# MAGNACHIP SEMICONDUCTOR Corp: Form 10-Q for the period ended Sep 30, 2020

- Company: [MAGNACHIP SEMICONDUCTOR Corp](/companies/mx.md) (CIK 1325702)
- Form: 10-Q
- Filed: 2020-11-06
- Accepted by EDGAR: Nov 6, 2020, 06:22 ET
- Period: 2020-09-30
- Accession: 0001193125-20-287329
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1325702/000119312520287329/d94454d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1325702/000119312520287329/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $124.8m | us-gaap:Revenues |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $364.1m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2020-07-01 to 2020-09-30 | $96.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2020-01-01 to 2020-09-30 | $274.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-07-01 to 2020-09-30 | $28.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2020-01-01 to 2020-09-30 | $89.9m | us-gaap:GrossProfit |
| Research and development | 3 months, 2020-07-01 to 2020-09-30 | $12.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2020-01-01 to 2020-09-30 | $34.1m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2020-07-01 to 2020-09-30 | $12.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2020-01-01 to 2020-09-30 | $37.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | $3.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-01-01 to 2020-09-30 | $17.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | −$1.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-01-01 to 2020-09-30 | $836.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | $273.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | $278.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $5.89 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | $7.93 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $7.74 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | $7.93 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 46,581,788 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 35,089,479 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | $51.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $16.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2020-01-01 to 2020-09-30 | $1.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-09-30 | $542.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $664.3m | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $757.5m | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $419.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-09-30 | $479.1m | us-gaap:Liabilities |
| Long-term debt | at 2020-09-30 | $0 | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-09-30 | $306.6m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-09-30 | $278.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 100,059 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. We have reclassified certain prior year amounts to conform to the current year’s presentation for discontinued operations to reflect the divestiture of our Foundry Services Group business and Fab 4. Unless otherwise stated, information in this section relates to our continuing operations. The consolidated statements of cash flows have not been adjusted to separately disclose cash flows related to discontinued operations.*

### Overview

We are a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, IoT applications, consumer, industrial and automotive applications. We provide technology platforms for analog, mixed-signal, power, high voltage, non-volatile memory, and radio frequency applications. We have a proven record with more than 40 years of operating history, a portfolio of approximately 1,200 registered patents and pending applications and extensive engineering and manufacturing process expertise.

On March 30, 2020, we entered into the Business Transfer Agreement for the sale of our Foundry Services Group business and Fab 4. The previously announced sale of the Foundry Services Group business and Fab 4 is expected to strategically shift our operational focus to our standard products business. As a result, the results of the Foundry Services Group business were classified as discontinued operations in our consolidated statements of operations from the first quarter of 2020 and excluded from both continuing operations and segment results for all periods presented. Accordingly, commencing in the first quarter of 2020, we have one reportable segment: our standard products business, together with transitional foundry services associated with our fabrication facility located in Gumi, Korea, known as Fab 3, that we expect to perform for the Buyer for up to three years (the “Transitional Fab 3 Foundry Services”). On September 1, 2020, we completed the sale of our Foundry Services Group business and Fab 4 to Key Foundry Co., Ltd. (the “Buyer”), for a purchase price equal to approximately $350.6 million in cash.

Our standard products business includes our Display Solutions and Power Solutions business lines.

Our Display Solutions products provide display solutions to major panel display suppliers of large and mobile rigid and flexible displays for home appliances, mobile communications, monitors, notebooks and automotive applications. Our Display Solutions products include source, gate drivers, timing controllers, and one-chip integrated solutions for LCD (Liquid Crystal Display) and OLED panel displays used in televisions, public displays, monitors, notebooks, mobile communications and automotive applications. Our Display Solutions products support the industry’s most advanced display technologies, such as OLEDs, and low temperature polysilicon (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 consumer, communications, computing, industrial and automotive 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, linear regulators, interface ICs and power management ICs (PMICs) for a range of devices, including televisions, smartphones, desktop PCs, notebooks, tablets, servers, telecommunication power, home appliances, industrial applications such as uninterruptible power supplies (UPSs), LED lighting, personal mobility, motor drives, battery management systems (BMS) and automotive electronics.

Our wide variety of analog and mixed-signal semiconductor products combined with our mature technology platform allow us to address multiple high-growth end markets and 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 also invest in relevant research and development activities 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.

Net sales for our standard products business 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 standard products business requires 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, such as organic light emitting diodes (OLED). We believe this balanced 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 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 12-inch foundry starting in 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 12-inch 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 8-inch manufacturing facilities and external 12-inch foundries, we apply our unique OLED process patents as well as other intellectual property, proprietary process design kits and custom design-flow methodologies.

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.

### Recent Developments

### Redemption of 6.625% Senior Notes due 2021

We completed the redemption of the outstanding 2021 Notes on October 2, 2020. We paid approximately $227.4 million to fully redeem all of the outstanding $224.25 million aggregate principal amount of the 2021 Notes at a redemption price equal to the sum of 100% of the principal amount thereof, plus accrued and unpaid interest on the 2021 Notes, but excluding, the Redemption Date. The redemption of the 2021 Notes was funded by our Korean subsidiary’s repayment of intercompany loans using the cash proceeds that it received from the sale of the Foundry Services Group business and Fab 4. On October 12, 2020, we paid a withholding tax of approximately $20.6 million, attributable to the repaid accrued interests on the related intercompany loans.

### Completion of Sale of the Foundry Services Group business and Fab 4

On September 1, 2020, we completed the previously announced sale of our Foundry Services Group business and Fab 4 to the Buyer in exchange for a purchase price equal to approximately $350.6 million, which included an estimated positive working capital adjustment of approximately $5.9 million, pursuant to the terms of the Business Transfer Agreement, which was entered into on March 30, 2020. The purchase price was paid in a combination of U.S. Dollars in the amount of $46.5 million and Korean Won in the amount of approximately KRW 360.6 billion. In addition to the purchase price, the Buyer assumed all severance liabilities relating to the transferred employees, which had a value of approximately $100 million. For a summary of the key terms and conditions of the Business Transfer Agreement, please see our Current Report on Form 8-K filed on March 31, 2020 and the Business Transfer Agreement filed as Exhibit 10.1 thereto.

### Power Outage

On July 20, 2020, our Fab 3 facility in Gumi, South Korea experienced a temporary power outage for approximately 9 hours and 15 minutes. The accident caused certain damage to our work in process wafers and we incurred charges for facility recovery, resulting in an incremental cost of approximately $1.2 million. Management is currently evaluating potential insurance and other claims that we may have to recover our costs incurred as a result of the loss and damages. The recovery of our Fab 3 from this power outage took longer than expected, which limited our ability to produce products in Fab 3 at full capacity, resulting in a lower factory utilization during the third quarter of 2020.

### COVID-19 Pandemic

In December 2019, a strain of coronavirus causing a disease known as COVID-19 surfaced in Wuhan, China, resulting in significant disruptions among Chinese manufacturing and other facilities and travel throughout China. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, which continues to spread rapidly in the U.S. and other countries throughout the world. Governmental authorities throughout the world have implemented numerous containment measures, including travel bans and restrictions, quarantines, shelter-in-place orders, and business restrictions and shutdowns, resulting in rapidly changing market and economic conditions.

While we experienced some minor disruption in our Power Solutions business from assembly and test subcontractors located in China in the first quarter of 2020 as a result of COVID-19, to date our external Display Solutions business contractors and sub-contractors have not been materially impacted by the outbreak. Nevertheless, while the future impact on our business from the COVID-19 pandemic is currently difficult to assess, the significant global macro-economic disruption will adversely affect customer demand for some of our products in the near term. We are, however, unable to accurately predict the full impact COVID-19 will have on our future results of operations due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, a potential future recurrence of the outbreak, further containment actions that may be taken by governmental authorities, the impact to the businesses of our customers and suppliers, and other factors.

We continue to closely monitor and evaluate the nature and scope of the impact on COVID-19 to our business, consolidated results of operations, and financial condition, and may take further actions altering our business operations and managing our costs and liquidity that we deem necessary or appropriate to respond to this fast moving and uncertain global health crisis and the resulting global economic consequences.

