Edgar Filing: MAGNACHIP SEMICONDUCTOR Corp

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 001-34791

MagnaChip Semiconductor Corporation

(Exact name of registrant as specified in its charter)

Delaware

83-0406195

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

c/o MagnaChip Semiconductor S.A.

74, rue de Merl, B.P. 709 L-2146

Luxembourg R.C.S.

Luxembourg B97483

(352) 45-62-62

(Address, zip code, and telephone number, including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. x Yes ¨ No

As of May 8, 2012, the registrant had 36,889,431 shares of common stock outstanding.

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS


			Page No.
PART I FINANCIAL INFORMATION				4

	Item 1.	Interim Consolidated Financial Statements (Unaudited)		4

		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011		4

		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and March 31, 2011		5

		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2012 and March 31, 2011		7

		MagnaChip Semiconductor Corporation and Subsidiaries Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and March 31, 2011		8

		MagnaChip Semiconductor Corporation and Subsidiaries Notes to Consolidated Financial Statements		9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44

	Item 4.	Controls and Procedures		44

PART II OTHER INFORMATION				45

	Item 1A.	Risk Factors		45

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		57

	Item 6.	Exhibits		58

SIGNATURES				59

FORWARD LOOKING STATEMENTS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All statements other than statements of historical facts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements.

These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in this section and in “Part II: Item 1A. Risk Factors” in this report.

All forward-looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information or future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Statements made in this Quarterly Report on Form 10-Q, unless the context otherwise requires, include the use of the terms “we,” “us,” “our” and “MagnaChip” refer to MagnaChip Semiconductor Corporation and its consolidated subsidiaries. The term “Korea” refers to the Republic of Korea or South Korea.

PART I—FINANCIAL INFORMATION

Item 1.

Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands of US dollars, except share data)


	March 31, 2012			December 31, 2011
Assets
Current assets
Cash and cash equivalents	$	156,623		$	162,111
Restricted cash		3,934			6,830
Accounts receivable, net		127,332			125,922
Inventories, net		68,105			62,836
Other receivables		4,343			256
Prepaid expenses		8,112			6,032
Other current assets		5,578			15,909

Total current assets		374,027			379,896

Property, plant and equipment, net		206,206			182,663
Intangible assets, net		20,348			16,787
Long-term prepaid expenses		4,107			4,790
Other non-current assets		17,972			18,539

Total assets	$	622,660		$	602,675

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	90,902		$	77,848
Other accounts payable		13,772			13,452
Accrued expenses		39,649			31,723
Current portion of capital lease obligations		1,458			2,852
Derivative liabilities		8,308			9,757
Other current liabilities		3,266			2,007

Total current liabilities		157,355			137,639

Long-term borrowings, net		201,452			201,389
Accrued severance benefits, net		94,352			90,755
Other non-current liabilities		5,596			6,222

Total liabilities		458,755			436,005

Stockholders’ equity
Common stock, $0.01 par value, 150,000,000 shares authorized, 39,457,063 shares issued and 36,880,879 outstanding at March 31, 2012 and 39,439,115 shares issued and 37,907,575 outstanding at December 31, 2011		394			394
Additional paid-in capital		99,495			98,929
Retained earnings		109,213			93,950
Treasury stock, 2,576,184 and 1,531,540 shares at March 31, 2012 and December 31, 2011, respectively		(23,728	)		(11,793	)
Accumulated other comprehensive loss		(21,469	)		(14,810	)

Total stockholders’ equity		163,905			166,670

Total liabilities and stockholders’ equity	$	622,660		$	602,675

The accompanying notes are an integral part of these consolidated financial statements

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands of US dollars, except share data)


	Three Months Ended
	March 31, 2012			March 31, 2011
Net sales	$	177,002		$	187,921
Cost of sales		127,087			131,447

Gross profit		49,915			56,474

Selling, general and administrative expenses		18,209			15,401
Research and development expenses		19,831			18,498
IPO incentive		—			12,146

Operating income		11,875			10,429

Other income (expenses)
Interest expense, net		(5,580	)		(7,111	)
Foreign currency gain, net		11,109			21,359
Other		89			166

		5,618			14,414

Income before income taxes		17,493			24,843

Income tax expenses		2,230			2,375

Net income	$	15,263		$	22,468

Earnings per common share—
Basic	$	0.41		$	0.59
Diluted	$	0.40		$	0.57
Weighted average number of shares—
Basic		37,524,127			38,332,750
Diluted		38,298,336			39,570,522

The accompanying notes are an integral part of these consolidated financial statements

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; in thousands of US dollars)


	Three Months Ended
	March 31, 2012			March 31, 2011
Net income	$	15,263		$	22,468
Other comprehensive loss
Unrealized holding gain of equity security		79			555
Derivative adjustments		1,574			(1,957	)
Foreign currency translation adjustments		(8,312	)		(14,267	)

Total comprehensive income	$	8,604		$	6,799

The accompanying notes are an integral part of these consolidated financial statements

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited; in thousands of US dollars, except share data)


						Additional Paid-In Capital		Retained Earnings (Accumulated deficit)		Common Stock Held in Treasury			Accumulated Other Comprehensive Income (loss)			Total
	Common Stock
	Shares			Amount
Three Months Ended March 31, 2012
Balance at January 1, 2012		37,907,575		$	394	$	98,929	$	93,950	$	(11,793	)	$	(14,810	)	$	166,670
Stock-based compensation		—			—		458		—		—			—			458
Issuance of new stock		818			—		8		—		—			—			8
Exercise of stock options		17,130			—		100		—		—			—			100
Acquisitions of treasury stock		(1,044,644	)		—		—		—		(11,935	)		—			(11,935	)
Comprehensive income:
Net income		—			—		—		15,263		—			—			15,263
Fair valuation of derivatives		—			—		—		—		—			1,542			1,542
Reclassification to net income from accumulated other comprehensive loss related to hedge derivatives		—			—		—		—		—			32			32
Foreign currency translation adjustments		—			—		—		—		—			(8,312	)		(8,312	)
Unrealized gains on investments		—			—		—		—		—			79			79

Total comprehensive income																	8,604

Balance at March 31, 2012		36,880,879		$	394	$	99,495	$	109,213	$	(23,728	)	$	(21,469	)	$	163,905

Three Months Ended March 31, 2011
Balance at January 1, 2011		38,401,989		$	384	$	95,585	$	72,157	$	—		$	(5,275	)	$	162,851
Stock-based compensation		—			—		431		—		—			—			431
Issuance of new stock		950,000			10		1,768		—		—			—			1,778
Exercise of stock options		4,760			—		28		—		—			—			28
Comprehensive income:
Net income		—			—		—		22,468		—			—			22,468
Fair valuation of derivatives		—			—		—		—		—			2,336			2,336
Reclassification to net income from accumulated other comprehensive loss related to hedge derivatives		—			—		—		—		—			(4,293	)		(4,293	)
Foreign currency translation adjustments		—			—		—		—		—			(14,267	)		(14,267	)
Unrealized gains on investments		—			—		—		—		—			555			555

Total comprehensive income																	6,799

Balance at March 31, 2011		39,356,749		$	394	$	97,812	$	94,625	$	—		$	(20,944	)	$	171,887

The accompanying notes are an integral part of these consolidated financial statements

MAGNACHIP SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands of US dollars)


	Three Months Ended
	March 31, 2012			March 31, 2011
Cash flows from operating activities
Net income	$	15,263		$	22,468
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		7,474			13,903
Provision for severance benefits		4,703			2,854
Amortization of debt issuance costs and original issue discount		242			246
Gain on foreign currency translation, net		(12,824	)		(23,684	)
Gain on disposal of property, plant and equipment, net		(269	)		—
Loss on disposal of intangible assets, net		11			4
Stock-based compensation		458			641
Other		123			549
Changes in operating assets and liabilities
Accounts receivable		1,339			(9,250	)
Inventories		(2,860	)		(3,467	)
Other receivables		(4,024	)		(1,041	)
Other current assets		8,536			(1,449	)
Deferred tax assets		871			548
Accounts payable		12,581			14,289
Other accounts payable		(298	)		(1,348	)
Accrued expenses		9,886			7,153
Other current liabilities		2,225			(1,518	)
Payment of severance benefits		(2,323	)		(1,610	)
Other		(1,261	)		(72	)

Net cash provided by operating activities		39,853			19,216
Cash flows from investing activities
Decrease in restricted cash		2,995			—
Proceeds from disposal of plant, property and equipment		273			—
Purchase of plant, property and equipment		(24,758	)		(6,779	)
Payment for intellectual property registration		(190	)		(165	)
Payment for purchase of Dawin, net of cash acquired		(8,642	)		—
Decrease in short-term financial instruments		173			—
Collection of guarantee deposits		31			979
Payment of guarantee deposits		(178	)		(1,004	)
Other		(48	)		(44	)

