Magnachip Semiconductor Corp【MX】株式ニュース

Rating Action: Moody's affirms MagnaChip's Caa1 ratings; outlook remains negative

https://www.moodys.com/research/Moodys-affirms-MagnaChips-Caa1-ratings-outlook-remains-negative--PR_318642?WT.mc_id=AM%7eWWFob29fRmluYW5jZTQyX1NCX1JhdGluZyBOZXdzX0FsbF9Fbmc%3d%7e20150216_PR_318642

Global Credit Research - 16 Feb 2015

Hong Kong, February 16, 2015 -- Moody's Investors Service has affirmed MagnaChip Semiconductor Corporation's Caa1 corporate family rating, as well as the Caa1 senior unsecured bond rating on its USD225 million, 6.625% notes due 2021, following the filing of the company's restated financial results with the Securities and Exchange Commission (SEC) on 12 February 2015.

The outlook on the ratings remains negative.

MagnaChip filed its financial statements for the fiscal year ended 31 December 2013 (FY2013) on Form 10-K, which also included restated financial statements for 2011 and 2012. In addition, the company filed its quarterly reports on Form 10-Q for the first three quarters of 2014, with each report including the comparative quarterly financials for 2013 on a restated basis.

RATINGS RATIONALE

"The rating affirmations reflect MagnaChip's vulnerable business and financial profile, as revealed in its most recent filings of financial statements for the reporting periods from 31 December 2011 to 30 September 2014," says Annalisa DiChiara, a Moody's Vice President and Senior Analyst.

The impact of MagnaChip's restatement of its revenues and earnings was more significant than Moody's had expected. In particular, the restatement adjustments on revenue recognition were the most severely negatively affected in the first nine months of 2013, and totaled USD78 million, and additional factors contributing another USD2 million.

Company explained that the revenue adjustments were mainly related to correcting the timing and amount of revenue recognized on the sale of products sold through certain distributors.

The company also made adjustments to costs, which, when combined with the revenue adjustments, resulted in a restated operating profit for the first nine months of 2013 of just USD6 million; an amount which was significantly lower than the USD84 million the company had originally reported for the same period.

"Moreover, the weak financial results for fiscal year 2013 and also in the first nine months of 2014 indicate significant operational challenges, which, when coupled with the company's high level of expenses related to the restatement process and legal costs, have significantly deteriorated the company's profitability and cash flows," adds DiChiara.

According to the restated financials, the company reported a 9% year-on-year fall in revenues in 2013, and a 5% fall for the first nine months of 2014. The company attributed some of the revenue decline to a slower than anticipated growth of certain high-end smartphone OEMs, and the resultant inventory correction in parts of the semiconductor supply chain.

Lower revenues, combined with lower fab utilization rates, and the slower rate of business development also negatively affected the company's gross margins. As a result, MagnaChip's restated gross margins contracted to around 20% for FY2013 and for the first nine months of 2014 versus 30% achieved in FY2012.

In early 2014, the company started incurring significant costs associated with the internal investigation into the company's internal controls and the restatement of its financials, as well as shareholder litigation. Such costs totaled USD29 million as at 30 September 2014; further widening the company's operating losses, which totaled approximately USD80 million for the 12 months to 30 September 2014.

Moody's notes that the company's profitability and credit metrics deteriorated significantly in 2013 and 2014.

Nonetheless, the company reported a cash balance of USD125 million as at 30 September 2014. While MagnaChip does not have any scheduled debt maturities over the next 12 months, its interest expenses total approximately USD14 million in 2015.

The $225 million, 6.625% senior unsecured notes due 2021 is the only debt outstanding.

On 20 June 2014, the company was served a notice of default for breaching a financial reporting covenant under the bond indenture. Moody's current ratings for MagnaChip assume that the recent filing of the financial reports has cured the covenant breach and has averted a potential notes acceleration, which was due to trigger on 14 February 2015.

