, 2017, our Standard Products Group business represented, on an adjusted basis, 48.5% of our net sales and its gross profit was $64.0 million, as adjusted for the segment change as described above.

### 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 EBITDA (as defined below), adjusted to exclude (i) restructuring and other gain, (ii) early termination charges, (iii) equity-based compensation expense, (iv) foreign currency loss (gain), net, (v) derivative valuation loss, net, (vi) restatement related expenses (gain), net, (vii) secondary offering expenses and (viii) others. EBITDA for the periods indicated is defined as net income before interest expense, net, income tax expenses, and depreciation and amortization.

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:

- we believe that Adjusted EBITDA, by eliminating the impact of a number of items that we do not consider to be indicative of our core ongoing operating performance, provides a more comparable measure of our operating performance from period-to-period and may be a better indicator of future performance;
- we believe that Adjusted EBITDA is commonly requested and used by securities analysts, investors and other interested parties in the evaluation of the Company as an enterprise level performance measure that eliminates the effects of financing, income taxes and the accounting effects of capital spending, as well as other one time or recurring items described above; and
- we believe that Adjusted EBITDA is useful for investors, among other reasons, to assess the Company’s period-to-period core operating performance and to understand and assess the manner in which management analyzes operating performance.

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, as determined in accordance with US GAAP. A reconciliation of net income to Adjusted EBITDA is as follows:

*(In millions)*

|  | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $17.2 | $(1.5) | $5.6 | $41.3 |
| Interest expense, net | 5.1 | 15.2 | 5.2 | 15.4 |
| Income tax expenses | 1.6 | 4.1 | 0.9 | 2.3 |
| Depreciation and amortization | 7.9 | 23.9 | 7.2 | 20.7 |
| EBITDA | $31.8 | $41.7 | $18.9 | $79.7 |
| Adjustments: |  |  |  |  |
| Restructuring and other gain(a) | — | — | — | (17.0) |
| Early termination charges(b) | — | — | — | 13.4 |
| Equity-based compensation expense(c) | 1.1 | 3.1 | 0.4 | 1.6 |
| Foreign currency loss (gain), net(d) | (6.0) | 20.1 | 3.7 | (26.2) |
| Derivative valuation loss, net(e) | 0.5 | 2.2 | 0.4 | 0.2 |
| Restatement related expenses (gain), net(f) | — | (0.8) | 0.8 | 6.0 |
| Secondary offering expenses(g) | — | — | 0.5 | 0.5 |
| Other(h) | 0.5 | 0.5 | — | — |
| Adjusted EBITDA | $27.9 | $66.9 | $24.7 | $58.1 |

38

(a) For the nine months ended September 30, 2017, this adjustment eliminates the $16.6 million restructuring gain on sale of a building in connection with the closure of our 6-inch fab and the $0.4 million gain on sale of our sensor business.

(b) This adjustment eliminates the charges related to the reduction of workforce through the Headcount Reduction Plan in the first half of 2017. As these early termination charges are recorded as a result of implementing a company-wide headcount reduction plan and are not expected to represent an ongoing operating expense to us, we believe our operating performance results are more usefully compared if these expenses are excluded.

(c) 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, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. 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.

(d) This adjustment mainly 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 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, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results.

(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 in connection with the Audit Committee’s independent investigation and related restatement and litigation, primarily comprised of legal, audit and consulting fees. For the nine months ended September 30, 2017, this adjustment includes the $3.0 million civil penalty imposed by the SEC. For the nine months September 30, 2018, this adjustment eliminates the reversal of a $0.8 million accrual related to certain legal fees incurred in prior periods and reimbursed by insurers in the first quarter of 2018. As these restatement related expenses meaningfully impacted our operating results and are not expected to represent an ongoing operating expense to us, we believe our operating performance results are more usefully compared if these expenses are excluded.

(g) This adjustment eliminates expenses incurred for the secondary offering by the Selling Stockholders primarily in the third quarter of 2017.

(h) This adjustment eliminates a $0.5 million legal expense related to the indemnification of a former employee. As the legal expense for the former employee is borne by us under a negotiated separation agreement, we do not believe that this charge is indicative of our core operating performance and have been excluded for comparative purposes.

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 need 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 to eliminate the impact of a number of non-cash expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted Net Income is particularly useful because it reflects the impact of our asset base and capital structure on our operating performance. We present Adjusted Net Income for a number of reasons, including:

- we use Adjusted Net Income in communications with our Board of Directors concerning our consolidated financial performance without the impact of non-cash expenses and the other items as we discussed below since we believe that it is a more consistent measure of our core operating results from period to period; and
- we believe that reporting Adjusted Net Income is useful to readers in evaluating our core operating results because it eliminates the effects of non-cash expenses as well as the other items we discuss below, such as foreign currency gains and losses, which are out of our control and can vary significantly from period to period.

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, 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 other gain, (ii) early termination charges, (iii) equity-based compensation expense, (iv) foreign currency loss (gain), net, (v) derivative valuation loss, net, (vi) restatement related expenses (gain), net, (vii) secondary offering expenses and (viii) others.