### Explanation and Reconciliation of Non-U.S. GAAP Measures

### Adjusted EBITDA, Adjusted Operating Income and Adjusted Net Income

We use the terms Adjusted EBITDA, Adjusted Operating Income and Adjusted Net Income (including on a per share basis) in our report. Adjusted EBITDA, as we define it, is a non-U.S. GAAP measure. We define Adjusted EBITDA for the periods indicated as EBITDA (as defined below), adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss (gain), net, (iii) derivative valuation loss (gain), net, (iv) loss on early extinguishment of long-term borrowings, net, (v) inventory reserve related to Huawei impact of downstream trade restrictions, (vi) expenses related to Fab 3 power outage and (vii) others. EBITDA for the periods indicated is defined as net income (loss) before interest expense, net, income tax expense, 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 U.S. 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 U.S. GAAP. A reconciliation of net income (loss) to Adjusted EBITDA from continuing operations is as follows:

*(In millions)*

|  | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 |
| --- | ---: | ---: | ---: | ---: |
| Income (loss) from continuing operations | $8.5 | $(10.8) | $(14.2) | $(44.3) |
| Interest expense, net | 4.9 | 14.5 | 4.9 | 14.8 |
| Income tax expenses | (1.1) | 0.8 | 1.7 | 3.3 |
| Depreciation and amortization | 2.9 | 8.0 | 2.6 | 7.7 |
| EBITDA | $15.0 | $12.5 | $(5.0) | $(18.5) |
| Adjustments: |  |  |  |  |
| Equity-based compensation expense(a) | 2.1 | 4.4 | 0.4 | 1.7 |
| Foreign currency loss (gain), net(b) | (8.9) | 13.6 | 22.0 | 44.2 |
| Derivative valuation loss (gain), net(c) | (0.1) | (0.2) | 0.0 | 0.2 |
| Loss on early extinguishment of long-term borrowings, net(d) | — | — | — | 0.0 |
| Inventory reserve related to Huawei impact of downstream trade restrictions (e) | 2.3 | 2.3 | — | — |
| Expenses related to Fab 3 power outage(f) | 1.2 | 1.2 | — | — |
| Others(g) | — | 0.6 | — | 0.6 |
| Adjusted EBITDA | $11.7 | $34.3 | $17.4 | $28.1 |

33

(a) 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.

(b) This adjustment mainly eliminates the impact of non-cash foreign currency translation associated with intercompany debt obligations with respect to the continuing operations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily non-cash gains or losses, 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.

(c) This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents 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.

(d) This adjustment eliminates $0.04 million in expenses related to the repurchase of a portion of the 2021 Notes and the Exchangeable Notes in the first quarter of 2019.

(e) This adjustment eliminates a $2.3 million excess and obsolete inventory charge that we recorded in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers. As this charge meaningfully impacted our operational results and is not expected to represent an ongoing operating expense subject to our ability to foresee and control, we believe our operating performance results are more meaningfully compared if this charge is excluded.

(f) This adjustment eliminates $1.2 million in expenses related to the write-off of the damaged work in process wafers and charges for facility recovery. These charges are inconsistent in amount and frequency, and we do not believe that these charges are indicative of our core operation performance and have been excluded for comparative purposes.

(g) For the nine months ended September 30, 2020, this adjustment primarily eliminates non-recurring professional service fees and expenses incurred in connection with certain treasury and finance initiatives incurred during the three months ended March 31, 2020. For the nine months ended September 30, 2019, this adjustment primarily eliminates a $0.5 million legal settlement charge related to dispute with a prior customer and a legal expense related to the indemnification of a former employee, which is borne by us under a negotiated separation agreement during the three months ended March 31, 2019. We do not believe that these charges are 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 U.S. 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 U.S. GAAP results and using Adjusted EBITDA only supplementally.

We present Adjusted Operating Income as supplemental measures of our performance. We prepare Adjusted Operating Income by adjusting operating income to eliminate the impact of equity-based compensation 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 Operating Income is useful to investors to provide a supplemental way to understand our underlying operating performance and allows investors to monitor and understand changes in our ability to generate income from ongoing business operations.

Adjusted Operating Income is not a measure defined in accordance with U.S. GAAP and should not be construed as an alternative to operating income, income from continuing operations, cash flows from operating activities or net income, as determined in accordance with U.S. GAAP. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Operating Income differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Operating Income, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Operating Income for the periods indicated as operating income adjusted to exclude (i) Equity-based compensation expense, (ii) inventory reserve related to Huawei impact of downstream trade restrictions, (iii) expenses related to Fab 3 power outage and (iv) others.

The following table summarizes the adjustments to operating income that we make in order to calculate Adjusted Operating Income from continuing operations for the periods indicated:

*(In millions)*

|  | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 |
| --- | ---: | ---: | ---: | ---: |
| Operating income | $3.2 | $17.8 | $14.3 | $18.0 |
| Adjustments: |  |  |  |  |
| Equity-based compensation expense(a) | 2.1 | 4.4 | 0.4 | 1.7 |
| Inventory reserve related to Huawei impact of downstream trade restrictions (b) | 2.3 | 2.3 | — | — |
| Expenses related to Fab 3 power outage(c) | 1.2 | 1.2 | — | — |
| Others(d) | — | 0.6 | — | 0.6 |
| Adjusted Operating Income | $8.8 | $26.2 | $14.8 | $20.3 |

(a) 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.

(b) This adjustment eliminates a $2.3 million excess and obsolete inventory charge that we recorded in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers. As this charge meaningfully impacted our operational results and is not expected to represent an ongoing operating expense subject to our ability to foresee and control, we believe our operating performance results are more meaningfully compared if this charge is excluded.

(c) This adjustment eliminates $1.2 million in expenses related to the write-off of the damaged work in process wafers and charges for facility recovery. These charges are inconsistent in amount and frequency, and we do not believe that these charges are indicative of our core operation performance and have been excluded for comparative purposes.

(d) For the nine months ended September 30, 2020, this adjustment primarily eliminates non-recurring professional service fees and expenses incurred in connection with certain treasury and finance initiatives incurred during the three months ended March 31, 2020. For the nine months ended September 30, 2019, this adjustment primarily eliminates a $0.5 million legal settlement charge related to dispute with a prior customer and a legal expense related to the indemnification of a former employee, which is borne by us under a negotiated separation agreement during the three months ended March 31, 2019. We do not believe that these charges are indicative of our core operating performance and have been excluded for comparative purposes.

We present Adjusted Net Income (including on a per share basis) as a further supplemental measure of our performance. We prepare Adjusted Net Income (including on a per share basis) by adjusting net income (loss) to eliminate the impact of a number of non-cash expenses and other items that may be either one time or recurring that we do not consider to be indicative of our core ongoing operating performance. We believe that Adjusted Net Income (including on a per share basis); is particularly useful because it reflects the impact of our asset base and capital structure on our operating performance. We present Adjusted Net Income (including on a per share basis) for a number of reasons, including:

- we use Adjusted Net Income (including on a per share basis) 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 (including on a per share basis) 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 (including on a per share basis) is not a measure defined in accordance with U.S. 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 U.S. 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 (including on a per share basis) differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Net Income (including on a per share basis), you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Net Income (including on a per share basis); for the periods indicated as net income (loss), adjusted to exclude (i) equity-based compensation expense, (ii) foreign currency loss (gain), net, (iii) derivative valuation loss (gain), net, (iv) loss on early extinguishment of long-term borrowings, net, (v) inventory reserve related to Huawei impact of downstream trade restrictions, (vi) expenses related to Fab 3 power outage and (vii) others.