Net cash used in investing activities		(30,344	)		(7,013	)

Cash flows from financing activities
Proceeds from issuance of common stock		108			11,425
Repayment of obligations under capital lease		(1,510	)		(1,562	)
Acquisition of treasury stock		(11,935	)		—

Net cash provided by (used in) financing activities		(13,337	)		9,863
Effect of exchange rates on cash and cash equivalents		(1,660	)		(59	)

Net increase (decrease) in cash and cash equivalents		(5,488	)		22,007

Cash and cash equivalents
Beginning of the period		162,111			172,172

End of the period	$	156,623		$	194,179

Supplemental cash flow information
Cash paid for interest	$	25		$	5,625

Cash paid (refunded) for income taxes	$	(416	)	$	2,004

Noncash transactions
Deferred offering costs reclassified as reduction of additional paid-in capital	$	—		$	9,619

The accompanying notes are an integral part of these consolidated financial statements

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited; tabular dollars in thousands, except share data)

1. General

The Company

MagnaChip Semiconductor Corporation (together with its subsidiaries, the “Company”) is a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer applications. The Company’s business is comprised of three key segments: Display Solutions, Power Solutions and Semiconductor Manufacturing Services. The Company’s Display Solutions products include display drivers for use in a wide range of flat panel displays and mobile multimedia devices. The Company’s Power Solutions products include discrete and integrated circuit solutions for power management in high-volume consumer applications. The Company’s Semiconductor Manufacturing Services segment provides specialty analog and mixed-signal foundry services for fabless semiconductor companies that serve the consumer, computing and wireless end markets.

2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). These interim consolidated financial statements include all adjustments consisting only of normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair presentation of financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with ASC 270, “Interim Reporting” (“ASC 270”), and, accordingly, do not include all of the information and note disclosures required by US GAAP for complete financial statements. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for a full year or for any other periods.

The December 31, 2011 balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP.

Recent Accounting Pronouncements

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”) which requires an entity to disclose information about offsetting and related arrangements to ensure that the users of the Company’s financial statement can understand the effect that offsetting has on the Company’s financial position. ASU 2001-11 is effective for annual periods beginning on or after January 1, 2013. Retrospective application is required for all comparative periods presented. The adoption of ASU 2011-11 is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles-Goodwill and Other (Topic 350)-Testing Goodwill for Impairment” (“ASU 2011-08”). ASU 2011-08 gives the option to first assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit. Under the amendments in ASU 2011-08, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments in ASU 2011-08 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2011. Early adoption is permitted. The company plans to adopt the applicable requirements of ASU 2011-08 in the fourth quarter of fiscal 2012. The company does not expect the provisions of ASU 2011-08 to have a material effect on its financial position, results of operations or cash flows.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (“ASU 2011-05”) which amends current comprehensive income guidance. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, it requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (“OCI”). ASU 2011-05 does not change the items that must be reported in OCI.

However, in December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”), which deferred the guidance on whether to require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-05 and did not change the effective date for ASU 2011-05. For public entities, the amendments in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. The adoption of ASU 2011-12 is not expected to have a material impact on the Company’s consolidated financial statements.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

3. Completion of Acquisition

On March 2, 2012, the Company’s Korean subsidiary, MagnaChip Semiconductor, Ltd., completed the acquisition of Dawin Electronics, a privately-held semiconductor company that designs and manufactures IGBT, Fast Recovery Diode and MOSFET modules.

The acquisition was accounted for as a business purchase pursuant to Accounting Standards Codification (ASC) 805, Business Combinations (“ASC 805”). As required by ASC 805-20, the Company allocated the purchase price to assets and liabilities based on their estimated fair value at the effective date of acquisition, March 2, 2012. The total consideration paid for the acquisition, amounted to $9,291 thousand. As a result of the acquisition, the Company expects to grow its IGBT and FRD business position and improve its IGBT module cost structure using Dawin’s developed technology and engineering know-how. The acquisition will be synergistic to the Company’s Power Solutions business and be accretive to its revenue. The Company recorded $3,163 thousand goodwill at the completion of the acquisition.

4. Sales of Accounts Receivable

The Company has entered into an agreement to sell selected trade accounts receivable to a financial institution. After the sale, the Company does not retain any interests in the receivables and the applicable financial institution collects these accounts receivable directly from the customer. The proceeds from the sale of these accounts receivable totaled $8,412 thousand for the three month period ended March 31, 2012 and these sales resulted in a pre-tax loss of $4 thousand for the three month period ended March 31, 2012, which is included in selling, general and administrative expenses in the consolidated Statements of Income. Net proceeds of from the accounts receivable sales program are recognized in the Consolidated Statements of Cash Flows as part of operating cash flows.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

5. Inventories

Inventories as of March 31, 2012 and December 31, 2011 consist of the following:


	March 31, 2012			December 31, 2011
Merchandise	$	90		$	—
Finished goods		9,119			7,140
Semi-finished goods and work-in-process		50,728			46,562
Raw materials		12,515			9,933
Materials in-transit		361			1,471
Less: inventory reserve		(4,708	)		(2,270	)

Inventories, net	$	68,105		$	62,836

6. Property, Plant and Equipment

Property, plant and equipment as of March 31, 2012 and December 31, 2011 comprise the following:


	March 31, 2012			December 31, 2011
Buildings and related structures	$	75,383		$	73,021
Machinery and equipment		174,935			151,100
Vehicles and others		13,192			11,998
Equipment under capital lease		11,452			11,160

		274,962			247,279
Less: accumulated depreciation		(82,854	)		(78,130	)
accumulated depreciation on equipment under capital lease		(2,810	)		(2,414	)
Land		16,360			15,928
Construction in-progress		548			—

Property, plant and equipment, net	$	206,206		$	182,663

7. Intangible Assets

Intangible assets as of March 31, 2012 and December 31, 2011 are as follows:


	March 31, 2012			December 31, 2011
Technology	$	23,545		$	21,126
Customer relationships		27,310			26,777
Intellectual property assets		6,105			5,868
Less: accumulated amortization		(39,775	)		(36,984	)
Goodwill		3,163			—

Intangible assets, net	$	20,348		$	16,787

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

8. Derivative Financial Instruments

The Company’s Korean subsidiary, MagnaChip Semiconductor, Ltd., entered into option, forward and zero cost collar contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues.

Details of derivative contracts as of March 31, 2012 are as follows:


Date of transaction	Type of derivative	Total notional amount		Month of settlement
January 17, 2011	Zero cost collar	$	30,000	April to June 2012
August 2, 2011	Zero cost collar		24,000	April to June 2012
August 8, 2011	Forward		54,000	July to September 2012
August 19, 2011	Forward		54,000	October to December 2012
March 23, 2012	Zero cost collar		54,000	January to March 2013

The option, forward and zero cost collar contracts qualify as cash flow hedges under ASC 815, “Derivatives and Hedging,” (“ASC 815”), since at both the inception of the contracts and on an ongoing basis, the hedging relationship was and is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the contracts. The Company is utilizing the “hypothetical derivative” method to measure the effectiveness by comparing the changes in value of the actual derivative versus the change in fair value of the “hypothetical derivative.”

The fair values of the Company’s outstanding forward and zero cost collar contracts recorded as assets and liabilities as of March 31, 2012 and December 31, 2011 are as follows:


Derivatives designated as hedging instruments:		March 31, 2012		December 31, 2011
Liability Derivatives:
Forward	Derivative liabilities	$	5,771	$	6,801
Zero cost collars	Derivative liabilities		2,537		2,956

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the three months ended March 31, 2012 and 2011:


Derivatives in ASC 815 Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)					Location of Gain (Loss) Reclassified from AOCI into Statement of Income (Effective Portion)		Amount of Gain (Loss) Reclassified from AOCI into Statement of Income (Effective Portion)						Location of Gain (Loss) Recognized in Statement of Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Statement of Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	1Q, 2012		1Q, 2011					1Q, 2012			1Q, 2011				1Q, 2012			1Q, 2011
Options	$	—	$	(71	)		Net sales	$	—		$	(333	)	Other income (expenses) — Others	$	—		$	(11	)
Forward		1,167		1,810			Net sales		—			4,626		Other income (expenses) — Others		(16	)		178
Zero cost collars		375		597			Net sales		(32	)		—		Other income (expenses) — Others		101			(9	)

Total	$	1,542	$	2,336				$	(32	)	$	4,293			$	85		$	158

The estimated net loss as of March 31, 2012 that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings within the next twelve months is $7,593 thousand.

The Company’s option, forward and zero cost collar contracts are subject to termination upon the occurrence of the following events:

(i) On the last day of a fiscal quarter, the sum of qualified and unrestricted cash and cash equivalents held by the Company is less than $30 million.