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, 2018 | Nine Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $17.2 | $(1.5) | $5.6 | $41.3 |
| Adjustments: |  |  |  |  |
| Restructuring and other gain(a) | — | — | — | (17.0) |
| Early termination charges(b) | — | — | — | 13.4 |
| Equity-based compensation expense(c) | 1.1 | 3.1 | 0.4 | 1.6 |
| Foreign currency loss (gain), net(d) | (6.0) | 20.1 | 3.7 | (26.2) |
| Derivative valuation loss, net(e) | 0.5 | 2.2 | 0.4 | 0.2 |
| Restatement related expenses (gain), net(f) | — | (0.8) | 0.8 | 6.0 |
| Secondary offering expenses(g) | — | — | 0.5 | 0.5 |
| Other(h) | 0.5 | 0.5 | — | — |
| Adjusted Net Income | $13.3 | $23.6 | $11.4 | $19.7 |

(a) For the nine months ended September 30, 2017, this adjustment eliminates the $16.6 million restructuring gain on sale of a building in connection with the closure of our 6-inch fab and the $0.4 million gain on sale of our sensor business.

(b) This adjustment eliminates the charges related to the reduction of workforce through the Headcount Reduction Plan in the first half of 2017. As these early termination charges are recorded as a result of implementing a company-wide headcount reduction plan and are not expected to represent an ongoing operating expense to us, we believe our operating performance results are more usefully compared if these expenses are excluded.

(c) 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, these expenses do not generally require cash settlement, and, therefore, are not used by us to assess the profitability of our operations. 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.

(d) This adjustment mainly 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 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, which we cannot control. Additionally, we believe the isolation of this adjustment provides investors with enhanced comparability to prior and future periods of our operating performance results.

(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 in connection with the Audit Committee’s independent investigation and related restatement and litigation, primarily comprised of legal, audit and consulting fees. For the nine months ended September 30, 2017, this adjustment includes the $3.0 million civil penalty imposed by the SEC. For the nine months September 30, 2018, this adjustment eliminates the reversal of a $0.8 million accrual related to certain legal fees incurred in prior periods and reimbursed by insurers in the first quarter of 2018. As these restatement related expenses meaningfully impacted our operating results and are not expected to represent an ongoing operating expense to us, we believe our operating performance results are more usefully compared if these expenses are excluded.

(g) This adjustment eliminates expenses incurred for the secondary offering by the Selling Stockholders primarily in the third quarter of 2017.

(h) This adjustment eliminates a $0.5 million legal expense related to the indemnification of a former employee. As the legal expense for the former employee is borne by us under a negotiated separation agreement, we do not believe that this charge is indicative of our core operating performance and have been excluded for comparative purposes.

There was no tax impact from the adjustments to net income (loss) to calculate our Adjusted Net Income for the nine months ended September 30, 2018 and 2017 due to net operating loss carry-forwards available to offset taxable income and full allowance for deferred tax assets. We believe that all adjustments to net income (loss) used to calculate Adjusted Net Income were applied consistently to the periods presented.

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 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 profitability 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 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 is in the United States, Europe and the Asia Pacific region. Our net sales from All other consist principally of the disposal of scrap materials.

Prior to the adoption of the new revenue standard effective on January 1, 2018, we had historically recognized 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. After the adoption of the new revenue standard effective on January 1, 2018, we recognize revenue over time for those foundry products without alternative use where we have an enforceable right to payment for the related foundry services completed to date. As we adopted the new revenue standard under the modified retrospective method, we have not changed the comparative information in our interim consolidated financial statements for the nine months ended September 30, 2017. Such comparative information continues to be reported under the accounting standards in effect for that period. See “Item 1. Interim Consolidated Financial Statements— Notes to Consolidated Financial Statements— Note 1— Business, Basis of Presentation and Significant Accounting Policies— Basis of Presentation and Recent Accounting Pronouncements” in this Report for further discussion. For the nine months ended September 30, 2018 and 2017, we sold products to 345 and 312 customers, respectively, and our net sales to our ten largest customers represented 62% and 59% of our net sales, respectively. We have a combined production capacity of approximately 113,000 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 increase significantly.

***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, 2018, 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 and the Exchangeable 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 September 30, 2018, the outstanding intercompany loans balances including accrued interests between our Korean subsidiary and our Dutch subsidiary were $680.4 million. This amount included an intercompany loan of $75.0 million executed during the first quarter of 2017, which was used to transfer a portion of the net proceeds from the offering of the Exchangeable Notes from our Luxembourg subsidiary to our Dutch subsidiary, and then to our Korean subsidiary. 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 primarily invest in manufacturing equipment, software design tools and other tangible assets mainly for fab maintenance, 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 mainly include our payments for the purchase of property, plant and equipment.