The following table summarizes the adjustments to income (loss) from continuing operations that we make in order to calculate Adjusted Net Income (including on a per share basis) from continuing operations for the periods indicated:

*(In millions)*

|  | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 |
| --- | ---: | ---: | ---: | ---: |
| Income (loss) from continuing operations | $8.5 | $(10.8) | $(14.2) | $(44.3) |
| Adjustments: |  |  |  |  |
| Equity-based compensation expense(a) | 2.1 | 4.4 | 0.4 | 1.7 |
| Foreign currency loss (gain), net(b) | (8.9) | 13.6 | 22.0 | 44.2 |
| Derivative valuation loss (gain), net(c) | (0.1) | (0.2) | 0.0 | 0.2 |
| Loss on early extinguishment of long-term borrowings, net(d) | — | — | — | 0.0 |
| Inventory reserve related to Huawei impact of downstream trade restrictions (e) | 2.3 | 2.3 | — | — |
| Expenses related to Fab 3 power outage(f) | 1.2 | 1.2 | — | — |
| Others(g) | — | 0.6 | — | 0.6 |
| Adjusted Net Income | $5.1 | $11.0 | $8.2 | $2.3 |
| Reported earnings (loss) per share – basic | $0.24 | $(0.31) | $(0.41) | $(1.29) |
| Reported earnings (loss) per share – diluted | $0.21 | $(0.31) | $(0.41) | $(1.29) |
| Weighted average number of shares – basic | 35,280,864 | 35,089,479 | 34,357,745 | 34,266,513 |
| Weighted average number of shares – diluted | 46,581,788 | 35,089,479 | 34,357,745 | 34,266,513 |
| Adjusted earnings per share – basic | $0.15 | $0.31 | $0.24 | $0.07 |
| Adjusted earnings per share – diluted | $0.14 | $0.30 | $0.21 | $0.07 |
| Weighted average number of shares – basic | 35,280,864 | 35,089,479 | 34,357,745 | 34,266,513 |
| Weighted average number of shares – diluted | 46,581,788 | 36,151,622 | 45,516,245 | 34,955,722 |

36

(a) 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.

(b) This adjustment mainly eliminates the impact of non-cash foreign currency translation associated with intercompany debt obligations with respect to the continuing operations and foreign currency denominated receivables and payables, as well as the cash impact of foreign currency transaction gains or losses on collection of such receivables and payment of such payables. Although we expect to incur foreign currency translation gains or losses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these primarily non-cash gains or losses, 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.

(c) This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents 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.

(d) This adjustment eliminates $0.04 million in expenses related to the repurchase of a portion of the 2021 Notes and the Exchangeable Notes in the first quarter of 2019.

(e) This adjustment eliminates a $2.3 million excess and obsolete inventory charge that we recorded in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers. As this charge meaningfully impacted our operational results and is not expected to represent an ongoing operating expense subject to our ability to foresee and control, we believe our operating performance results are more meaningfully compared if this charge is excluded.

(f) This adjustment eliminates $1.2 million in expenses related to the write-off of the damaged work in process wafers and charges for facility recovery. These charges are inconsistent in amount and frequency, and we do not believe that these charges are indicative of our core operation performance and have been excluded for comparative purposes.

(g) For the nine months ended September 30, 2020, this adjustment primarily eliminates non-recurring professional service fees and expenses incurred in connection with certain treasury and finance initiatives incurred during the three months ended March 31, 2020. For the nine months ended September 30, 2019, this adjustment primarily eliminates a $0.5 million legal settlement charge related to dispute with a prior customer and a legal expense related to the indemnification of a former employee, which is borne by us under a negotiated separation agreement during the three months ended March 31, 2019. We do not believe that these charges are 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 from continuing operations for the nine months ended September 30, 2020 and 2019 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) from continuing operations used to calculate Adjusted Net Income from continuing operations 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 U.S. 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 U.S. GAAP results and using Adjusted Net Income only supplementally.

### Factors Affecting Our Results of Operations

**Net** ***Sales.*** We derive substantially all of our sales (net of sales returns and allowances) from our standard products business. We outsource manufacturing of advanced OLED products to external 12-inch foundries. 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.

We recognize revenue when risk and reward of ownership pass to the customer either upon shipment, upon product delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement. For the nine months ended September 30, 2020 and 2019, we sold products to 170 customers, in each period, and our net sales to our ten largest customers represented 88% and 90% of our net sales — standard products business, respectively.

We will provide the Transitional Fab 3 Foundry Services for a period up to three years after the sale of the Foundry Services Group business and Fab 4. For the periods prior to the closing of the sale of the Foundry Services Group business and Fab 4 (which is accounted for as a discontinued operation beginning in the first quarter of 2020), revenue derived from the Transitional Fab 3 Foundry Services is recorded at cost in both our continuing and discontinued operations. Following the consummation of the sale, and for up to three years, we are expected to provide the Transitional Fab 3 Foundry Services at an agreed upon cost plus mark-up.

***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 facility 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 material costs consist 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, 2020, 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 of our display business are material and design-related costs for OLED display driver IC product development involving 40-nanometer or finer processes. The majority of research and development expenses of our power business are certain equipment, material and design-related costs for power discrete products and material and design-related costs for power IC products. Power IC uses standard BCD process technologies which can be sourced from multiple foundries, including Fab 4.

***Interest Expense.*** Our interest expense was incurred primarily under our 2021 Notes and our Exchangeable Notes. On October 2, 2020, we redeemed all outstanding 2021 Notes. We will not incur interest expense associated with the 2021 Notes from and after October 2, 2020.

***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, 2020, the outstanding intercompany loan balance including accrued interest between our Korean subsidiary and our Dutch subsidiary was $446.0 million. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our stock could be adversely affected.

From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. Our Korean subsidiary enters into foreign currency forward and zero cost collar contracts in order to mitigate a portion of the impact of U.S. dollar-Korean won exchange rate fluctuations on our operating results. Obligations under these foreign currency forward and zero cost collar contracts must be cash collateralized if our exposure exceeds certain specified thresholds. These forward and zero cost collar contracts may be terminated by a counterparty in a number of circumstances, including if our long-term debt rating falls below B-/B3 or if our total cash and cash equivalents is less than $30.0 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 foreign currency gain (loss), net in our statements of operations. 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.

We are subject to income- or non-income-based tax examinations by tax authorities of the U.S., Korea and multiple other foreign jurisdictions, where applicable, for all open tax years. Significant estimates and judgments are required in determining our worldwide provision for income- or non-income based 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.

***Discontinued Operations.*** On March 30, 2020, we entered into the Business Transfer Agreement for the sale of our Foundry Services Group business and Fab 4 to the Buyer. As a result, the results of the Foundry Services Group business were classified as discontinued operations in our consolidated statements of operations and excluded from both continuing operations and segment results for all periods presented. On September 1, 2020, we completed the sale for a purchase price equal to approximately $350.6 million in cash.

***Capital Expenditures.*** We primarily invest in manufacturing equipment, software design tools and other tangible assets mainly for fabrication facility 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, 2020 and 2019

The following table sets forth consolidated results of operations for the three months ended September 30, 2020 and 2019:

*(In millions)*

| Revenues | Three Months Ended September 30, 2020 Amount | % of Total revenues | Three Months Ended September 30, 2019 Amount | % of Total revenues | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales – standard products business | $116.3 | 93.1% | $139.3 | 93.4% | $(23.0) |
| Net sales – transitional Fab 3 foundry services | 8.6 | 6.9 | 9.9 | 6.6 | (1.3) |
| Total revenues | 124.8 | 100.0 | 149.2 | 100.0 | (24.4) |
| Cost of sales |  |  |  |  |  |
| Cost of sales – standard products business | 87.5 | 70.1 | 104.0 | 69.7 | (16.5) |
| Cost of sales – transitional Fab 3 foundry services | 8.7 | 7.0 | 9.9 | 6.6 | (1.2) |
| Total cost of sales | 96.2 | 77.1 | 113.9 | 76.4 | (17.7) |
| Gross profit | 28.6 | 22.9 | 35.3 | 23.6 | (6.7) |
| Selling, general and administrative expenses | 12.9 | 10.3 | 10.7 | 7.2 | 2.2 |
| Research and development expenses | 12.5 | 10.0 | 10.2 | 6.9 | 2.2 |
| Operating income | 3.2 | 2.6 | 14.3 | 9.6 | (11.1) |
| Interest expense | (5.5) | (4.4) | (5.5) | (3.7) | 0.1 |
| Foreign currency gain (loss), net | 8.9 | 7.1 | (22.0) | (14.7) | 30.8 |
| Others, net | 0.7 | 0.6 | 0.7 | 0.5 | 0.0 |
|  | 4.1 | 3.3 | (26.8) | (18.0) | 30.9 |
| Income (loss) from continuing operations before income tax expense | 7.3 | 5.9 | (12.5) | (8.4) | 19.8 |
| Income tax expense (benefit) | (1.1) | (0.9) | 1.7 | 1.2 | (2.9) |
| Income (loss) from continuing operations | 8.5 | 6.8 | (14.2) | (9.5) | 22.7 |
| Income from discontinued operations, net of tax | 264.5 | 211.9 | 12.6 | 8.5 | 251.9 |
| Net income (loss) | $273.0 | 218.7 | $(1.6) | (1.1) | $274.6 |