(ii) The rating of the Company’s debt is B- or lower by Standard & Poor’s Ratings Group or any successor rating agency thereof (“S&P”) or B3 or lower by Moody’s Investor Services, Inc. or any successor rating agency thereof (“Moody’s”) or the Company’s debt ceases to be assigned a rating by either S&P or Moody’s.

In addition, the Company is required to deposit cash collateral with Goldman Sachs International Bank, the counterparty to the option, forward and zero cost collar contracts, for any exposure in excess of $5 million.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

9. Fair Value Measurements

The Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2012, and the basis for that measurement is as follows:


	Carrying Value		Fair Value Measurement		Quoted Prices in Active Markets for Identical Asset (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available-for-sale securities	$	658	$	658	$	658	$	—	$	—
Liabilities:
Derivative liabilities		8,308		8,308		—		8,308		—

As of March 31, 2012, the total carrying value and estimated fair value of the senior notes which are not measured at fair value on a recurring basis were $201,452 thousand and $227,625 thousand, respectively. The estimated fair value is based on Level 2 inputs.

10. Capital Leases

The Company entered into several lease agreements for the use of equipment for manufacturing and research and development. These leases are accounted for as capital leases as the ownership of the equipment will be transferred to the Company upon expiration of the lease terms.


Payable during	Capital Lease
Remainder of 2012	$	1,494

Total future minimum lease payments		1,494
Less: Amount representing interest (a)		(36	)

Present value of net minimum lease payments	$	1,458

(a)	The lessor’s implicit rate at lease inception was applied.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

11. Accrued Severance Benefits

The majority of accrued severance benefits are for employees in the Company’s Korean subsidiary, MagnaChip Semiconductor Ltd. Pursuant to the Employee Retirement Benefit Security Act of Korea, most employees and executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of March 31, 2012, 98.5% of employees of the Company were eligible for severance benefits.

Changes in accrued severance benefits for each period are as follows:


	Three Months Ended
	March 31, 2012			March 31, 2011
Beginning balance	$	91,882		$	88,973
Provisions		4,703			2,854
Severance payments		(2,323	)		(1,610	)
Translation adjustments		1,209			2,498

		95,471			92,715

Less: Cumulative contributions to the National Pension Fund		(393	)		(463	)
Group Severance insurance plan		(726	)		(749	)

Accrued severance benefits, net	$	94,352		$	91,503

The severance benefits are funded approximately 1.17% and 1.31% as of March 31, 2012 and 2011, respectively, through the Company’s National Pension Fund and group severance insurance plan which will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.

The Company is liable to pay the following future benefits to its non-executive employees upon their normal retirement age:


	Severance benefit
Remainder of 2012	$	156
2013		—
2014		320
2015		326
2016		1,195
2017		1,608
2018 – 2022		16,618

The above amounts were determined based on the non-executive employees’ current salary rates and the number of service years that will be accumulated upon their retirement dates. These amounts do not include amounts that might be paid to non-executive employees that will cease working with the Company before their normal retirement ages.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

12. Foreign Currency Gain (Loss), Net

Net foreign currency gain or loss includes non-cash translation gain or loss associated with intercompany balances.

13. Income Taxes

The Company files income tax returns in the U.S., Korea, Japan, Taiwan and various other jurisdictions.

MagnaChip Semiconductor, Ltd. (Korea) is the principal operating entity within the consolidated Company. For the three months ended March 31, 2012 and 2011, no income tax expense for MagnaChip Semiconductor, Ltd. (Korea) was recorded due to net operating loss carry-forwards available to offset taxable income and full allowance for deferred tax assets.

Income tax expense recorded for the three month period ended March 31, 2012 and 2011 was $2,230 and $2,375, respectively.

14. Geographic and Segment Information

The following sets forth information relating to the reportable segments:


	Three Months Ended
	March 31, 2012		March 31, 2011
Net Sales
Display Solutions	$	83,225	$	74,464
Semiconductor Manufacturing Services		67,863		92,266
Power Solutions		25,253		20,412
All other		661		779

Total segment net sales	$	177,002	$	187,921

The following is a summary of net sales by region, based on the location of the customer:


	Three Months Ended
	March 31, 2012		March 31, 2011
Korea	$	97,951	$	87,513
Asia Pacific		52,603		57,295
Japan		6,632		13,339
North America		13,370		25,922
Europe		5,565		2,967
Africa		881		885

Total	$	177,002	$	187,921

Net sales from the Company’s top ten largest customers accounted for 63.7% and 61.1% for the three months ended March 31, 2012 and 2011, respectively.

The Company recorded $24,503 thousand and $26,681 thousand of sales to one customer within its Display Solutions segment, which represents greater than 10% of net sales, for the three months ended March 31, 2012 and 2011, respectively.

Over 99% of the Company’s property, plant and equipment are located in Korea as of March 31, 2012.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

15. Earnings per Share

The following table illustrates the computation of basic and diluted earnings per common share:


	Three Months Ended
	March 31, 2012		March 31, 2011
Net income	$	15,263	$	22,468
Weighted average common stock outstanding—
Basic		37,524,127		38,332,750
Diluted		38,298,336		39,570,522
Earnings per share—
Basic	$	0.41	$	0.59
Diluted	$	0.40	$	0.57

The following outstanding instruments were excluded from the computation of diluted earnings per share, as they have an anti-dilutive effect on the calculation:


	Three Months Ended
	March 31, 2012		March 31, 2011
Options		248,399		—
Warrants		1,875,028		1,875,017

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

16. Condensed Consolidating Financial Information

The Company’s $203.7 million senior notes are guaranteed by the Company and all of its subsidiaries, except for MagnaChip Semiconductor, Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited. These guarantees are full and unconditional, subject to certain customary release provisions, as well as joint and several.

The senior notes are structurally subordinated to the creditors of the Company’s principal manufacturing and selling subsidiary, MagnaChip Semiconductor, Ltd. (Korea), which accounts for substantially all of the Company’s net sales and assets.

Below are condensed consolidating balance sheets as of March 31, 2012 and December 31, 2011, condensed consolidating statements of operations for the three months ended March 31, 2012 and 2011 and condensed consolidating statements of cash flows for the three months ended March 31, 2012 and 2011 of those entities that guarantee the senior notes, those that do not, MagnaChip Semiconductor Corporation, and the co-issuers.

For the purpose of the guarantor financial information, the investments in subsidiaries are accounted for under the equity method.

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Balance Sheets

March 31, 2012


	MagnaChip Semiconductor Corporation (Parent)			Co-Issuers			Non- Guarantors			Guarantors			Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	319		$	25,094		$	128,726		$	2,484		$	—		$	156,623
Restricted cash		—			—			3,934			—			—			3,934
Accounts receivable, net		—			—			127,430			22,003			(22,101	)		127,332
Inventories, net		—			—			68,105			158			(158	)		68,105
Other receivables		43			22,825			6,242			363			(25,130	)		4,343
Prepaid expenses		69			—			10,343			597			(2,897	)		8,112
Other current assets		64,477			199,175			2,063			193,694			(453,831	)		5,578

Total current assets		64,908			247,094			346,843			219,299			(504,117	)		374,027

Property, plant and equipment, net		—			—			206,118			88			—			206,206
Intangible assets, net		—			—			20,113			235			—			20,348
Long-term prepaid expenses		—			—			9,617			7			(5,517	)		4,107
Investment in subsidiaries		(572,654	)		(655,953	)		—			(475,184	)		1,703,791			—
Long-term intercompany loan		697,125			803,337			—			648,013			(2,148,475	)		—
Other non-current assets		86			6,416			8,210			3,260			—			17,972

Total Assets	$	189,465		$	400,894		$	590,901		$	395,718		$	(954,318	)	$	622,660

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	—		$	—		$	112,634		$	272		$	(22,004	)	$	90,902
Other accounts payable		24,829			26			13,326			721			(25,130	)		13,772
Accrued expenses		488			74,168			198,805			220,116			(453,928	)		39,649
Current portion of capital lease obligations		—			—			1,458			—			—			1,458
Derivative liabilities		—			—			8,308			—			—			8,308
Other current liabilities		243			267			2,531			3,122			(2,897	)		3,266

Total current liabilities		25,560			74,461			337,062			224,231			(503,959	)		157,355

Long-term borrowings, net		—			898,577			631,351			819,999			(2,148,475	)		201,452
Accrued severance benefits, net		—			—			94,208			144			—			94,352
Other non-current liabilities		—			—			3,384			7,723			(5,511	)		5,596

Total liabilities		25,560			973,038			1,066,005			1,052,097			(2,657,945	)		458,755