***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, 2018 and 2017

The following table sets forth consolidated results of operations for the three months ended September 30, 2018 and 2017:

*(In millions)*

|  | Three Months Ended September 30, 2018 Amount | % of Net Sales | Three Months Ended September 30, 2017 Amount | % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $206.0 | 100.0% | $176.7 | 100.0% | $29.3 |
| Cost of sales | 150.3 | 72.9 | 126.4 | 71.5 | 23.9 |
| Gross profit | 55.7 | 27.1 | 50.3 | 28.5 | 5.4 |
| Selling, general and administrative expenses | 18.6 | 9.0 | 17.3 | 9.8 | 1.3 |
| Research and development expenses | 18.9 | 9.2 | 17.6 | 9.9 | 1.4 |
| Operating income | 18.3 | 8.9 | 15.5 | 8.8 | 2.8 |
| Interest expenses | (5.6) | (2.7) | (5.5) | (3.1) | (0.1) |
| Foreign currency gain (loss), net | 6.0 | 2.9 | (3.7) | (2.1) | 9.7 |
| Others, net | 0.2 | 0.1 | 0.2 | 0.1 | (0.0) |
|  | 0.6 | 0.3 | (8.9) | (5.1) | 9.5 |
| Income before income taxes | 18.8 | 9.1 | 6.5 | 3.7 | 12.3 |
| Income tax expenses | 1.6 | 0.8 | 0.9 | 0.5 | 0.7 |
| Net income | $17.2 | 8.4 | $5.6 | 3.2 | $11.6 |

### Results by segment

*(In millions)*

| Net Sales | Three Months Ended September 30, 2018 Amount % of Net Sales | Three Months Ended September 30, 2017 (As adjusted) Amount % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: |
| Foundry Services Group | $83.9 40.7% | $89.0 50.4% | $(5.1) |
| Standard Products Group |  |  |  |
| Display Solutions | 77.6 37.7 | 48.6 27.5 | 28.9 |
| Power Solutions | 44.5 21.6 | 39.0 22.1 | 5.5 |
| Total Standard Products Group | 122.0 59.2 | 87.6 49.6 | 34.4 |
| All other | 0.1 0.0 | 0.1 0.0 | 0.0 |
| Total net sales | $206.0 100.0% | $176.7 100.0% | $29.3 |
|  | **Three Months Ended September 30, 2018** | **Three Months Ended September 30, 2017 (As adjusted)** |  |
|  | **Amount** **% of Net Sales** | **Amount** **% of Net Sales** | **Change Amount** |
|  | **(In millions)** |  |  |
| **Gross Profit** |  |  |  |
| Foundry Services Group | $20.4 24.4% | $26.3 29.6% | $(5.9) |
| Standard Products Group | 35.2 28.8 | 23.9 27.3 | 11.3 |
| All other | 0.1 100.0 | 0.1 100.0 | 0.0 |
| Total gross profit | $55.7 27.1 | $50.3 28.5 | $5.4 |

44

### Net Sales

Net sales were $206.0 million for the three months ended September 30, 2018, a $29.3 million, or 16.6%, increase compared to $176.7 million for the three months ended September 30, 2017. This increase was primarily attributable to an increase in revenue from our Standard Products Group, which was offset in part by a decrease in revenue from our Foundry Services Group as described below.

***Foundry Services Group.*** Net sales from our Foundry Services Group segment were $83.9 million for the three months ended September 30, 2018, a $5.1 million, or 5.8%, decrease compared to $89.0 million for the three months ended September 30, 2017. The decrease was primarily attributable to a decrease in demand of low margin product sales from a global power management IC foundry customer and a decrease in demand from a customer serving the mid-range mobile phone market.

***Standard Products Group.*** Net sales from our Standard Products Group segment were $122.0 million for the three months ended September 30, 2018, a $34.4 million, or 39.3%, increase compared to $87.6 million for the three months ended September 30, 2017. This increase was primarily attributable to an increase in revenue related to an improvement in mobile OLED display driver ICs in connection with the introduction of new OLED smartphones from China manufacturers, which was offset in part by a strategic reduction of low margin LCD business. In addition, the increase was also attributable to a higher demand of MOSFETs for TV and mobile battery products.

***All Other.*** All other net sales were $0.1 million for the three months ended September 30, 2018 and 2017.

### Gross Profit

Total gross profit was $55.7 million for the three months ended September 30, 2018 compared to $50.3 million for the three months ended September 30, 2017, a $5.4 million, or 10.8%, increase. Gross profit as a percentage of net sales for the three months ended September 30, 2018 decreased to 27.1% compared to 28.5% for the three months ended September 30, 2017. The decrease in gross profit as a percentage of net sales from our Foundry Services Group was offset in part by an increase in gross profits as a percentage of net sales from our Standard Products Group.

***Foundry Services Group.*** Gross profit from our Foundry Services Group segment was $20.4 million for the three months ended September 30, 2018, a $5.9 million, or 22.4%, decrease compared to $26.3 million for the three months ended September 30, 2017. Gross profit as a percentage of net sales for the three months ended September 30, 2018 decreased to 24.4% compared to 29.6% for the three months ended September 30, 2017. The decrease in gross profit as a percentage of net sales was mainly attributable to a lower utilization rate, which was affected in part by a strategic reduction of low margin LCD business, and an increase in raw wafer prices.

***Standard Products Group.*** Gross profit from our Standard Products Group segment was $35.2 million for the three months ended September 30, 2018, an $11.3 million, or 47.2%, increase from $23.9 million for the three months ended September 30, 2017. Gross profit as a percentage of net sales for the three months ended September 30, 2018 increased to 28.8% compared to 27.3% for the three months ended September 30, 2017. The increase in both gross profit and gross profit margin was primarily attributable to a favorable product mix from an increase in sales of mobile OLED display driver ICs.