Management has also indicated that capex for 2015 will total just USD25 million, an amount which is approximately half the USD50 million three-year average for capex between FY2011 and FY2013. The lower spending will help preserve cash against the backdrop of weak industry fundamentals.

However, Moody's does not expect any significant cash flow generation from MagnaChip's operations over the next 6-12 months, given that the company's operating profit is expected to remain under pressure over this period.

While the company's cash position remains adequate at this time, higher than expected costs associated with efforts to resolve the material weaknesses in the company's internal controls and potential cash outlays associated with shareholder lawsuit, could deplete cash more quickly than Moody's expects, and present a more fragile liquidity position over time, particularly given that the company has no back up banking facilities in place.

Moody's notes that any delay in the filing of its financial reports could once again trigger a breach of the financial reporting covenant under the company's bond indenture.

The negative ratings outlook reflects the challenges the company needs to overcome to restore its operating and financial profile, including generating positive earnings and cash flows, as well as the successful completion of the remediation of material weaknesses in its internal controls.

Given the negative outlook, an upgrade of the company's ratings is unlikely over the near-term.

However, the outlook could revert to stable if the company:

(1) Resumes the timely filing of its financial statements with the SEC;

(2) Successfully turns around its operations such that operating profit turns positive on a meaningful and sustained basis;

(3) Maintains an adequate liquidity profile; and

(4) Demonstrates evidence of improved financial controls and practices.

Furthermore, a change in the ratings outlook would only occur if the pending litigation with respect to the class action lawsuit is resolved, and if the SEC's investigation is resolved, with limited adverse impact on the company's operating performance, including revenue growth, liquidity and cash flows.

On the other hand, downward ratings pressure could emerge if the company:

(1) Fails to file its quarterly statement for 1Q2015 or annual report for 2014 in a timely manner;

(2) Encounters any significant delays or hurdles in completing by 2015, the remediation of material weaknesses in internal controls;

(3) Fails to turn around its operations, such that it continues reporting operating losses; or

(4) Reports cash on hand below USD50 million.

Moreover, any additional findings of material weaknesses related to internal controls and/or any adverse outcomes of litigation or SEC investigation proceedings, such that the company incurs significant cash outflows, will also be negative for the ratings.

The principal methodology used was the Global Semiconductor Industry Methodology published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

MagnaChip Semiconductor Corporation is a Korean-based designer and manufacturer of analog and mixed-signal semiconductor products, mainly for high-volume consumer applications, such as TVs, PCs, mobile phones, and tablets.

MagnaChip Announces Completion of Audit Committee's Investigation; Update on Restatement Process

November 12, 2014 4:05 PM

http://finance.yahoo.com/news/magnachip-announces-completion-audit-committees-210500117.html

SEOUL, South Korea, Nov. 12, 2014 /PRNewswire/ -- MagnaChip Semiconductor Corporation ("MagnaChip" or the "Company") (MX), a designer and manufacturer of analog and mixed-signal semiconductor products, today announced the completion of an independent internal review into the Company's accounting practices and procedures (the "Investigation") that was conducted by the Audit Committee of the Company's Board of Directors (the "Audit Committee").

The Company previously reported that as a result of the preliminary findings of the Investigation, the Company's financial statements for each of the fiscal years ended December 31, 2012 and December 31, 2011 and the quarters ended March 31st, June 30th, and September 30th in 2013 and 2012 included in the Company's 2012 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for 2013, and together with all three, six and nine month financial information contained therein, should no longer be relied upon, and that the Company will be restating as appropriate its financial statements.

Legal counsel engaged by the Audit Committee to conduct the Investigation, with the assistance of outside forensic accountants, has recently reported to the Audit Committee and the Board of Directors that the Investigation, which began in January 2014, has been completed.