Commitments and contingencies
Stockholders’ equity
Common stock		394			136,229			39,005			51,976			(227,210	)		394
Additional paid-in capital		99,495			(732,737	)		(536,410	)		(730,716	)		1,999,863			99,495
Retained earnings		109,213			45,833			45,532			43,868			(135,233	)		109,213
Treasury stock		(23,728	)		—			—			—			—			(23,728	)
Accumulated other comprehensive loss		(21,469	)		(21,469	)		(23,231	)		(21,507	)		66,207			(21,469	)

Total stockholders’ equity		163,905			(572,144	)		(475,104	)		(656,379	)		1,703,627			163,905

Total liabilities and stockholders’ equity	$	189,465		$	400,894		$	590,901		$	395,718		$	(954,318	)	$	622,660

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Balance Sheets

December 31, 2011


	MagnaChip Semiconductor Corporation (Parent)			Co-Issuers			Non- Guarantors			Guarantors			Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	1,677		$	25,119		$	127,118		$	8,197		$	—		$	162,111
Restricted cash		—			—			6,830			—			—			6,830
Accounts receivable, net		—			—			126,391			22,179			(22,648	)		125,922
Inventories, net		—			—			62,836			158			(158	)		62,836
Other receivables		1			11,793			7,581			399			(19,518	)		256
Prepaid expenses		34			2			8,509			384			(2,897	)		6,032
Other current assets		58,636			188,018			11,738			183,685			(426,168	)		15,909

Total current assets		60,348			224,932			351,003			215,002			(471,389	)		379,896

Property, plant and equipment, net		—			—			182,583			80			—			182,663
Intangible assets, net		—			—			16,514			273			—			16,787
Long-term prepaid expenses		—			—			10,963			66			(6,239	)		4,790
Investment in subsidiaries		(576,642	)		(655,845	)		—			(481,478	)		1,713,965			—
Long-term intercompany loan		697,125			809,913			—			660,066			(2,167,104	)		—
Other non-current assets		—			6,505			8,170			3,864			—			18,539

Total Assets	$	180,831		$	385,505		$	569,233		$	397,873		$	(930,767	)	$	602,675

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	—		$	—		$	99,560		$	842		$	(22,554	)	$	77,848
Other accounts payable		13,659			1			13,115			6,195			(19,518	)		13,452
Accrued expenses		502			63,033			186,678			207,770			(426,260	)		31,723
Current portion of capital lease obligations		—			—			2,852			—			—			2,852
Other current liabilities		—			1			11,544			3,117			(2,898	)		11,764

Total current liabilities		14,161			63,035			313,749			217,924			(471,230	)		137,639

Long-term borrowings, net		—			898,514			642,383			827,596			(2,167,104	)		201,389
Accrued severance benefits, net		—			—			90,611			144			—			90,755
Other non-current liabilities		—			—			3,894			8,567			(6,239	)		6,222

Total liabilities		14,161			961,549			1,050,637			1,054,231			(2,644,573	)		436,005

Commitments and contingencies
Stockholders’ equity
Common stock		394			136,229			39,005			51,976			(227,210	)		394
Additional paid-in capital		98,929			(733,223	)		(536,894	)		(731,209	)		2,001,326			98,929
Retained earnings		93,950			35,760			35,141			37,722			(108,623	)		93,950
Treasury stock		(11,793	)		—			—			—			—			(11,793	)
Accumulated other comprehensive loss		(14,810	)		(14,810	)		(18,656	)		(14,847	)		48,313			(14,810	)

Total stockholders’ equity		166,670			(576,044	)		(481,404	)		(656,358	)		1,713,806			166,670

Total liabilities and stockholders’ equity	$	180,831		$	385,505		$	569,233		$	397,873		$	(930,767	)	$	602,675

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Statements of Operations

For the three months ended March 31, 2012


	MagnaChip Semiconductor Corporation (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Net sales	$	—		$	—		$	177,011		$	4,824		$	(4,833	)	$	177,002
Cost of sales		—			—			127,086			252			(251	)		127,087

Gross profit		—			—			49,925			4,572			(4,582	)		49,915

Selling, general and administrative expenses		620			44			18,010			3,086			(3,551	)		18,209
Research and development expenses		—			—			20,572			290			(1,031	)		19,831

Operating income (loss)		(620	)		(44	)		11,343			1,196			—			11,875

Other income (expense)		5,796			4,180			(462	)		(3,896	)		—			5,618

Income before income taxes, equity in earnings of related equity investment		5,176			4,136			10,881			(2,700	)		—			17,493

Income tax expenses		115			125			447			1,543			—			2,230

Income before equity in earnings of related investment		5,061			4,011			10,434			(4,243	)		—			15,263

Equity in earnings of related investment		10,202			6,105			—			10,432			(26,739	)		—

Net income	$	15,263		$	10,116		$	10,434		$	6,189		$	(26,739	)	$	15,263

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Statements of Operations

For the three months ended March 31, 2011


	MagnaChip Semiconductor Corporation (Parent)			Co-Issuers			Non-Guarantors		Guarantors			Eliminations			Consolidated
Net sales	$	—		$	—		$	187,750	$	6,616		$	(6,445	)	$	187,921
Cost of sales		—			—			131,445		74			(72	)		131,447

Gross profit		—			—			56,305		6,542			(6,373	)		56,474

Selling, general and administrative expenses		637			235			15,614		3,103			(4,188	)		15,401
Research and development expenses		—			—			19,301		1,382			(2,185	)		18,498
IPO incentive		—			—			11,355		791			—			12,146

Operating income (loss)		(637	)		(235	)		10,035		1,266			—			10,429

Other income (expense)		—			20,752			6,190		(12,528	)		—			14,414

Income (loss) before income taxes, equity in earnings of related equity investment		(637	)		20,517			16,225		(11,262	)		—			24,843

Income tax expenses		—			—			154		2,221			—			2,375

Income (loss) before equity in earnings of related investment		(637	)		20,517			16,071		(13,483	)		—			22,468

Equity in earnings of related investment		23,105			2,544			—		16,071			(41,720	)		—

Net income	$	22,468		$	23,061		$	16,071	$	2,588		$	(41,720	)	$	22,468

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Statements of Cash Flows

For the three months ended March 31, 2012


	MagnaChip Semiconductor Corporation (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Cash flow from operating activities
Net income	$	15,263		$	10,116		$	10,434		$	6,189		$	(26,739	)	$	15,263
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization		—			—			7,430			44			—			7,474
Provision for severance benefits		—			—			4,694			9			—			4,703
Amortization of debt issuance costs and original issue discount.		—			242			—			—			—			242
Loss (gain) on foreign currency translation, net		—			(4,456	)		(11,903	)		3,535			—			(12,824	)
Gain on disposal of property, plant and equipment, net		—			—			(269	)		—			—			(269	)
Loss on disposal of intangible assets, net		—			—			11			—			—			11
Stock-based compensation		(34	)		—			484			8			—			458
Equity in earnings of related investment		(10,202	)		(6,105	)		—			(10,432	)		26,739			—
Other		1			1			95			27			(1	)		123
Changes in operating assets and liabilities
Accounts receivable, net		—			—			1,888			(3	)		(546	)		1,339
Inventories, net		—			—			(2,860	)		—			—			(2,860	)
Other receivables		1			(11,032	)		1,367			29			5,611			(4,024	)
Other current assets		(5,913	)		(11,197	)		8,590			(29,369	)		46,425			8,536
Deferred tax assets		74			81			190			526			—			871
Accounts payable		—			—			12,601			(570	)		550			12,581
Other accounts payable		11,170			25			(401	)		(5,481	)		(5,611	)		(298	)
Accrued expenses		(13	)		11,135			14,010			31,183			(46,429	)		9,886
Other current liabilities		243			266			705			1,011			—			2,225
Payment of severance benefits		—			—			(2,323	)		—			—			(2,323	)
Other		(121	)		(133	)		982			(1,989	)		—			(1,261	)

Net cash provided by (used in) operating activities		10,469			(11,057	)		45,725			(5,283	)		(1	)		39,853

Cash flows from investing activities
Decrease in restricted cash		—			—			2,995			—			—			2,995
Proceeds from disposal of plant, property		—			—			273			—			—			273
Purchases of plant, property and equipment		—			—			(24,743	)		(15	)		—			(24,758	)
Payment for intellectual property registration		—			—			(190	)		—			—			(190	)
Payment for purchase of Dawin, net of cash acquired		—			—			(8,642	)		—			—			(8,642	)
Decrease in short-term financial instruments		—			—			173			—			—			173
Collection of guarantee deposits		—			—			14			17			—			31
Payment of guarantee deposits		—			—			(176	)		(2	)		—			(178	)
Other		—			11,032			(34	)		11,017			(22,063	)		(48	)