***All Other.*** All other gross profits were $0.1 million for the three months ended September 30, 2018 and 2017.

### 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 September 30, 2018 and 2017:

*(In millions)*

|  | Three Months Ended September 30, 2018 Amount | % of Net Sales | Three Months Ended September 30, 2017 Amount | % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Korea | $91.6 | 44.5% | $74.3 | 42.1% | $17.2 |
| Asia Pacific (other than Korea) | 93.5 | 45.4 | 83.2 | 47.1 | 10.3 |
| United States | 5.8 | 2.8 | 8.4 | 4.8 | (2.6) |
| Europe | 14.4 | 7.0 | 10.5 | 5.9 | 4.0 |
| Others | 0.7 | 0.3 | 0.3 | 0.1 | 0.4 |
|  | $206.0 | 100.0% | $176.7 | 100.0% | $29.3 |

Net sales in Korea for the three months ended September 30, 2018 increased from $74.3 million to $91.6 million compared to the three months ended September 30, 2017, or by $17.2 million, or 23.2%, due primarily to an increase in revenue related to the introduction of new OLED display driver ICs. This is offset in part by a strategic reduction of low margin LCD business.

Net sales in Asia Pacific (other than Korea) for the three months ended September 30, 2018 increased from $83.2 million to $93.5 million compared to the three months ended September 30, 2017, or by $10.3 million, or 12.3%, due primarily to an increase in revenue related to an improvement in mobile OLED display driver ICs in connection with the introduction of new OLED smartphones. This increase was in part offset by a decrease in sales of certain products from a foundry customer serving the mid-range mobile phone market.

Net sales in the United States for the three months ended September 30, 2018 decreased from $8.4 million to $5.8 million compared to the three months ended September 30, 2017, or by $2.6 million, or 30.6%, primarily due to a decrease in sales of certain products from a global power management IC foundry customer.

Net sales in Europe for the three months ended September 30, 2018 increased from $10.5 million to $14.4 million compared to the three months ended September 30, 2017, or by $4.0 million, or 37.7%, primarily due to an increase in sales of certain battery charger related products from a global power management IC foundry customer, which was offset in part by lower demand from a customer serving the high-end smartphone market.

### Operating Expenses

***Selling, General and Administrative Expenses.*** Selling, general and administrative expenses were $18.6 million, or 9.0% of net sales, for the three months ended September 30, 2018, compared to $17.3 million, or 9.8% of net sales, for the three months ended September 30, 2017. The increase of $1.3 million, or 7.5%, was primarily attributable to an increase in employee compensation, including issuance of equity-based compensation, and an allowance of $0.4 million related to employee withholding amounts, which was in part offset by a gain of $1.1 million from the sale of certain old fab equipment.

***Research and Development Expenses.*** Research and development expenses were $18.9 million, or 9.2% of net sales, for the three months ended September 30, 2018, compared to $17.6 million, or 9.9% of net sales, for the three months ended September 30, 2017. The increase of $1.4 million, or 7.8%, was primarily attributable to an increase in development activities for new OLED products.

### Operating Income

As a result of the foregoing, operating income increased by $2.8 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. As discussed above, the increase in operating income resulted from a $5.4 million increase in gross profit, which was partially offset by a $1.3 million increase in selling, general and administrative expenses and a $1.4 million increase in research development expenses.

### Other Income

***Interest Expenses.*** Interest expenses were $5.6 million and $5.5 million for the three months ended September 30, 2018 and September 30, 2017, respectively.

***Foreign Currency Gain (Loss), Net.*** Net foreign currency gain for the three months ended September 30, 2018 was $6.0 million compared to net foreign currency loss of $3.7 million for the three months ended September 30, 2017. The net foreign currency gain for the three months ended September 30, 2018 was due to the appreciation in value of the Korean won relative to the U.S. dollar during the period. The net foreign currency loss for the three months ended September 30, 2017 was due to the depreciation in value of the Korean won relative to the U.S. dollar during the period.

A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss associated with the intercompany long-term loans to our Korean subsidiary, which is denominated in U.S. dollars, and is affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of September 30, 2018 and September 30, 2017, the outstanding intercompany loan balances including accrued interests between our Korean subsidiary and our Dutch subsidiary were $680 million and $670 million, respectively. 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 rental income, interest income, and gains and losses from valuation of derivatives which were designated as hedging instruments. Others for the three months ended September 30, 2018 and September 30, 2017 was $0.2 million and $0.2 million, respectively.

### Income Tax Expenses

Income tax expenses for the three months ended September 30, 2018 and 2017 were $1.6 million and $0.9 million, respectively. The increase in income tax expenses was primarily attributable to an increase in income tax expense for our Korean subsidiary, which is estimated to generate taxable income for the fiscal year ending December 31, 2018, combined with its ability to utilize net operating loss carryforwards up to 70% of taxable income for the year.

### Net Income

As a result of the foregoing, net income increased by $11.6 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. As discussed above, the increase in net income primarily resulted from a $9.7 million increase in net foreign currency gain and a $2.8 million increase in operating income.