41

The following sets forth information relating to our continuing operations:

*(In millions)*

| Revenues Net sales – standard products business | Three Months Ended September 30, 2020 Amount | % of Total Revenues | Three Months Ended September 30, 2019 Amount | % of Total Revenues | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Display Solutions | $69.6 | 55.7% | $90.6 | 60.7% | $(21.0) |
| Power Solutions | 46.7 | 37.4 | 48.7 | 32.7 | (2.0) |
| Total standard products business | 116.3 | 93.1 | 139.3 | 93.4 | (23.0) |
| Net sales – transitional Fab 3 foundry services | 8.6 | 6.9 | 9.9 | 6.6 | (1.3) |
| Total revenues | $124.8 | 100.0% | $149.2 | 100.0% | $(24.4) |

*(In millions)*

| Gross Profit | Three Months Ended September 30, 2020 Amount | % of Net sales | Three Months Ended September 30, 2019 Amount | % of Net sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Gross profit – standard products business | $28.8 | 24.7% | $35.3 | 25.3% | $(6.5) |
| Gross profit – transitional Fab 3 foundry services | (0.2) | (2.1) | — | — | (0.2) |
| Total gross profit | $28.6 | 22.9% | $35.3 | 23.6% | $(6.7) |

### Revenues

Total revenues were $124.8 million for the three months ended September 30, 2020, a $24.4 million, or 16.3%, decrease compared to $149.2 million for the three months ended September 30, 2019. This decrease was primarily due to a decrease in revenue related to our standard products business as described below.

***The standard products business.*** Net sales from our standard products business were $116.3 million for the three months ended September 30, 2020, a $23.0 million, or 16.5%, decrease compared to $139.3 million for the three months ended September 30, 2019. The decrease in net sales from our Display Solutions business line was primarily attributable to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, that impacted the shipment of certain mobile OLED display driver ICs to our customers, and a strategic reduction of our lower margin non-auto LCD DDIC business. The decrease in net sales from our Power Solutions business line was primarily attributable to the Fab 3 power outage that affected our ability to meet customer demand for some of our Power Solution products during the three months ended September 30, 2020.

***The transitional Fab 3 foundry services.*** Net sales from the transitional Fab 3 foundry services were $8.6 million and $9.9 million for the three months ended September 30, 2020 and 2019, respectively.

### Gross Profit

Total gross profit was $28.6 million for the three months ended September 30, 2020 compared to $35.3 million for the three months ended September 30, 2019, a $6.7 million, or 18.9%, decrease. Gross profit as a percentage of net sales for the three months ended September 30, 2020 decreased to 22.9% compared to 23.6% for the three months ended September 30, 2019. The decrease in gross profit and gross profit as a percentage of net sales was primarily due to a decrease in gross profit and gross profit as a percentage of net sales from our standard products business as further described below.

***The standard products business.*** Gross profit from our standard products business was $28.8 million for the three months ended September 30, 2020, which represented a $6.5 million, or 18.4%, decrease from gross profit of $35.3 million for the three months ended September 30, 2019. Gross profit as a percentage of net sales for the three months ended September 30, 2020 decreased to 24.7% compared to 25.3% for the three months ended September 30, 2019. The decrease was primarily attributable to a $2.3 million of unexpected excess and obsolete inventory charge that we recorded in the third quarter of 2020 in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers. The delayed recovery of Fab 3 from the power outage, which resulted in a lower than anticipated utilization rate, also negatively affected both gross profit and gross profit as a percentage of net sales.

### Net Sales – Standard Products Business by Geographic Region

We report net sales – standard products business by geographic region based on the location to which the products are billed. The following table sets forth our net sales—standard products business by geographic region and the percentage of total net sales—standard products business represented by each geographic region for the three months ended September 30, 2020 and 2019:

*(In millions)*

|  | Three Months Ended September 30, 2020 Amount | % of Net Sales – standard products business | Three Months Ended September 30, 2019 Amount | % of Net Sales – standard products business | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Korea | $28.4 | 24.4% | $36.1 | 25.9% | $(7.7) |
| Asia Pacific (other than Korea) | 84.2 | 72.4 | 100.9 | 72.4 | (16.7) |
| United States | 1.8 | 1.5 | 0.5 | 0.3 | 1.3 |
| Europe | 1.5 | 1.2 | 1.5 | 1.1 | (0.1) |
| Others | 0.5 | 0.4 | 0.3 | 0.2 | 0.2 |
|  | $116.3 | 100.0% | $139.3 | 100.0% | $(23.0) |

Net sales – standard products business in Korea for the three months ended September 30, 2020 decreased from $36.1 million to $28.4 million compared to the three months ended September 30, 2019, which represented a decrease of $7.7 million, or 21.4%, primarily due to a strategic reduction of our lower margin non-auto LCD DDIC business and lower demand for power products such as MOSFETs primarily for TV and smartphone applications, which was offset in part by an increase in revenue related to our mobile OLED display driver ICs due to an increase in demand for production of new OLED smartphones by Chinese manufacturers due in part to the geographic diversification of our OLED product portfolio amid a COVID-19-related disruption. This increase continued until the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, impacted the shipment of certain mobile OLED display driver ICs to certain of our customers.

Net sales – standard products business in Asia Pacific (other than Korea) for the three months ended September 30, 2020 decreased to $84.2 million from $100.9 million in the three months ended September 30, 2019, which represented a decrease of $16.7 million, or 16.5%, primarily due to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, that impacted the shipment of certain mobile OLED display driver ICs to our customers.

### Operating Expenses

***Selling, General and Administrative Expenses.*** Selling, general and administrative expenses were $12.9 million, or 10.3%, of total revenues, for the three months ended September 30, 2020, compared to $10.7 million, or 7.2%, of total revenues, for the three months ended September 30, 2019. The increase of $2.2 million, or 20.6%, was primarily attributable to an increase in employee compensation, including equity-based compensation.

***Research and Development Expenses.*** Research and development expenses were $12.5 million, or 10.0%, of total revenues, for the three months ended September 30, 2020, compared to $10.2 million, or 6.9%, of total revenues, for the three months ended September 30, 2019. The increase of $2.2 million, or 21.9%, was primarily attributable to an increase in development activities for our 28-nanometer OLED display driver ICs and an increase in employee compensation, including equity-based compensation.

### Operating Income

As a result of the foregoing, operating income of $3.2 million was recorded for the three months ended September 30, 2020, compared to operating income of $14.3 million the three months ended September 30, 2019. As discussed above, the decrease in operating income of $11.1 million resulted primarily from a $6.7 million decrease in gross profit, a $2.2 million increase in selling, general and administrative expenses and a $2.2 million increase in research and development expenses.

### Other Income

***Interest Expense.*** Interest expenses were $5.5 million for each of the three months ended September 30, 2020 and September 30, 2019.