Net cash provided by (used in) investing activities		—			11,032			(30,330	)		11,017			(22,063	)		(30,344	)

Cash flow from financing activities
Proceeds from issuance of common stock		108			—			—			—			—			108
Repayment of long-term intercompany borrowings		—			—			(11,321	)		(11,032	)		22,353			—
Repayment of obligations under capital lease		—			—			(1,510	)		—			—			(1,510	)
Acquisition of treasury stock		(11,935	)		—			—			—			—			(11,935	)

Net cash used in financing activities		(11,827	)		—			(12,831	)		(11,032	)		22,353			(13,337	)

Effect of exchanges rate on cash and cash equivalents		—			—			(956	)		(415	)		(289	)		(1,660	)

Net increase (decrease) in cash and cash equivalents		(1,358	)		(25	)		1,608			(5,713	)		—			(5,488	)

Cash and cash equivalents
Beginning of the period		1,677			25,119			127,118			8,197			—			162,111

End of the period	$	319		$	25,094		$	128,726		$	2,484		$	—		$	156,623

MagnaChip Semiconductor Corporation and Subsidiaries

Notes to Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except share data)

Condensed Consolidating Statements of Cash Flows

For the three months ended March 31, 2011


	MagnaChip Semiconductor Corporation (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Cash flow from operating activities
Net income	$	22,468		$	23,061		$	16,071		$	2,588		$	(41,720	)	$	22,468
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization		—			—			13,826			77			—			13,903
Provision for severance benefits		—			—			2,796			58			—			2,854
Amortization of debt issuance costs and original issue discount.		—			246			—			—			—			246
Loss (gain) on foreign currency translation, net		—			(10,701	)		(24,128	)		11,145			—			(23,684	)
Loss on disposal of intangible assets, net		—			—			4			—			—			4
Stock-based compensation		73			—			590			335			(357	)		641
Equity in earnings of related investment		(23,105	)		(2,544	)		—			(16,071	)		41,720			—
Other		(1	)		—			290			232			28			549
Changes in operating assets and liabilities
Accounts receivable, net		—			—			30,499			38,116			(77,865	)		(9,250	)
Inventories, net		—			—			(3,467	)		—			—			(3,467	)
Other receivables		718			718			17,656			2,719			(22,852	)		(1,041	)
Other current assets		(713	)		(16,858	)		(531	)		(14,432	)		31,085			(1,449	)
Deferred tax assets		—			—			—			548			—			548
Accounts payable		—			—			(22,873	)		(40,744	)		77,906			14,289
Other accounts payable		(6,613	)		(8,842	)		(3,455	)		(5,290	)		22,852			(1,348	)
Accrued expenses		(151	)		6,530			14,904			16,996			(31,126	)		7,153
Other current liabilities		—			—			(415	)		(1,103	)		—			(1,518	)
Payment of severance benefits		—			—			(1,610	)		—			—			(1,610	)
Other		—			—			972			(1,044	)		—			(72	)

Net cash provided by (used in) operating activities		(7,324	)		(8,390	)		41,129			(5,870	)		(329	)		19,216

Cash flows from investing activities
Purchases of plant, property and equipment		—			—			(6,765	)		(14	)		—			(6,779	)
Payment for intellectual property registration		—			—			(165	)		—			—			(165	)
Collection of guarantee deposits		—			—			979			—			—			979
Payment of guarantee deposits		—			—			(1,004	)		—			—			(1,004	)
Other		—			—			(23	)		(21	)		—			(44	)

Net cash used in investing activities		—			—			(6,978	)		(35	)		—			(7,013	)

Cash flow from financing activities
Proceeds from issuance of common stock		11,425			—			—			—			—			11,425
Repayment of obligations under capital lease		—			—			(1,515	)		(47	)		—			(1,562	)

Net cash provided by (used in) financing activities		11,425			—			(1,515	)		(47	)		—			9,863

Effect of exchanges rate on cash and cash equivalents		—			—			(159	)		(229	)		329			(59	)

Net increase (decrease) in cash and cash equivalents		4,101			(8,390	)		32,477			(6,181	)		—			22,007

Cash and cash equivalents
Beginning of the period		79			46,595			112,370			13,128			—			172,172

End of the period	$	4,180		$	38,205		$	144,847		$	6,947		$	—		$	194,179

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the related notes included elsewhere in this report. This discussion and analysis contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” and elsewhere in this report.

Overview

We are a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer applications. We believe we have one of the broadest and deepest analog and mixed-signal semiconductor technology platforms in the industry, supported by our 30-year operating history, large portfolio of approximately 3,040 registered novel patents and 340 pending novel patent applications and extensive engineering and manufacturing process expertise. Our business is comprised of three key segments: Display Solutions, Power Solutions and Semiconductor Manufacturing Services. Our Display Solutions products include display drivers that cover a wide range of flat panel displays and multimedia devices. Our Power Solutions products include discrete and integrated circuit solutions for power management in high-volume consumer applications. Our Semiconductor Manufacturing Services segment provides specialty analog and mixed-signal foundry services for fabless semiconductor companies that serve the consumer, computing and wireless end markets.

Our wide variety of analog and mixed-signal semiconductor products and manufacturing services combined with our deep technology platform allows us to address multiple high-growth end markets and to rapidly develop and introduce new products and services in response to market demands. Our substantial manufacturing operations and design center in Korea place us at the core of the global consumer electronics supply chain. We believe this enables us to quickly and efficiently respond to our customers’ needs and allows us to better service and capture additional demand from existing and new customers.

To maintain and increase our profitability, we must accurately forecast trends in demand for consumer electronics products that incorporate semiconductor products we produce. We must understand our customers’ needs as well as the likely end market trends and demand in the markets they serve. We must balance the likely manufacturing utilization demand of our product businesses and foundry business to optimize our facilities utilization. We must also invest in relevant research and development activities and manufacturing capacity and purchase necessary materials on a timely basis to meet our customers’ demand while maintaining our target margins and cash flow.

The semiconductor markets in which we participate are highly competitive. The prices of our products tend to decrease regularly over their useful lives, and such price decreases can be significant as new generations of products are introduced by us or our competitors. We strive to offset the impact of declining selling prices for existing products through cost reductions and the introduction of new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to mitigate the risk of losses from product obsolescence.

Demand for our products and services is driven primarily by overall demand for consumer electronics products and can be adversely affected by periods of weak consumer spending or by market share losses by our customers. To mitigate the impact of market volatility on our business, we seek to address market segments and geographies with higher growth rates than the overall consumer electronics industry. We expect to derive a meaningful portion of our growth from growing demand in such markets. We also expect that new competitors will emerge in these markets that may place increased pressure on the pricing for our products and services, but we believe that we will be able to successfully compete based upon our higher quality products and services and that the impact from the increased competition will be more than offset by increased demand arising from such markets. Further, we believe we are well-positioned competitively as a result of our long operating history, existing manufacturing capacity and our Korea-based operations.

Within our Display Solutions and Power Solutions segments, net sales are driven by design wins in which we or another company is selected by an electronics OEM or other potential customer to supply its demand for a particular product. A customer will often have more than one supplier designed in to multi-source components for a particular product line. Once designed in, we often specify the pricing of a particular product for a set period of time, with periodic discussions and renegotiations of pricing with our customers. In any given period, our net sales depend heavily upon the end-market demand for the goods in which our products are used, the inventory levels maintained by our customers and in some cases, allocation of demand for components for a particular product among selected qualified suppliers.

Within the Semiconductor Manufacturing Services business, net sales are driven by customers’ decisions on which manufacturing services provider to use for a particular product. Most of our Semiconductor Manufacturing Services customers are fabless and depend upon service providers like us to manufacture their products. A customer will often have more than one supplier of manufacturing services; however, they tend to allocate a majority of manufacturing volume to one of their suppliers. We strive to be the primary supplier of manufacturing services to our customers. Once selected as a primary supplier, we often specify the pricing of a

particular service on a per wafer basis for a set period of time, with periodic discussions and renegotiations of pricing with our customers. In any given period, our net sales depend heavily upon the end-market demand for the goods in which the products we manufacture for customers are used, the inventory levels maintained by our customers and in some cases, allocation of demand for manufacturing services among selected qualified suppliers.

In contrast to fabless semiconductor companies, our internal manufacturing capacity provides us with greater control over manufacturing costs and the ability to implement process and production improvements which can favorably impact gross profit margins. Our internal manufacturing capacity also allows for better control over delivery schedules, improved consistency over product quality and reliability and improved ability to protect intellectual property from misappropriation. However, having internal manufacturing capacity exposes us to the risk of under-utilization of manufacturing capacity which results in lower gross profit margins, particularly during downturns in the semiconductor industry.