### Results of Operations – Comparison of Nine Months Ended September 30, 2018 and 2017

The following table sets forth consolidated results of operations for the nine months ended September 30, 2018 and 2017:

*(In millions)*

|  | Nine Months Ended September 30, 2018 Amount | % of Net Sales | Nine Months Ended September 30, 2017 Amount | % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales | $571.5 | 100.0% | $505.1 | 100.0% | $66.4 |
| Cost of sales | 417.3 | 73.0 | 366.6 | 72.6 | 50.8 |
| Gross profit | 154.2 | 27.0 | 138.5 | 27.4 | 15.6 |
| Selling, general and administrative expenses | 55.1 | 9.6 | 58.1 | 11.5 | (3.0) |
| Research and development expenses | 59.5 | 10.4 | 52.4 | 10.4 | 7.1 |
| Restructuring and other gain | — | — | (17.0) | (3.4) | 17.0 |
| Early termination charges | — | — | 13.4 | 2.6 | (13.4) |
| Operating income | 39.6 | 6.9 | 31.6 | 6.3 | 8.0 |
| Interest expenses | (16.5) | (2.9) | (16.1) | (3.2) | (0.4) |
| Foreign currency gain (loss), net | (20.1) | (3.5) | 26.2 | 5.2 | (46.3) |
| Others, net | (0.3) | (0.1) | 1.9 | 0.4 | (2.2) |
|  | (37.0) | (6.5) | 12.0 | 2.4 | (49.0) |
| Income before income taxes | 2.6 | 0.5 | 43.6 | 8.6 | (41.0) |
| Income tax expenses | 4.1 | 0.7 | 2.3 | 0.5 | 1.8 |
| Net income (loss) | $(1.5) | (0.3) | $41.3 | 8.2 | $(42.8) |

### Results by segment

*(In millions)*

| Net Sales | Nine Months Ended September 30, 2018 Amount % of Net Sales | Nine Months Ended September 30, 2017 (As adjusted) Amount % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: |
| Foundry Services Group | $242.2 42.4% | $260.1 51.5% | $(17.9) |
| Standard Products Group |  |  |  |
| Display Solutions | 206.0 36.0 | 135.2 26.8 | 70.8 |
| Power Solutions | 123.2 21.5 | 109.6 21.7 | 13.6 |
| Total Standard Products Group | 329.1 57.6 | 244.8 48.5 | 84.3 |
| All other | 0.2 0.0 | 0.2 0.0 | (0.0) |
| Total net sales | $571.5 100.0% | $505.1 100.0% | $66.4 |
|  | **Nine Months Ended September 30, 2018** | **Nine Months Ended September 30, 2017 (As adjusted)** |  |
|  | **Amount** **% of Net Sales** | **Amount** **% of Net Sales** | **Change Amount** |
|  | **(In millions)** |  |  |
| **Gross Profit** |  |  |  |
| Foundry Services Group | $63.3 26.1% | $74.3 28.6% | $(11.0) |
| Standard Products Group | 90.9 27.6 | 64.0 26.2 | 26.8 |
| All other | 0.0 10.8 | 0.2 100.0 | (0.2) |
| Total gross profit | $154.2 27.0 | $138.5 27.4 | $15.6 |

48

### Net Sales

Net sales were $571.5 million for the nine months ended September 30, 2018, a $66.4 million, or 13.1%, increase compared to $505.1 million for the nine months ended September 30, 2017. This increase was primarily attributable to an increase in revenue from our Standard Products Group, which was offset in part by a decrease in revenue from our Foundry Services Group as described below.

***Foundry Services Group.*** Net sales from our Foundry Services Group segment were $242.2 million for the nine months ended September 30, 2018, a $17.9 million, or 6.9%, decrease compared to $260.1 million for the nine months ended September 30, 2017. The decrease was primarily attributable to a decrease in demand of low margin product sales from a global power management IC foundry customer and a decrease in demand from a customer serving the mid-range mobile phone market. This decrease was offset in part by an increase in sales of certain battery charger related products from a global power management IC foundry customer.

***Standard Products Group.*** Net sales from our Standard Products Group segment were $329.1 million for the nine months ended September 30, 2018, a $84.3 million, or 34.4%, increase compared to $244.8 million for the nine months ended September 30, 2017. This increase was primarily attributable to an increase in revenue related to an improvement in mobile OLED display driver ICs in connection with the introduction of new OLED smartphones from China manufacturers, which was offset in part by a strategic reduction of low margin LCD business. In addition, the increase was also attributable to a higher demand of MOSFETs for TV and mobile battery products.

***All Other.*** All other net sales were $0.2 million for the nine months ended September 30, 2018 and 2017.

### Gross Profit

Total gross profit was $154.2 million for the nine months ended September 30, 2018 compared to $138.5 million for the nine months ended September 30, 2017, a $15.6 million, or 11.3%, increase. Gross profit as a percentage of net sales for the nine months ended September 30, 2018 decreased to 27.0% compared to 27.4% for the nine months ended September 30, 2017. The decrease in gross profit as a percentage of net sales from our Foundry Services Group was offset in part by an increase in gross profits as a percentage of net sales from our Standard Products Group.

***Foundry Services Group.*** Gross profit from our Foundry Services Group segment was $63.3 million for the nine months ended September 30, 2018, an $11.0 million, or 14.8%, decrease compared to $74.3 million for the nine months ended September 30, 2017. Gross profit as a percentage of net sales for the nine months ended September 30, 2018 decreased to 26.1% compared to 28.6% for the nine months ended September 30, 2017. The decrease in gross profit as a percentage of net sales was mainly attributable to an unfavorable product mix and a lower utilization rate, which was affected in part by a strategic reduction of low margin LCD business, and an increase in raw wafer prices.