***Foreign Currency Gain (Loss), Net.*** Net foreign currency gain for the three months ended September 30, 2020 was $8.9 million compared to net foreign currency loss of $22.0 million for the three months ended September 30, 2019. The net foreign currency gain for the three months ended September 30, 2020 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, 2019 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 intercompany long-term loans to our Korean subsidiary, which are denominated in U.S. dollars, and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of September 30, 2020 and September 30, 2019, the outstanding intercompany loan balances including accrued interest between our Korean subsidiary and our Dutch subsidiary were $446.0 million and $679.6 million, respectively. The decrease in the outstanding intercompany loan balances including accrued interest was primarily attributable to our Korean subsidiary’s repayment of certain loans by our Dutch subsidiary to fund the redemption of the outstanding 2021 Notes on October 2, 2020. Foreign currency translation gain or loss from intercompany balances were 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, 2020 and September 30, 2019 was $0.7 million in each period.

### Income Tax Expense (Benefit)

Income tax benefit for the three months ended September 30, 2020 was $1.1 million, which was primarily attributable to the foreign translation loss realized by our Korean subsidiary upon the repayment of a part of its intercompany loans by the Dutch subsidiary to fund the redemption of the 2021 Notes. Income tax expense of $1.7 million for the three month ended September 30, 2019 was primarily attributable to interest on intercompany loan balances. Income tax expense was recorded for our Korean subsidiary based on the estimated taxable income for the respective periods, combined with its ability to utilize net operating loss carryforwards up to 60% in 2019.

### Income (Loss) from Continuing Operations

As a result of the foregoing, income from continuing operations increased by $22.7 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. As discussed above, the increase in income from continuing operations primarily resulted from a $30.8 million improvement in net foreign currency loss and a $2.9 million decrease in income tax expense, which was offset in part by an $11.1 million decrease in operating income.

### Income from Discontinued Operations, Net of Tax

On March 30, 2020, we entered into the Business Transfer Agreement for the sale of our Foundry Services Group business and Fab 4. As a result, the results of the Foundry Services Group business were classified as discontinued operations in our consolidated statements of operations and excluded from our continuing operations for all periods presented.

Income from discontinued operations, net of tax for the three months ended September 30, 2020 was $264.5 million, compared to income from discontinued operations, net of tax of $12.6 million for the three months ended September 30, 2019. The $251.9 million increase in income from discontinued operations, net of tax primarily resulted from a $287.1 million increase in gain on sale of discontinued operations, which was offset in part by a $14.5 million increase in income tax expense, a $10.8 million increase in transaction costs, a $7.1 million increase in restructuring and other charges and a $5.4 million decrease in gross profit.

### Net Income (Loss)

As a result of the foregoing, net income of $273.0 million was recorded for the three months ended September 30, 2020 compared to net loss of $1.6 million for the three months ended September 30, 2019. As discussed above, the increase in net income of $274.6 million primarily resulted from a $251.9 million increase in income from discontinued operations, net of tax, mainly attributable to the completion of the sale of the Foundry Service Group business and Fab 4, and a $22.7 million improvement in loss from continuing operations.

### Results of Operations – Comparison of Nine Months Ended September 30, 2020 and 2019

The following table sets forth consolidated results of operations for the nine months ended September 30, 2020 and 2019:

*(In millions)*

| Revenues | Nine Months Ended September 30, 2020 Amount | % of Total revenues | Nine Months Ended September 30, 2019 Amount | % of Total revenues | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net sales – standard products business | $336.0 | 92.3% | $371.5 | 93.5% | $(35.6) |
| Net sales – transitional Fab 3 foundry services | 28.2 | 7.7 | 25.8 | 6.5 | 2.4 |
| Total revenues | 364.1 | 100.0 | 397.3 | 100.0 | (33.2) |
| Cost of sales |  |  |  |  |  |
| Cost of sales – standard products business | 245.9 | 67.5 | 285.6 | 71.9 | (39.7) |
| Cost of sales – transitional Fab 3 foundry services | 28.3 | 7.8 | 25.8 | 6.5 | 2.6 |
| Total cost of sales | 274.3 | 75.3 | 311.4 | 78.4 | (37.2) |
| Gross profit | 89.9 | 24.7 | 85.9 | 21.6 | 4.0 |
| Selling, general and administrative expenses | 37.4 | 10.3 | 33.8 | 8.5 | 3.6 |
| Research and development expenses | 34.1 | 9.4 | 34.0 | 8.6 | 0.0 |
| Other charges | 0.6 | 0.2 | — | — | 0.6 |
| Operating income | 17.8 | 4.9 | 18.0 | 4.5 | (0.2) |
| Interest expense | (16.5) | (4.5) | (16.6) | (4.2) | 0.1 |
| Foreign currency loss, net | (13.6) | (3.7) | (44.2) | (11.1) | 30.5 |
| Loss on early extinguishment of long-term borrowings, net | — | — | (0.0) | (0.0) | 0.0 |
| Others, net | 2.3 | 0.6 | 1.8 | 0.5 | 0.5 |
|  | (27.8) | (7.6) | (59.0) | (14.9) | 31.2 |
| Loss from continuing operations before income tax expense | (10.0) | (2.7) | (41.0) | (10.3) | 31.0 |
| Income tax expense | 0.8 | 0.2 | 3.3 | 0.8 | (2.5) |
| Loss from continuing operations | (10.8) | (3.0) | (44.3) | (11.1) | 33.4 |
| Income (loss) from discontinued operations, net of tax | 289.2 | 79.4 | (1.0) | (0.2) | 290.2 |
| Net income (loss) | $278.4 | 76.5 | $(45.3) | (11.4) | $323.6 |

45

The following sets forth information relating to our continuing operations:

*(In millions)*

| Revenues Net sales – standard products business | Nine Months Ended September 30, 2020 Amount | % of Total Revenues | Nine Months Ended September 30, 2019 Amount | % of Total Revenues | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Display Solutions | $216.4 | 59.4% | $233.0 | 58.7% | $(16.7) |
| Power Solutions | 119.6 | 32.8 | 138.5 | 34.9 | (18.9) |
| Total standard products business | 336.0 | 92.3 | 371.5 | 93.5 | (35.6) |
| Net sales – transitional Fab 3 foundry services | 28.2 | 7.7 | 25.8 | 6.5 | 2.4 |
| Total revenues | $364.1 | 100.0% | $397.3 | 100.0% | $(33.2) |

*(In millions)*

| Gross Profit | Nine Months Ended September 30, 2020 Amount | % of Net sales | Nine Months Ended September 30, 2019 Amount | % of Net sales | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Gross profit – standard products business | $90.0 | 26.8% | $85.9 | 23.1% | $4.1 |
| Gross profit – transitional Fab 3 foundry services | (0.2) | (0.6) | — | — | (0.2) |
| Total gross profit | $89.9 | 24.7% | $85.9 | 21.6% | $4.0 |

### Revenues

Total revenues were $364.1 million for the nine months ended September 30, 2020, a $33.2 million, or 8.4%, decrease compared to $397.3 million for the nine months ended September 30, 2019. This decrease was primarily due to a decrease in revenue related to our standard products business as described below.

***The standard products business.*** Net sales from our standard products business were $336.0 million for the nine months ended September 30, 2020, a $35.6 million, or 9.6%, decrease compared to $371.5 million for the nine months ended September 30, 2019. The decrease in net sales from our Display Solutions business line was primarily attributable to a strategic reduction of our lower margin non-auto LCD DDIC business and a decrease in revenue related to our mobile OLED display driver ICs as a result of COVID-19, which negatively affected the global smartphone market in 2020. The U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, also impacted the shipment of certain mobile OLED display driver ICs to certain of our customers. The decrease in net sales from our Power Solutions business line was primarily attributable to the significant global macro-economic market disruption due to COVID-19, which affected customer demand for some of our Power Solution products.

***The transitional Fab 3 foundry services.*** Net sales from the transitional Fab 3 foundry services were $28.2 million and $25.8 million for the nine months ended September 30, 2020 and 2019, respectively.