Our products and services require investments in capital equipment. Analog and mixed-signal manufacturing facilities and processes are typically distinguished by the design and process implementation expertise rather than the use of the most advanced equipment. These processes also tend to migrate more slowly to smaller geometries due to technological barriers and increased costs. For example, some of our products use high-voltage technology that requires larger geometries and that may not migrate to smaller geometries for several years, if at all. Additionally, the performance of many of our products is not necessarily dependent on geometry. As a result, our manufacturing base and strategy does not require substantial investment in leading edge process equipment, allowing us to utilize our facilities and equipment over an extended period of time with moderate required capital investments. Generally, incremental capacity expansions in our segment of the market result in more moderate industry capacity expansion as compared to leading edge processes. As a result, this market, and we, specifically, are less likely to experience significant industry overcapacity, which can cause product prices to plunge dramatically. In general, we seek to invest in manufacturing capacity that can be used for multiple high-value applications over an extended period of time. We believe this capital investment strategy enables us to optimize our capital investments and facilitates deeper and more diversified product and service offerings.

Our success going forward will depend upon our ability to adapt to future challenges such as the emergence of new competitors for our products and services or the consolidation of current competitors. Additionally, we must innovate to remain ahead of, or at least rapidly adapt to, technological breakthroughs that may lead to a significant change in the technology necessary to deliver our products and services. We believe that our established relationships and close collaboration with leading customers enhance our visibility into new product opportunities, market and technology trends and improve our ability to meet these challenges successfully. In our Semiconductor Manufacturing Services business, we strive to maintain competitiveness and our position as a primary manufacturing services provider to our customers by offering high value added, unique processes, high flexibility and excellent service.

Recent Changes to Our Business

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

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

On May 16, 2011, two of our wholly-owned subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, repurchased $35.0 million out of $250.0 million aggregate principal amount of our 10.5% senior notes due 2018, or senior notes, then outstanding at a price of 109.0% from funds affiliated with Avenue Capital Management II, L.P., collectively referred to in this report as Avenue. In connection with the May 2011 repurchase of the senior notes, the Company recognized $4.1 million of loss on early extinguishment of senior notes, which consisted of $3.2 million from repurchase premium, $0.4 million from write-off of discounts, $0.2 million from write-off of debt issuance costs and $0.3 million from incurrence of direct legal and advisory service fees.

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

On October 11, 2011, we announced that our board of directors adopted a stock repurchase program whereby we may, subject to prevailing market conditions and other factors, repurchase up to $35.0 million of our outstanding common stock. The stock repurchase program began on October 27, 2011 and will end on October 27, 2012 unless earlier terminated by our board. The stock repurchase program does not require that we purchase a minimum amount of shares of our common stock and may be commenced, suspended, resumed or terminated at any time without notice. As of March 31, 2012, we had purchased 2,576,184 shares of our common stock in the open market at an aggregate cost of $23.7 million.

On March 2, 2012, our Korean subsidiary, MagnaChip Semiconductor, Ltd, completed the acquisition of Dawin Electronics, a privately-held semiconductor company that designs and manufactures IGBT, Fast Recovery Diode and MOSFET modules. The total consideration paid for the acquisition, amounted to $9.3 million. As a result of the acquisition, we expect to grow our IGBT and FRD business position and improve our IGBT module cost structure using Dawin’s developed technology and engineering know-how. The acquisition will be synergistic to our Power Solutions business and be accretive to its revenue. We recorded $3.2 million goodwill at the completion of the acquisition.

Business Segments

We report in three separate business segments because we derive our revenues from three principal business lines: Display Solutions, Power Solutions, and Semiconductor Manufacturing Services. We have identified these segments based on how we allocate resources and assess our performance.

•

Display Solutions: Our Display Solutions products include source and gate drivers and timing controllers that cover a wide range of flat panel displays used in LCD televisions and LED televisions and displays, mobile PCs and mobile communications and entertainment devices. Our display solutions support the industry’s most advanced display technologies, such as LTPS and AMOLED, as well as high-volume display technologies such as TFT. Our Display Solutions business represented 47.0% and 39.6% of our net sales for the three months ended March 31, 2012 and March 31, 2011, respectively.

•

Power Solutions: Our Power Solutions segment produces power management semiconductor products including discrete and integrated circuit solutions for power management in high-volume consumer applications. These products include MOSFETs, LED drivers, DC-DC converters, analog switches and linear regulators, such as low-dropout regulators, or LDOs. Our power solutions products are designed for applications such as mobile phones, LCD televisions, and desktop computers, and allow electronics manufacturers to achieve specific design goals of high efficiency and low standby power consumption. Going forward, we expect to continue to expand our power management product portfolio. Our Power Solutions business represented 14.3% and 10.9% of our net sales for three months ended March 31, 2012 and March 31, 2011, respectively.

•

Semiconductor Manufacturing Services: Our Semiconductor Manufacturing Services segment provides specialty analog and mixed-signal foundry services to fabless semiconductor companies that serve the consumer, computing and wireless end markets. We manufacture wafers based on our customers’ product designs. We do not market these products directly to end customers but rather supply manufactured wafers and products to our customers to market to their end customers. We offer approximately 285 process flows to our manufacturing services customers. We also often partner with key customers to jointly develop or customize specialized processes that enable our customers to improve their products and allow us to develop unique manufacturing expertise. Our manufacturing services are targeted at customers who require differentiated, specialty analog and mixed-signal process technologies such as high voltage CMOS, embedded memory and power. These customers typically serve high-growth and high-volume applications in the consumer, computing and wireless end markets. Our Semiconductor Manufacturing Services business represented 38.3% and 49.1% of our net sales for the three months ended March 31, 2012 and March 31, 2011, respectively.

Factors Affecting Our Results of Operations

Net Sales. We derive a majority of our sales (net of sales returns and allowances) from three reportable segments: Display Solutions, Power Solutions and Semiconductor Manufacturing Services. Our product inventory is primarily located in Korea and is available for drop shipment globally. Outside of Korea, we maintain limited product inventory, and our sales representatives generally relay orders to our factories in Korea for fulfillment. We have strategically located our sales and technical support offices near concentrations of major customers. Our sales offices are located in Hong Kong, Japan, Korea, Taiwan, China and the United States. Our network of authorized agents and distributors consists of agents in the United States and Europe and distributors and agents in the Asia Pacific region. Our net sales from All other consist principally of rental income and the disposal of waste.

We recognize revenue when risk and reward of ownership passes to the customer either upon shipment, upon product delivery at the customer’s location or upon customer acceptance, depending on the terms of the arrangement. For the three months ended March 31, 2012 and March 31, 2011, we sold products to over 190 and 209 customers, respectively, and our net sales to our ten largest customers represented 64% and 61% of our net sales. We have a combined production capacity of over 136,000 eight-inch equivalent semiconductor wafers per month. We believe our large-scale, cost-effective fabrication facilities enable us to rapidly adjust our production levels to meet shifts in demand by our end customers.

Gross Profit. Our overall gross profit generally fluctuates as a result of changes in overall sales volumes and in the average selling prices of our products and services. Other factors that influence our gross profit include changes in product mix, the introduction of new products and services and subsequent generations of existing products and services, shifts in the utilization of our manufacturing facilities and the yields achieved by our manufacturing operations, changes in material, labor and other manufacturing costs and variation in depreciation expense. Gross profit varies by our operating segments.

Average Selling Prices. Average selling prices for our products tend to be highest at the time of introduction of new products which utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products. We strive to offset the impact of declining selling prices for existing products through our product development activities and by introducing new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to preclude losses from product and productive capacity obsolescence.

Material Costs. Our cost of sales consists of costs of raw materials, such as silicon wafers, chemicals, gases and tape, packaging supplies, equipment maintenance and depreciation expenses. We use processes that require specialized raw materials, such as silicon wafers, that are generally available from a limited number of suppliers. If demand increases or supplies decrease, the costs of our raw materials could significantly increase.

Labor Costs. A significant portion of our employees are located in Korea. Under Korean labor laws, most employees and certain executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of March 31, 2012, approximately 98.5% 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 five 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. As incentive compensation is tied to various net sales goals, it will increase or decrease with net sales.

General and Administrative Expenses. General and administrative expenses consist of the costs of various corporate operations, including finance, legal, human resources and other administrative functions. These expenses primarily consist of payroll-related expenses, consulting and other professional fees and office facility-related expenses. Historically, our selling, general and administrative expenses have remained relatively constant as a percentage of net sales, and we expect this trend to continue in the future.