***Standard Products Group.*** Gross profit from our Standard Products Group segment was $90.9 million for the nine months ended September 30, 2018, a $26.8 million, or 41.9%, increase from $64.0 million for the nine months ended September 30, 2017. Gross profit as a percentage of net sales for the nine months ended September 30, 2018 increased to 27.6% compared to 26.2% for the nine months ended September 30, 2017. The increase in both gross profit and gross profit margin was primarily attributable to a favorable product mix from an increase in sales of mobile OLED display driver ICs.

***All Other.*** All other gross profit was $0.02 million for the nine months ended September 30, 2018 and $0.2 million for the nine months ended September 30, 2017.

### 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 nine months ended September 30, 2018 and 2017:

*(In millions)*

|  | Nine Months Ended September 30, 2018 Amount | % of Net Sales | Nine Months Ended September 30, 2017 Amount | % of Net Sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Korea | $204.3 | 35.8% | $207.4 | 41.1% | $(3.1) |
| Asia Pacific (other than Korea) | 302.9 | 53.0 | 239.2 | 47.4 | 63.7 |
| United States | 29.2 | 5.1 | 28.7 | 5.7 | 0.5 |
| Europe | 33.0 | 5.8 | 29.1 | 5.8 | 4.0 |
| Others | 2.0 | 0.3 | 0.7 | 0.1 | 1.3 |
|  | $571.5 | 100.0% | $505.1 | 100.0% | $66.4 |

Net sales in Korea for the nine months ended September 30, 2018 decreased from $207.4 million to $204.3 million compared to the nine months ended September 30, 2017, or by $3.1 million, or 1.5%, primarily due to a strategic reduction of low margin LCD business. This was offset in part by an increase in revenue related to the introduction of new OLED display driver ICs.

Net sales in Asia Pacific for the nine months ended September 30, 2018 increased from $239.2 million to $302.9 million compared to the nine months ended September 30, 2017, or by $63.7 million, or 26.6%, primarily due to an increase in revenue related to a sharp improvement in mobile OLED display driver ICs in connection with the introduction of new OLED smartphones. This increase was in part offset by a decrease in sales of certain products from a foundry customer serving the mid-range mobile phone market, and a decrease in sales of certain products from a global power management IC foundry customer.

Net sales in Europe for the nine months ended September 30, 2018 increased from $29.1 million to $33.0 million compared to the nine months ended September 30, 2017, or by $4.0 million, or 13.7%, primarily due to an increase in sales of certain battery charger related products from a global power management IC foundry customer, which was offset in part by lower demand from a customer serving the high-end smartphone market.

### Operating Expenses

***Selling, General and Administrative Expenses.*** Selling, general, and administrative expenses were $55.1 million, or 9.6% of net sales, for the nine months ended September 30, 2018, compared to $58.1 million, or 11.5% of net sales, for the nine months ended September 30, 2017. The decrease of $3.0 million, or 5.2%, was mainly attributable to a $3.0 million civil penalty in connection with our final settlement with the SEC, which was recorded in the first quarter of 2017 and an increase in gain of $0.9 million from the sale of certain old fab equipment. These decreases were offset in part by an allowance of $0.4 million related to employee withholding amounts recorded in the third quarter of 2018 and an increase in equity-based compensation.

***Research and Development Expenses.*** Research and development expenses were $59.5 million, or 10.4% of net sales, for the nine months ended September 30, 2018, compared to $52.4 million, or 10.4% of net sales, for the nine months ended September 30, 2017. The increase of $7.1 million, or 13.5%, was primarily attributable to an increase in development activities for new OLED product.

***Restructuring and Other Gain.*** Restructuring and other gain of $17.0 million recorded for the nine months ended September 30, 2017 resulted from a $16.6 million restructuring gain on the sale of the building related to the closure of our 6-inch fab and a $0.4 million gain on sale of our sensor business.

***Early Termination Charges.*** Early termination charges of $13.4 million for the nine months ended September 30, 2017 were recorded for the termination benefits payable to the employees affected under our Headcount Reduction Plan.

### Operating Income

As a result of the foregoing, operating income increased by $8.0 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. As discussed above, the increase in operating income resulted from a $15.6 million increase in gross profit, a $13.4 million decrease in early termination charges and $3.0 million decrease in selling, general and administrative expenses, which was partially offset by a $17.0 million decrease in restructuring and other gain and a $7.1 million increase in research development expenses.

### Other Income

***Interest Expenses.*** Interest expenses were $16.5 million and $16.1 million for the nine months ended September 30, 2018 and September 30, 2017, respectively.

***Foreign Currency Gain (Loss), Net.*** Net foreign currency loss for the nine months ended September 30, 2018 was $20.1 million compared to net foreign currency gain of $26.2 million for the nine months ended September 30, 2017. The net foreign currency loss for the nine months ended September 30, 2018 was due to the depreciation in value of the Korean won relative to the U.S. dollar during the period. The net foreign currency gain for the nine months ended September 30, 2017 was due to the appreciation in value of the Korean won relative to the U.S. dollar during the period.