### Gross Profit

Total gross profit was $89.9 million for the nine months ended September 30, 2020 compared to $85.9 million for the nine months ended September 30, 2019, a $4.0 million, or 4.6%, increase. Gross profit as a percentage of net sales for the nine months ended September 30, 2020 increased to 24.7% compared to 21.6% for the nine months ended September 30, 2019. The increase in gross profit and gross profit as a percentage of net sales was due to the increase in gross profit and gross profit as a percentage of net sales from our standard products business as further described below.

***The standard products business.*** Gross profit from our standard products business was $90.0 million for the nine months ended September 30, 2020, which represented a $4.1 million, or 4.8%, increase from gross profit of $85.9 million for the nine months ended September 30, 2019. Gross profit as a percentage of net sales for the nine months ended September 30, 2020 increased to 26.8% compared to 23.1% for the nine months ended September 30, 2019. The increase in both gross profit and gross profit as a percentage of net sales was primarily attributable to inventory reserves related to certain legacy display products that were recorded in the first half of 2019 and an improved product mix, which was offset in part by a $2.3 million of unexpected excess and obsolete inventory charge that we recorded in the third quarter of 2020 in relation to the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers. The delayed recovery of Fab 3 from the power outage, resulting in a lower than anticipated utilization rate, also negatively affected both gross profit and gross profit as a percentage of net sales.

### Net Sales – Standard Products Business by Geographic Region

We report net sales – standard products business by geographic region based on the location to which the products are billed. The following table sets forth our net sales—standard products business by geographic region and the percentage of total net sales—standard products business represented by each geographic region for the nine months ended September 30, 2020 and 2019:

*(In millions)*

|  | Nine Months Ended September 30, 2020 Amount | % of Net Sales – standard products business | Nine Months Ended September 30, 2019 Amount | % of Net Sales – standard products business | Change Amount |
| --- | ---: | ---: | ---: | ---: | ---: |
| Korea | $81.1 | 24.2% | $107.3 | 28.9% | $(26.2) |
| Asia Pacific (other than Korea) | 245.9 | 73.2 | 258.3 | 69.5 | (12.3) |
| United States | 4.0 | 1.2 | 1.6 | 0.4 | 2.4 |
| Europe | 3.3 | 1.0 | 3.5 | .0.9 | (0.2) |
| Others | 1.6 | 0.5 | 0.8 | 0.2 | 0.8 |
|  | $336.0 | 100.0% | $371.5 | 100.0% | $(35.6) |

Net sales – standard products business in Korea for the nine months ended September 30, 2020 decreased from $107.3 million to $81.1 million compared to the nine months ended September 30, 2019, which represented a decrease of $26.2 million, or 24.4%, primarily due to a strategic reduction of our lower margin non-auto LCD DDIC business and lower demand for power products such as MOSFETs primarily for TV and smartphone applications, which was offset in part by an increase in revenue related to our mobile OLED display driver ICs due to an increase in demand for production of new OLED smartphones by Chinese manufacturers due in part to the geographic diversification of our OLED product portfolio amid a COVID-19-related disruption. This increase continued until the U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, impacted the shipment of certain mobile OLED display driver ICs to certain of our customers.

Net sales – standard products business in Asia Pacific (other than Korea) for the nine months ended September 30, 2020 decreased to $245.9 million from $258.3 million in the nine months ended September 30, 2019, which represented a decrease of $12.3 million, or 4.8%, primarily due to a decrease in revenue related to our mobile OLED display driver ICs as a result of COVID-19, which negatively has affected the global smartphone market in 2020. The U.S. Government’s export restrictions on Huawei, which is a downstream customer of some of our direct customers, also impacted the shipment of certain mobile OLED display driver ICs to certain of our customers.

### Operating Expenses

***Selling, General and Administrative Expenses.*** Selling, general and administrative expenses were $37.4 million, or 10.3%, of total revenues, for the nine months ended September 30, 2020, compared to $33.8 million, or 8.5%, of total revenues, for the nine months ended September 30, 2019. The increase of $3.6 million, or 10.6%, was primarily attributable to an increase in employee compensation, including equity-based compensation, and legal and consulting service fees, which was offset in part by a $0.5 million legal settlement charge related to dispute with a prior customer recorded in the first quarter of 2019.

***Research and Development Expenses.*** Research and development expenses were $34.1 million, or 9.4%, of total revenues, for the nine months ended September 30, 2020, which remained flat, compared to $34.0 million, or 8.6%, of total revenues, for the nine months ended September 30, 2019.

***Other Charges.*** Other charges were $0.6 million for the nine months ended September 30, 2020, which consisted of professional service fees and expenses incurred in connection with certain treasury and finance initiatives incurred during the three months ended March 31, 2020.

### Operating Income

As a result of the foregoing, operating income of $17.8 million was recorded for the nine months ended September 30, 2020 compared to operating income of $18.0 million the nine months ended September 30, 2019. As discussed above, the decrease in operating income of $0.2 million resulted primarily from a $3.6 million increase in selling, general and administrative expenses and a $0.6 million increase in other charges, which was nearly offset by a $4.0 million increase in gross profit.

### Other Income

***Interest Expense.*** Interest expenses were $16.5 million and $16.6 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.

***Foreign Currency Loss, Net.*** Net foreign currency loss for the nine months ended September 30, 2020 was $13.6 million compared to net foreign currency loss of $44.2 million for the nine months ended September 30, 2019. The net foreign currency loss for the nine months ended September 30, 2020 and September 30, 2019 was due to the depreciation in value of the Korean won relative to the U.S. dollar during each period.

A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss associated with intercompany long-term loans to our Korean subsidiary, which are denominated in U.S. dollars, and are affected by changes in the exchange rate between the Korean won and the U.S. dollar. As of September 30, 2020 and September 30, 2019, the outstanding intercompany loan balances including accrued interest between our Korean subsidiary and our Dutch subsidiary were $446.0 million and $679.6 million, respectively. The decrease in the outstanding intercompany loan balances including accrued interest was primarily attributable to our Korean subsidiary’s repayment of certain loans by our Dutch subsidiary to fund the redemption of the outstanding 2021 Notes on October 2, 2020. Foreign currency translation gain or loss from intercompany balances were included in determining our consolidated net income since the intercompany balances were not considered long-term investments in nature because management intended to settle these intercompany balances at their respective maturity dates.

***Loss on Early Extinguishment of Long-Term Borrowings, Net.*** For the nine months ended September 30, 2019, we repurchased a principal amount of $0.3 million and $0.9 million of the 2021 Notes and the Exchangeable Notes, respectively. In connection with these repurchases, we recognized a $0.04 million net loss.

***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 nine months ended September 30, 2020 and September 30, 2019 was $2.3 million and $1.8 million, respectively.

### Income Tax Expense

Income tax expense was $0.8 million and $3.3 million for the nine months ended September 30, 2020 and 2019, respectively. Income tax expense for the nine months ended September 30, 2020 was primarily attributable to interest on intercompany loan balances, which was offset in part by the income tax benefit due mainly to the foreign translation loss realized by our Korean subsidiary upon the repayment of a part of its intercompany loans by the Dutch subsidiary to fund the redemption of the 2021 Notes. Income tax expense for the nine month ended September 30, 2019 was primarily attributable to interest on intercompany loan balances. Income tax expense was recorded for our Korean subsidiary based on the estimated taxable income for the respective periods, combined with its ability to utilize net operating loss carryforwards up to 60% in 2019 and 2020.

### Loss from Continuing Operations

As a result of the foregoing, loss from continuing operations improved by $33.4 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. As discussed above, the improvement in loss from continuing operations primarily resulted from a $30.5 million improvement in net foreign currency loss and a $2.5 million decrease in income tax expense.

### Income (Loss) from Discontinued Operations, Net of Tax

On March 30, 2020, we entered into the Business Transfer Agreement for the sale of our Foundry Services Group business and Fab 4. As a result, the results of the Foundry Services Group business were classified as discontinued operations in our consolidated statements of operations and excluded from our continuing operations for all periods presented.