Research and Development. The rapid technological change and product obsolescence that characterize our industry require us to make continuous investments in research and development. Product development time frames vary but, in general, we incur research and development costs one to two years before generating sales from the associated new products. These expenses include personnel costs for members of our engineering workforce, cost of photomasks, silicon wafers and other non-recurring engineering charges related to product design. Additionally, we develop base-line process technology through experimentation and through the design and use of characterization wafers that help achieve commercially feasible yields for new products. The majority of research and development expenses are for process development that serves as a common technology platform for all of our product segments. Consequently, we do not allocate these expenses to individual segments.

Restructuring and Impairment Charges. We evaluate the recoverability of certain long-lived assets and in-process research and development assets on a periodic basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In our efforts to improve our overall profitability in future periods, we have closed or otherwise impaired, and may in the future close or impair, facilities that are underutilized and that are no longer aligned with our long-term business goals.

Interest Expense, Net. Our interest expense was incurred primarily under our $203.7 million in aggregate principal amount of 10.500% senior notes due 2018.

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

From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. Our Korean subsidiary enters into foreign currency option, forward and zero cost collar contracts in order to mitigate a portion of the impact of U.S. dollar-Korean won exchange rate fluctuations on our operating results. These foreign currency option, forward and zero cost collar contracts typically require us to sell specified notional amounts in U.S. dollars and provide us the option to sell specified notional amounts in U.S. dollars during successive months to our counterparty in exchange for Korean won at specified exchange rates. Obligations under these foreign currency option, forward and zero cost collar contracts must be cash collateralized if our exposure exceeds certain specified thresholds. These option, forward and zero cost collar contracts may be terminated by the counterparty in a number of circumstances, including if our long-term debt rating falls below B-/B3 or if our total cash and cash equivalents is less than $30.0 million at the end of a fiscal quarter. We cannot assure you that any hedging technique we implement will be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on our results of operations.

Foreign Currency Gain or Loss. Foreign currency translation gains or losses on transactions by us or our subsidiaries in a currency other than our or our subsidiaries’ functional currency are included in our statements of operations as a component of other income (expense). A substantial portion of this net foreign currency gain or loss relates to non-cash translation gain or loss related to the principal balance of intercompany balances at our Korean subsidiary that are denominated in U.S. dollars. This gain or loss results from fluctuations in the exchange rate between the Korean won and U.S. dollar.

Income Taxes. We record our income taxes in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax bases of our assets and liabilities. We exercise significant management judgment in determining our provision for income taxes, deferred tax assets and liabilities. We assess whether it is more likely than not that the deferred tax assets existing at the period-end will be realized in future periods. In such assessment, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent results of operations. In the event, we were to determine that it would be able to realize the deferred income tax assets in the future in excess of their net recorded amount, we would adjust the valuation allowance, which would reduce the provision for income taxes.

Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions, including Korea. Significant estimates and judgments are required in determining our worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.

Capital Expenditures. We invest in manufacturing equipment, software design tools and other tangible and intangible assets for capacity expansion and technology improvement. Capacity expansions and technology improvements typically occur in anticipation of seasonal increases in demand. We typically pay for capital expenditures in partial installments with portions due on order, delivery and final acceptance. Our capital expenditures include our payments for the purchase of property, plant and equipment as well as payments for the registration of intellectual property rights.

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

Principles of Consolidation. Our consolidated financial statements include the accounts of our company and our wholly-owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation.

Segments. We operate in three segments: Display Solutions, Power Solutions and Semiconductor Manufacturing Services. Net sales for the All other category primarily relate to certain business activities that do not constitute operating or reportable segments.

Results of Operations – Comparison of Three Months Ended March 31, 2012 and 2011

The following table sets forth consolidated results of operations for the three months ended March 31, 2012 and 2011:


	Three Months Ended March 31, 2012						Three Months Ended March 31, 2011
	Amount			% of Net Sales			Amount			% of Net Sales			Change Amount
	(In millions)
Net sales	$	177.0			100.0	%	$	187.9			100.0	%	$	(10.9	)
Cost of sales		127.1			71.8			131.4			69.9			(4.4	)

Gross profit		49.9			28.2			56.5			30.1			(6.6	)

Selling, general and administrative expenses		18.2			10.3			15.4			8.2			2.8
Research and development expenses		19.8			11.2			18.5			9.8			1.3
Special expense for IPO incentive		—			—			12.1			6.5			(12.1	)

Operating income		11.9			6.7			10.4			5.5			1.4

Interest expense, net		(5.6	)		(3.2	)		(7.1	)		(3.8	)		1.5
Foreign currency gain, net		11.1			6.3			21.4			11.4			(10.2	)
Others		0.1			0.1			0.2			0.1			(0.1	)

		5.6			3.2			14.4			7.7			(8.8	)

Income before income taxes		17.5			9.9			24.8			13.2			(7.4	)
Income tax expenses		2.2			1.3			2.4			1.3			(0.1	)

Net income	$	15.3			8.6	%	$	22.5			12.0	%	$	(7.2	)

Net Sales


	Three Months Ended March 31, 2012					Three Months Ended March 31, 2011
	Amount		% of Net Sales			Amount		% of Net Sales			Change Amount
	(In millions)
Display Solutions	$	83.2		47.0	%	$	74.5		39.6	%	$	8.8
Power Solutions		25.2		14.3			20.4		10.9			4.8
Semiconductor Manufacturing Services		67.9		38.3			92.3		49.1			(24.4	)
All other		0.7		0.4			0.8		0.4			(0.1	)

	$	177.0		100.0	%	$	187.9		100.0	%	$	(10.9	)

Net sales were $177.0 million for the three months ended March 31, 2012, a $10.9 million, or 5.8%, decrease, compared to $187.9 million for the three months ended March 31, 2011. This decrease was primarily due to lower net sales driven by our Semiconductor Manufacturing Services segment, which was offset in part by an increase in net sales from our Display Solutions segment and Power Solutions segment.

Display Solutions. Net sales from our Display Solutions segment were $83.2 million for the three months ended March 31, 2012, an $8.8 million, or 11.8%, increase from $74.5 million for the three months ended March 31, 2011. The increase was primarily due to an increase in sales volume related to higher demand for certain consumer electronics products such as digital televisions, PCs and smart phones and an increase in average selling prices due to an improved product mix.

Power Solutions. Net sales from our Power Solutions segment were $25.2 million for the three months ended March 31, 2012, a $4.8 million, or 23.7%, increase from $20.4 million for the three months ended March 31, 2011. The increase was primarily due to an increase in sales volume and an increase in average selling prices driven by an improved product mix and higher demand for MOSFET products from existing and new customers as we expanded this business.

Semiconductor Manufacturing Services. Net sales from our Semiconductor Manufacturing Services segment were $67.9 million for the three months ended March 31, 2012, a $24.4 million, or 26.4%, decrease compared to $92.3 million for the three months ended March 31, 2011. This decrease was primarily due to a decrease in sales volume of eight-inch equivalent wafers driven by weak market demand, which was partially offset by an increase in average selling prices.

All Other. Net sales from All other were $0.7 million for the three months ended March 31, 2012, a $0.1 million, or 15.1%, decrease compared to $0.8 million for the three months ended March 31, 2011.

Net Sales by Geographic Region

The following table sets forth our net sales by geographic region and the percentage of total net sales represented by each geographic region for the three months ended March 31, 2012 and 2011:


	Three Months Ended March 31, 2012					Three Months Ended March 31, 2011
	Amount		% of Net Sales			Amount		% of Net Sales			Change Amount
	(In millions)
Korea	$	98.0		55.3	%	$	87.5		46.6	%	$	10.4
Asia Pacific		52.6		29.7			57.3		30.5			(4.7	)
Japan		6.6		3.7			13.3		7.1			(6.7	)
North America		13.4		7.6			25.9		13.8			(12.6	)
Europe		5.6		3.1			3.0		1.6			2.6
Africa		0.9		0.5			0.9		0.5			0.0

	$	177.0		100.0	%	$	187.9		100.0	%	$	10.9

Net sales in Korea for the three months ended March 31, 2012 increased from $87.5 million to $98.0 million compared to the three months ended March 31, 2011, or by $10.4 million, or 11.9%, primarily due to increased demand in the market for Display Solution products. Net sales in North America for the three months ended March 31, 2012 decreased from $25.9 million to $13.4 million compared to the three months ended March 31, 2011, or by $12.6 million, or 48.4%, primarily due to decreased demand for Semiconductor Manufacturing Services products.

Gross Profit

Total gross profit was $49.9 million for the three months ended March 31, 2012 compared to $56.5 million for the three months ended March 31, 2011, a $6.6 million, or 11.6%, decrease. Gross profit as a percentage of net sales for the three months ended March 31, 2012 decreased to 28.2% compared to 30.1% for the three months ended March 31, 2011. This decrease in gross profit was primarily attributable to a significant volume decrease in our Semiconductor Manufacturing Services segment, which was partially offset by an increase in product sales volume in our Display Solutions segment and an increase in average selling prices in our Power Solutions segment.