A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss associated with the intercompany long-term loans to our Korean subsidiary, which is denominated in U.S. dollars, and is affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of September 30, 2018 and September 30, 2017, the outstanding intercompany loan balances including accrued interests between our Korean subsidiary and our Dutch subsidiary were $680 million and $670 million, respectively. 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 the valuation of derivatives which were designated as hedging instruments, rental income and interest income. Others for the nine months ended September 30, 2018 and September 30, 2017 was negative $0.3 million and $1.9 million, respectively.

### Income Tax Expenses

Income tax expenses for the nine months ended September 30, 2018 and 2017 were $4.1 million and $2.3 million, respectively. The increase in income tax expenses was primarily attributable to an increase in income tax expense for our Korean subsidiary, which is estimated to generate taxable income for the fiscal year ending December 31, 2018, combined with its ability to utilize net operating loss carryforwards up to 70% of taxable income for the year.

### Net Income

As a result of the foregoing, net income decreased by $42.8 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. As discussed above, the decrease in net income primarily resulted from a $46.3 million increase in net foreign currency loss which was partially offset by an $8.0 million increase in operating income.

### 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 September 30, 2018, we do not have any accounts payable on extended terms or payment deferment with our vendors.

On January 17, 2017, MagnaChip Semiconductor S.A., our Luxembourg subsidiary, closed the Exchangeable Notes Offering of the Exchangeable Notes with $86.25 million aggregate principal amount, reflecting the full exercise of the initial purchasers’ option to purchase additional Exchangeable Notes. We used a portion of the net proceeds from the Exchangeable Notes Offering to repurchase approximately $11.4 million of our common stock as part of our stock repurchase program.

We currently believe that we will have sufficient cash reserves from cash on hand and expected cash from operations to fund our operations as well as capital expenditures for the next twelve months and the foreseeable future.

### Cash Flows from Operating Activities

Cash inflow provided by operating activities totaled $25.0 million for the nine months ended September 30, 2018, compared to $24.3 million of cash outflow used in operating activities for the nine months ended September 30, 2017. The net operating cash inflow for the nine months ended September 30, 2018 reflects our net loss of $1.5 million and favorable adjustments of $70.1 million which mainly consisted of depreciation and amortization, provision for severance benefits and net foreign currency loss, and a net decrease in operating assets and liabilities of $43.5 million.

Our working capital balance as of September 30, 2018 was $224.6 million compared to $192.1 million as of December 31, 2017. The $32.5 million increase was primarily attributable to an $11.2 million increase in account receivables and a $35.8 million increase in unbilled accounts receivable, which was a new item created in our balance sheet to conform with the new revenue recognition standard and represented our contractual right to consideration for manufacturing work performed on a customer contract or an individual purchase order basis, which had not been invoiced to the customer. This increase was offset in part by a $15.6 million increase in account payables.

### Cash Flows from Investing Activities

Cash outflow used in investing activities totaled $21.3 million and $24.0 million for the nine months ended September 30, 2018 and 2017, respectively. The $2.7 million decrease was primarily attributable to a $6.6 million net decrease in hedge collateral, which was offset in part by a $3.9 million net increase in purchase of plant, property and equipment.

### Cash Flows from Financing Activities

Cash inflow provided by financing activities totaled $5.1 million for the nine months ended September 30, 2018, compared to $72.3 million of cash inflow provided by financing activities for the nine months ended September 30, 2017. The financing cash inflow for the nine months ended September 30, 2018 was primarily attributable to proceeds of $4.3 million in connection with the water treatment facility arrangement. The financing cash inflow for the nine months ended September 30, 2017 consisted of $80.3 million of net proceeds received from the issuance of the Exchangeable Notes and $3.4 million of proceeds received from the exercise of stock options, which was partly offset by the payment of $11.4 million for the repurchase of 1,795,444 shares of our common stock in January 2017 pursuant to our stock repurchase plan.

### Capital Expenditures

We routinely make capital expenditures for fab maintenance, enhancement of our existing facilities and reinforcement of our global research and development capability. For the nine months ended September 30, 2018, capital expenditures were $23.2 million, a $3.9 million, or 20.2%, increase from $19.3 million for the nine months ended September 30, 2017. The capital expenditures for the nine months ended September 30, 2018 included a $4.3 million payment for the purchase of certain facilities related to a water treatment facility arrangement. The remaining expenditures were for meeting our customer demand, and supporting technology and facility improvements at our fabrication facilities.

### Contractual Obligations

The following summarizes our contractual obligations as of September 30, 2018:

*(In millions)*

|  | Payments Due by Period Total | Remainder of 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Exchangeable Notes(1) | $97.0 | $— | $4.3 | $4.3 | $88.4 | $— | $— |
| 2021 Notes(2) | 269.7 | — | 14.9 | 14.9 | 239.9 | — | — |
| Operating lease(3) | 26.4 | 1.7 | 3.6 | 3.0 | 1.4 | 1.3 | 15.4 |
| Water Treatment Services(3)(4) | 60.1 | 2.2 | 8.7 | 8.7 | 8.6 | 8.6 | 23.3 |
| Others(5) | 27.2 | 2.5 | 11.5 | 10.6 | 2.6 | — | — |

(1) Interest payments as well as $86.25 million aggregate principal amount of the Exchangeable Notes outstanding as of September 30, 2018, which bear interest at a rate of 5.0% per annum and are scheduled to mature in 2021 if not earlier converted or redeemed.