Income from discontinued operations, net of tax for the nine months ended September 30, 2020 was $289.2 million compared to loss from discontinued operations, net of tax of $1.0 million for the nine months ended September 30, 2019. The $290.2 million increase in income from discontinued operations, net of tax primarily resulted from a $287.1 million increase in gain on sale of discontinued operations, a $30.4 million increase in gross profit due in part to depreciation and amortization associated with the assets classified as those held for sale having been ceased starting in the second quarter of 2020, a $3.3 million decrease in selling, general and administrative expenses and a $2.8 million decrease in research and development expenses, which were offset in part by a $15.7 million increase in income tax expense, a $10.8 million increase in transaction costs, a $5.8 million increase in restructuring and other charges.

### Net Income (Loss)

As a result of the foregoing, net income of $278.4 million was recorded for the nine months ended September 30, 2020 compared to net loss of $45.3 million for the nine months ended September 30, 2019. As discussed above, the increase in net income of $323.6 million primarily resulted from a $290.2 million increase in income from discontinued operations, net of tax, mainly attributable to the completion of the sale of the Foundry Service Group business and Fab 4, and a $33.4 million improvement in loss from continuing operations.

### 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, cash flows from operations and 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. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 3. 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, 2020, we do not have any accounts payable on extended terms or payment deferment with our vendors.

On September 1, 2020, we completed the previously announced sale of our Foundry Services Group business and Fab 4 to the Buyer in exchange for a purchase price equal to approximately $350.6 million, which included an estimated positive working capital adjustment of approximately $5.9 million, pursuant to the terms of the Business Transfer Agreement, which was entered into on March 30, 2020. The purchase price was paid in a combination of U.S. Dollars in the amount of $46.5 million and Korean Won in the amount of approximately KRW 360.6 billion.

On October 2, 2020, we redeemed of all of our outstanding 2021 Notes. We paid approximately $227.4 million to fully redeem all of the outstanding $224.25 million aggregate principal amount of the 2021 Notes at a redemption price equal to the sum of 100% of the principal amount plus accrued and unpaid interest thereon.

On January 17, 2017, we issued an aggregate of $86.3 million in principal amount of our Exchangeable Notes. We may, from time to time, repurchase a portion of our outstanding our Exchangeable Notes through open market purchases or privately negotiated transactions subject to prevailing market conditions and our available cash reserves. In December 2018 and February 2019, we repurchased a principal amount equal to $1.6 million and $0.9 million, respectively, of the Exchangeable Notes in the open market. As of September 30, 2020, our Exchangeable Notes were recorded as a current liability as their maturities were less than one year.

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.

### Working Capital

Our working capital balance as of September 30, 2020 was $244.9 million, compared to $245.5 million as of December 31, 2019. The increase in working capital was primarily attributable to increased cash and cash equivalents as a result of the completion of sale of our Foundry Services Group business and Fab 4, which was offset in part by reclassification of the outstanding Exchangeable Notes and 2021 Notes, which were reclassified as a current liability in the first and third quarter of 2020, respectively.

### Cash Flows from Operating Activities

Cash inflow provided by operating activities totaled $51.5 million for the nine months ended September 30, 2020, compared to $30.0 million of cash inflow provided by operating activities for the nine months ended September 30, 2019. The net operating cash inflow for the nine months ended September 30, 2020 reflects our net loss of $8.7 million, excluding gain on sale of discontinued operations, as adjusted favorably by $45.3 million, which mainly consisted of net foreign currency loss, depreciation and amortization, provision for severance benefits, and net favorable impact of $15.0 million from changes of operating assets and liabilities.

### Cash Flows from Investing Activities

Cash inflow provided by investing activities totaled $334.0 million for the nine months ended September 30, 2020, compared to $22.6 million of cash outflow used in investing activities for the nine months ended September 30, 2019. The $356.6 million increase in cash inflow was primarily attributable to $350.6 million of proceeds received from the sale of the Foundry Services Group business and Fab 4, a $4.6 million net decrease in hedge collateral and a $1.1 million net decrease in guarantee deposits.

### Cash Flows from Financing Activities

Cash inflow provided by financing activities totaled $1.1 million for the nine months ended September 30, 2020, compared to $3.3 million of cash outflow used in financing activities for the nine months ended September 30, 2019. The financing cash inflow for the nine months ended September 30, 2020 was primarily attributable to $2.7 million of proceeds received from the issuance of common stock in connection with the exercise of stock options, which was offset in part by a payment of $1.0 million for the repurchase of our common stock to satisfy tax withholding obligation in connection with the vesting of restricted stock units. The financing cash outflow for the nine months ended September 30, 2019 was primarily attributable to a payment of $1.2 million for the repurchases of 2021 Notes and Exchangeable Notes in the first quarter of 2019 and a payment of $2.4 million for the repurchases of our common stock in January 2019 pursuant to our stock repurchase plan, which was offset in part by $1.0 million of proceeds received from the issuance of common stock in connection with the exercise of stock options.

For additional cash flow information associated with our discontinued operation, please see “Item 1. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 2 – Discontinued Operations and Assets Held for Sale” included elsewhere in this Report.

### Capital Expenditures

We routinely make capital expenditures for fabrication facility maintenance, enhancement of our existing facilities and reinforcement of our global research and development capabilities. For the nine months ended September 30, 2020, capital expenditures for plant, property and equipment were $16.4 million, which remained flat, compared to $16.7 million of capital expenditures for the nine month ended September 30, 2019. The capital expenditures for the nine months ended September 30, 2020 and 2019 were related to meeting customer demand, supporting technology and facility improvement at our fabrication facilities.

### Contractual Obligations

The following summarizes our contractual obligations as of September 30, 2020:

*(In millions)*

|  | Payments Due by Period Total | Remainder of 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Exchangeable Notes(1) | $85.8 | $— | $85.8 | $— | $— | $— | $— |
| Senior Notes(2) | 227.4 | 227.4 | — | — | — | — | — |
| Operating leases(3) | 2.2 | 0.4 | 1.5 | 0.3 | 0.0 | — | — |
| Finance leases(3) | 0.2 | 0.0 | 0.1 | 0.1 | 0.1 | — | — |
| Water Treatment Services(3)(4) | 29.2 | 1.0 | 4.0 | 3.9 | 3.9 | 3.7 | 12.7 |
| Others(5) | 13.0 | 4.5 | 5.2 | 1.4 | 0.8 | 0.6 | 0.4 |

(1) Interest payments as well as $83.7 million aggregate principal amount of the Exchangeable Notes outstanding as of September 30, 2020, which bear interest at a rate of 5.0% per annum and are scheduled to mature in 2021 if not earlier exchanged at the price of approximately $8.26 per share of common stock.

(2) Interest payments as well as $224.3 million aggregate principal amount of the 2021 Notes outstanding as of September 30, 2020, which bore interest at a rate of 6.625% per annum and were scheduled to mature in 2021. The notice of redemption was issued in September and the redemption occurred in October after the September 30, 2020 reference date.

(3) Assumes constant currency exchange rate for Korean won to U.S. dollars of 1,173.5:1, the exchange rate as of September 30, 2020.

(4) Includes future payments for water treatment services for our fabrication facility in Gumi, Korea based on the contractual terms.

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

The indenture relating to the Exchangeable Notes contains covenants as detailed in “Item 1. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 11. 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 are rated investment grade at any time.

We lease office space and equipment under various operating lease agreements that expire through 2023.

We are a party to an arrangement for the water treatment facility in Gumi, Korea, which includes a 10-year service agreement.

Beginning in July 2018, we have contributed a certain percentage of severance benefits, accrued for eligible employees for their services beginning 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 these severance insurance deposit accounts from our accrued severance benefits. As of September 30, 2020, our accrued severance benefits totaled $52.0 million and cumulative contributions to these severance insurance deposit accounts amounted to $1.6 million. Our related cash payments for future contributions are $3.4 million for the remaining period of 2020, to the extent that our obligations are contractual, fixed and reasonably estimable.

We follow U.S. GAAP guidance on uncertain tax positions. Our unrecognized tax benefits totaled $0.4 million as of September 30, 2020. 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.