Operating Expenses

Selling, General and Administrative Expenses. Selling, general, and administrative expenses were $18.2 million, or 10.3% of net sales, for the three months ended March 31, 2012, compared to $15.4 million, or 8.2% of net sales, for the three months ended March 31, 2011. The increase of $2.8 million, or 18.2%, was primarily attributable to an increase in salaries and related expenses resulting from an annual salary increase and an increase in outside service fees.

Research and Development Expenses. Research and development expenses were $19.8 million, or 11.2% of net sales, for the three months ended March 31, 2012, compared to $18.5 million, or 9.8% of net sales, for the three months ended March 31, 2011. The increase of $1.3 million, or 7.2%, was due to an increase in material costs, partially offset by a decrease in outside service fees.

Special expense for the MagnaChip Corporation IPO Incentive. We paid the special incentives to all employees, excluding management, which were contingent upon the consummation of MagnaChip Corporation IPO in March 2011.

Operating Income

As a result of the foregoing, operating income increased by $1.4 million, or 13.9%, in the three months ended March 31, 2012 compared to the three months ended March 31, 2011. As discussed above, the increase in operating income resulted from the payment of $12.1 million incentive which was incurred in March 2011 in connection with the MagnaChip Corporation IPO, which was partially offset by a $6.6 million decrease in gross profit, a $2.8 million increase in selling, general, and administrative expenses and $1.3 million increase in research and development expenses.

Other Income (Expense)

Interest Expense, Net. Net interest expense was $5.6 million during the three months ended March 31, 2012, a decrease of $1.5 million compared to $7.1 million for the three months ended March 31, 2011. Interest expense for the three months ended March 31, 2012 and March 31, 2011 was mainly incurred under our senior notes issued on April 9, 2010. This decrease is attributable to the repurchase of $35.0 million and $11.3 million out of an aggregate of $250.0 million of our senior notes on May 16, 2011 and on September 19, 2011, respectively.

Foreign Currency Gain (Loss), Net. Net foreign currency gain for the three months ended March 31, 2012 was $11.1 million compared to net foreign currency gain of $21.4 million for the three months ended March 31, 2011. A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss associated with intercompany balances at our Korean subsidiary and is affected by changes in the exchange rate between the Korean won and the U.S. dollar. Foreign currency translation gain from intercompany balances was included in determining our consolidated net income since the intercompany balances were not considered long-term investments in nature because management intended to settle these intercompany balances at their respective maturity dates. The Korean won to U.S. dollar exchange rates were 1,137.8:1 and 1,107.2:1 using the first base rate as of March 31, 2012 and March 31, 2011, respectively, as quoted by the Korea Exchange Bank.

Others. Others were comprised of gains and losses on valuation of derivatives which were designated as hedging instruments. Net gain on valuation of derivatives for the three months ended March 31, 2012 represents either hedge ineffectiveness or components of changes in fair value of derivatives excluded from the assessments of hedge effectiveness.

Income Tax Expenses

Income tax expenses for the three months ended March 31, 2012 were $2.2 million compared $2.4 million for the three months ended March 31, 2011. This decrease was primarily attributable to a $0.4 million decrease of withholding taxes. The majority of income tax expenses for the three months ended March 31, 2012 was comprised of $1.1 million of withholding taxes mostly accrued on intercompany interest payments, which would be utilized as foreign tax credits, but due to the uncertainty of utilization, full valuation allowance was recognized, and a $0.6 million income tax effect from the change of deferred tax assets.

Net Income

As a result of the foregoing, net income decreased by $7.2 million, or 32.1%, in the three months ended March 31, 2012 compared to the three months ended March 31, 2011. As discussed above, the decrease in net income was primarily due to a $10.2 million decrease of foreign currency gain, which was partially offset by a $1.5 million decrease in interest expenses.

Additional Business Metrics Evaluated by Management

Adjusted EBITDA and Adjusted Net Income

We define Adjusted EBITDA as net income adjusted to exclude (i) depreciation and amortization, (ii) interest expense, net, (iii) income tax expenses, (iv) stock-based compensation expense, (v) foreign currency gain, net, (vi) derivative valuation gain, net, and (vii) one-time incentive payments in connection with the MagnaChip Corporation IPO. See the footnotes to the table below for further information regarding these items. We present Adjusted EBITDA as a supplemental measure of our performance because:

•

Adjusted EBITDA eliminates the impact of a number of items that may be either one time or recurring items that we do not consider to be indicative of our core ongoing operating performance;

•

we believe that Adjusted EBITDA is an enterprise level performance measure commonly reported and widely used by analysts and investors in our industry;

•

our investor and analyst presentations include Adjusted EBITDA; and

•

we believe that Adjusted EBITDA provides investors with a more consistent measurement of period to period performance of our core operations, as well as a comparison of our operating performance to that of other companies in our industry.

We use Adjusted EBITDA in a number of ways, including:

•

for planning purposes, including the preparation of our annual operating budget;

•

to evaluate the effectiveness of our enterprise level business strategies;

•

in communications with our board of directors concerning our consolidated financial performance; and

•

in certain of our compensation plans as a performance measure for determining incentive compensation payments.

We encourage you to evaluate each adjustment and the reasons we consider them appropriate. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Adjusted EBITDA is not a measure defined in accordance with GAAP and should not be construed as an alternative to cash flows from operating activities or net income, as determined in accordance with GAAP. A reconciliation of net income to Adjusted EBITDA is as follows:


	Successor
	Three Months Ended March 31, 2012			Three Months Ended March 31, 2011
	(In millions)
Net income	$	15.3		$	22.5
Adjustments:
Depreciation and amortization		7.5			13.9
Interest expense, net		5.6			7.1
Income tax expenses		2.2			2.4
Stock-based compensation expense⁽^a⁾		0.5			0.6
Foreign currency gain, net⁽^b⁾		(11.1	)		(21.4	)
Derivative valuation gain, net⁽^c⁾		(0.1	)		(0.2	)
One-time IPO incentive⁽^d)		—			12.1

Adjusted EBITDA	$	19.8		$	37.1

(a)

This adjustment eliminates the impact of non-cash stock-based compensation expenses. Although we expect to incur non-cash equity-based compensation expenses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses, as supplemental information.

(b)

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

(c)

This adjustment eliminates the impact of gain or loss recognized in income on derivatives, which represents hedge ineffectiveness or derivatives value changes excluded from the risk being hedged. We enter into derivative transactions to mitigate foreign exchange risks. As our derivative transactions are limited to a certain portion of our expected cash flows denominated in USD, 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 the one-time impact of incentive payments to all employees excluding management in connection with the MagnaChip Corporation IPO.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•

Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

•

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

•

Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

•

Adjusted EBITDA does not consider the potentially dilutive impact of issuing stock-based compensation to our management team and employees;

•

Adjusted EBITDA does not reflect the costs of holding certain assets and liabilities in foreign currencies; and

•

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

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

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

We present Adjusted Net Income for a number of reasons, including:

•

we use Adjusted Net Income in communications with our board of directors concerning our consolidated financial performance;

•

we believe that Adjusted Net Income is an enterprise level performance measure commonly reported and widely used by analysts and investors in our industry; and

•

our investor and analyst presentations include Adjusted Net Income.

Adjusted Net Income is not a measure defined in accordance with GAAP and should not be construed as an alternative to cash flows from operating activities or net income, as determined in accordance with GAAP. We encourage you to evaluate each adjustment and the reasons we consider them appropriate. Other companies in our industry may calculate Adjusted Net Income differently than we do, limiting its usefulness as a comparative measure. In addition, in evaluating Adjusted Net Income, you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. We define Adjusted Net Income as net income adjusted to exclude (i) stock-based compensation expense, (ii) amortization of intangibles, (iii) foreign currency gain, net, (iv) derivative valuation gain, net, and (v) one-time incentive payments in connection with the MagnaChip Corporation IPO.

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


	Successor
	Three Months Ended March 31, 2012			Three Months Ended March 31, 2011
	(In millions)
Net income	$	15.3		$	22.5
Adjustments:
Stock-based compensation expense⁽^a⁾		0.5			0.6
Amortization of intangibles⁽^b⁾		2.0			2.0
Foreign currency gain, net⁽^c⁾		(11.1	)		(21.4	)
Derivative valuation gain, net⁽^d⁾		(0.1	)		(0.2	)
One-time IPO incentive⁽^e)		—			12.1

Adjusted Net Income	$	6.5		$	15.7

(a)

This adjustment eliminates the impact of non-cash stock-based compensation expenses. Although we expect to incur non-cash stock-based compensation expenses in the future, we believe that analysts and investors will find it helpful to review our operating performance without the effects of these non-cash expenses, as supplemental informati

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