(2) Interest payments as well as $225.0 million aggregate principal amount of the 2021 Notes outstanding as of September 30, 2018, which bear interest at a rate of 6.625% per annum and are scheduled to mature in 2021 if not earlier redeemed.

(3) Assumes constant currency exchange rate for Korean won to U.S. dollars of 1,112.7:1, the exchange rate as of September 30, 2018.

(4) Includes future payments for water treatment services based on contractual terms for our fabs in Korea.

(5) Includes license agreements, funding obligations for the accrued severance benefits and other contractual obligations.

The indentures relating to the Exchangeable Notes and the 2021 Notes contain covenants as detailed in “Item 1. Interim Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 9. Long-Term Borrowings” in this Report. Those covenants are subject to a number of exceptions and qualifications. Certain of those restrictive covenants will terminate if the Exchangeable Notes or the 2021 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 are a party to the arrangements for the water treatment facilities in Cheongju and Gumi, Korea, which includes a 5-year and 10-year service agreements, respectively.

Beginning in July 2018, we contribute a certain percentage of severance benefits, accrued for eligible employees for their services from January 1, 2018, to certain severance insurance deposit accounts. These accounts consist of time deposits and other guaranteed principal and interest, and are maintained at insurance companies, banks or security companies for the benefit of employees. We deduct the contributions made to certain severance insurance deposit accounts from our accrued severance benefits. As of September 30, 2018, our accrued severance benefits totaled $148.1 million and cumulative contributions to these severance insurance deposit accounts amounted to $0.9 million. Our related cash payments for future contributions have been included in the amount of $1.8 million, $2.7 million and $3.6 million for the fourth quarter of 2018, 2019 and 2020, respectively, to the extent that our obligations are contractual, fixed and reasonably estimable.

We follow accounting guidance on uncertain tax positions. Our unrecognized tax benefits totaled $0.5 million as of September 30, 2018. 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 further in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for our fiscal year ended December 31, 2017, or our 2017 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 our 2017 Form 10-K, under “Management’s Discussion and Analysis of Financial Conditions and Reports of Operations—Critical Accounting Policies and Estimates.” Our critical accounting policies for revenue recognition as updated for the adoption of the new revenue standard are disclosed in the following section. There have been no other material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates included in our 2017 Form 10-K.

### Revenue Recognition

We recognize revenue when a performance obligation is satisfied by transferring control over a product or service to a customer. Revenue is measured based on the consideration specified in a contract with a customer in exchange for such product or service.

Our Foundry Services Group manufactures products based on customers’ specific product designs. We recognize revenue over time for those foundry products without alternative use where we have an enforceable right to payment for the related foundry services completed to date. The revenue recognized over time is in proportion of wafer manufacturing costs incurred relative to total estimated costs at completion to measure our performance to date. However, in certain circumstances, we may not have an enforceable right to payment for performed foundry services pursuant to a customer contract or an individual purchase order. In this situation, we recognize revenue when a customer obtains control of the product, which is generally upon product shipment, delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement.

Our Standards Products Group sells products manufactured based on our design. Our Standard Products Group’s products are either standardized with an alternative use or we do not have an enforceable right to payment for the related manufacturing services completed to date. For those products, revenue is recognized when a customer obtains control of the product, which is generally upon product shipment, delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement.

A portion of our sales are made through distributors for which we apply the same revenue recognition guidance as described above. We defer recognition of revenue when we receive cash from certain customers and distributors for the sale of products prior to obtaining an enforceable right to payment for performance completed to date or control of the product being transferred to the customer.

In accordance with the revenue recognition guidance, any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction, and that is collected by us from a customer, is excluded from revenue and presented in the statement of operations on a net basis.

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), cash discounts for early payments, volume rebate and certain allowances to its 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.

Substantially all of our contracts are one year or less in duration. The standard payment terms with customers is generally thirty to sixty days from the time of shipment, product delivery at the customer’s location or customer acceptance, depending on the terms of the related arrangement.

### Recent Accounting Pronouncements

For a full description of new accounting pronouncements and recently adopted accounting pronouncements, 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, 2,349 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, 2018 for our Korean subsidiary, a 10% devaluation of the Korean won against the U.S. dollar would have resulted in a decrease of $1.8 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 September 30, 2018, $86.25 million aggregate principal amount of our Exchangeable Notes were outstanding. Interest on the Exchangeable Notes accrues at a fixed rate of 5.0% per annum and is paid semi-annually every March 1 and September 1 of each year until the Exchangeable Notes mature on March 1, 2021. As of September 30, 2018, $225.0 million aggregate principal amount of our 2021 Notes were also 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 rates are fixed, we have no market risk related to the Exchangeable Notes and the 2021 Notes.

## Controls and procedures

As filed, 1,458 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 our periodic reports filed or submitted under 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 Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In connection with the preparation of this Report, 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 September 30, 2018, 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 effective as of September 30, 2018.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 921 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 2017 Form 10-K, Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2018, and other reports we have filed with the SEC. 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 2017 Form 10-K and Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2018.

Filed Nov 7, 2018.
Source: SEC EDGAR, the filing index for accession 0001193125-18-320929. Last ingested by Listed: Nov 5, 2026, 18:59 ET. No prices; not investment advice.