### Off-Balance Sheet Arrangements

As of September 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

### Critical Accounting Policies and Estimates

Preparing financial statements in conformity with U.S. 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, 2019, or our 2019 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 judgment appears in our 2019 Form 10-K, under “Management’s Discussion and Analysis of Financial Conditions and Reports of Operations—Critical Accounting Policies and Estimates.” There have been no material changes in the matters for which we make accounting estimates in the preparation of our consolidated financial statements for the nine months ended September 30, 2020, except for those related to discontinued operations as a result of changes in reporting that relate to the sale of the Foundry Services Group business and Fab 4.

***Discontinued Operations.*** We review the presentation of the planned disposition of the Foundry Services Group business and Fab 4 based on the available information and events that have occurred. The review consists of evaluating whether the disposition meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business, and if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results. In addition, we evaluate whether the Foundry Services Group business and Fab 4 have met the criteria as assets held for sale. In order for a planned disposition to be classified as assets held for sale, the established criteria must be met as of the reporting date, including an active program to market the sale and the expected disposition of within one year. The assets classified as held for sale are recorded at the lower of carrying amounts or estimated fair value less costs to sell and depreciation and amortization ceases on the that the held for sale criteria are met.

The Foundry Services Group business and Fab 4 is presented as discontinued operations beginning in the first quarter 2020 since all the criteria described above are met. For a divestiture that qualifies as a discontinued operation, all comparative periods presented are reclassified in the consolidated balance sheet. Additionally, the results of operations of a discontinued operation are reclassified to income or loss from discontinued operations, net of tax, for all periods presented. See “Item 1. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 2—Discontinued Operations and Assets Held for Sale” for additional information.

### 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, 2,397 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, 2020 for our Korean subsidiary, a 10% devaluation of the Korean won against the U.S. dollar would have resulted in a decrease of $8.5 million in our U.S. dollar financial instruments and cash balances.

See “Note 9. 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, 2020, $83.74 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, 2020, $224.25 million aggregate principal amount of our 2021 Notes were also outstanding; however, we redeemed all outstanding 2021 Notes on October 2, 2020. Interest on the 2021 Notes accrued at a fixed rate of 6.625% per annum and was paid semi-annually every January 15 and July 15 of each year. Since the interest rates are and were fixed, we have no market interest rate 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, 2020, 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, 2020.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 8,543 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 2019 Form 10-K (including that the impact of the COVID-19 pandemic may also exacerbate the risks discussed therein), herein 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.

### Risks Related to COVID-19

***Our business, results of operations and financial condition and prospects may be materially and adversely affected by the recent COVID-19 pandemic.***

COVID-19, a virus causing potentially deadly respiratory tract infections, which has spread rapidly and enveloped most of the world, is a global public health crisis. On March 11, 2020, the World Health Organization characterized the COVID-19 outbreak as a pandemic. Governments in affected countries are imposing travel bans, quarantines and other emergency public health measures. In response to the virus, national and local governments in numerous countries around the world have implemented substantial lockdown measures, and other countries and local governments may enact similar policies. Private sector companies are also taking precautionary measures, such as requiring employees to work remotely, imposing travel restrictions and temporarily closing businesses and facilities. These restrictions, and future prevention and mitigation measures, are likely to have an adverse impact on global economic conditions, which could materially adversely affect our future operations. Uncertainties regarding the economic impact of the COVID-19 outbreak are likely to result in sustained market turmoil, which could also negatively impact our business, financial condition and cash flows.

These measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners. The disruptions to our operations caused by the COVID-19 outbreak may result in inefficiencies, delays and additional costs in our research and development, sales and marketing, and customer service efforts that we cannot fully mitigate through remote or other alternative work arrangements. Also, some suppliers of materials used in the production of our products may be located in areas that have been or will be more severely impacted by COVID-19, which could limit our ability to obtain sufficient materials for our products. In addition, the severe global economic disruption caused by COVID-19 may cause our customers and end-users of our products to suffer significant economic hardship, which could result in decreased demand for our products in the future and materially adversely affect our business, results of operations, financial condition (including liquidity) and prospects.

The impact of the COVID-19 pandemic continues to evolve and its duration and ultimate disruption on our customers, end-users, overall demand for our products, supply chain, and the related financial impact to us, cannot be estimated at this time. Should such disruption continue for an extended period of time, the impact could have a more severe adverse effect on our business, results of operations and financial condition (including liquidity). Additionally, weaker economic conditions generally could result in impairment in value of our tangible or intangible assets, or our ability to raise additional capital, if needed.

### Risks Related to Independent Subcontractors

***We rely on a number of independent subcontractors and the failure of any of these independent subcontractors to perform as required could adversely affect our operating results.***

A substantial portion of our net sales are derived from semiconductor devices assembled in packages or on film. The packaging and testing of semiconductors require technical skills and specialized equipment. For the portion of packaging and testing that we outsource, we use subcontractors located in Korea, China, Taiwan and Thailand. We rely on these subcontractors to package and test our devices with acceptable quality and yield levels, and, while we specify quality standards, we are not able to directly oversee their day-to-day operations and the packaging and testing of our devices. Onboarding of a new subcontractor, including as a result of switching from one subcontractor to another, takes approximately three to six months to verify the subcontractor’s capabilities and an additional six to twelve months to receive approval from our customers to use such subcontractor. We could be adversely affected by political disorders, labor disruptions, public health issues (including viral outbreaks such as the COVID-19 coronavirus) and natural disasters where our subcontractors are located due to the time it would take to onboard a new subcontractor. If our semiconductor packagers and test service subcontractors experience problems in packaging and testing our semiconductor devices, experience prolonged quality or yield problems, experience shutdowns or delays associated with public health issues (such as those associated with the COVID-19 coronavirus), or decrease the capacity of their operations available to us, our operating results could be adversely affected.

### Risks Related to Our International Operations and Trade

***Recent changes in international trade policy and the imposition and threats of international tariffs, including tariffs applied to goods traded between the United States and China, could materially and adversely affect our business and results of operations.***

Since the beginning of 2018, there have been increasing public threats and, in some cases, legislative or executive action, from U.S. and foreign leaders regarding instituting tariffs against foreign imports of certain materials. More specifically, since March of 2018, the U.S. and China have applied tariffs to certain of each other’s exports. The institution of trade tariffs globally, and between the U.S. and China specifically, may negatively impact the affected countries’ economic conditions, which could negatively affect demand for our products in those countries and materially and adversely affect our business and results of operations of our customers serving the affected markets. Furthermore, imposition of tariffs could increase costs of the end-user products we supply that we may not be able to pass on to our customers, which could in turn cause a decrease in the sales of our products and services and materially and adversely affect our business and results of operations.

***Expanded trade restrictions imposed by the United States may limit our ability to sell to certain customers.***

On August 17, 2020, the U.S. Department of Commerce expanded the scope of export restrictions as applied to products directed to Huawei and its affiliates listed on the Bureau of Industry and Security’s Entity List (collectively, “Huawei”). While prior restrictions had minimal effect on our ability to supply to customers, the newly expanded restriction would limit our ability to supply to a variety of customers who we believe incorporate our products to those customers’ products directly or indirectly sold to Huawei. As of the date of this Quarterly Report, we are uncertain on the seriousness of the restriction’s impact or duration, nor are we certain about the future trajectory of our business from customers who directly or indirectly supply Huawei with products that incorporate our products. If required by the new restrictions, we will consider applying for export license in order to continue to sell to the affected customers, but at this moment we are unsure whether our application, if we were to apply, will be successful. There is also a possibility that the export restrictions may be further expanded to target other companies besides Huawei, which may have additional impact on our ability to sell to our customers. The export restriction may also affect our contractors, suppliers or customers, and we cannot assure that they will not violate the restriction. Their violations of the restriction may result in fines or criminal sanctions against us, and it may also damage our reputation.

Filed Nov 6, 2020.
Source: SEC EDGAR, the filing index for accession 0001193125-20-287329. Last ingested by Listed: Nov 5, 2026, 18:59 ET. No prices; not investment advice.