As previously announced, the Investigation had found that the Company incorrectly recognized revenue on certain transactions when products were shipped to a distributor; such revenue should have been recognized when the distributor shipped the product to the customer. In addition, the Investigation identified the following, among other, undisclosed business practices at the Company's Korean subsidiary (the Company's principal operating entity), that involved a lack of adequate controls and procedures:

various manufacturing-related business practices that facilitated premature revenue recognition on unfinished goods, semi-finished goods, and inventory manufactured in advance that affected revenue and sales targets;

various sales practices that resulted in overstated revenue for particular reporting periods, including premature shipment of products to and pulled-in orders from distributors and customers at quarter end;

cash payments to certain vendors, using expense and capital expenditure accounts at the Company, that (i) the vendors used to purchase products from certain distributors; (ii) the distributors then paid to the Company for those products; and (iii) in turn were applied to aged accounts receivable;

various improper inventory reserve accounting, non-recurring engineering (NRE) accounting, warranty reserve accounting and capitalization of repair expenses as capital expenditures that affected gross margins;

improper allocations of selling, general, and administrative costs ("SG&A") that understated such costs and smoothed the SG&A-to-revenue ratio trend;

improper deferral of outsourcing and free sample expenses that smoothed expense trends;

improper revenue recognition on a gross rather than net basis for certain products and customers; and

various undisclosed business practices and related concessions for distributors and customers (including credit limit increases, payment term extensions, provision of free samples, future discounts, and stock rotations), with distributor and customer consent, that affected the Company's sales.

The materials reviewed during the Investigation did not reveal any evidence that the Company's Audit Committee, the current directors, or the Company's independent registered public accounting firm, Samil PricewaterhouseCoopers ("Samil PwC"), were aware of the undisclosed business practices described above.

In addition to the Investigation, management of the Company has also concurrently undertaken a comprehensive review of the Company's accounting practices during the restatement periods in connection with the preparation of restated financial statements, including a Company-wide review of its revenue recognition practices and policies, and to date has identified certain additional errors and adjustments that it expects to correct as part of the restatement. When completed, the restatement will correct the accounting errors that were identified during the Investigation and review process. Due to the ongoing nature of the Company's internal review and restatement process, the Company cannot at this time provide an estimate of the individual or net effect of these errors and adjustments for any given period, but currently expects that the impact of some of the adjustments on certain periods in the restatement periods will be material. The Company's management and its outside advisors continue to evaluate and review the various types of errors and adjustments that have been identified as of the date of this release, and these adjustments are subject to change until the Company completes its restatement of its financial statements. Additional errors or adjustments may be identified prior to the completion of the restatement, some or all of which may be material to the Company's financial statements.

As a result of the accounting and other issues identified by management and the Investigation, management has concluded that one or more material weaknesses exist in the Company's internal control over financial reporting and that, as a result, the Company's disclosure controls and procedures were not effective as of the end of each of the restatement periods, and that the Company did not maintain effective internal control over financial reporting as of December 31, 2013.

While the Company has not yet completed its assessment of disclosure controls and procedures and internal control over financial reporting for the restatement periods, the Company has already initiated a number of remedial measures that are ongoing in response to the Investigation, including:

the development of more detailed revenue recognition practices and policies, including consideration for sales and payment discounts, price protections, returns, stock rotation, samples, payment terms and credit limit extensions;

the strengthening of the accounting, finance and internal audit teams with additional personnel with extensive US GAAP experience;

the strengthening of overall controls and disclosure processes and systems;

implementing financial accounting and reporting literacy training for the accounting, finance, internal audit and sales teams, including acceptable business practices;

the enhancement of enterprise resource planning reporting to highlight changes in exceptions or sales terms and to prohibit the manual acceleration of inventory through the manufacturing process;

the building of an overall culture of compliance and establishment of a compliance office; and

the development of distributor inventory policy, process and system controls.

Following the Company's initial announcement of the restatement in March 2014, a purported class action lawsuit was filed against the Company and certain of the Company's current and now-former officers. On September 30, 2014, an amended complaint was filed against the Company, certain current and former officers, certain members of the Company's Board of Directors and a shareholder of the Company, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company intends to vigorously defend itself.

The Company is continuing the process of completing the preparation, review and audit of its financial statements for its fiscal year ended December 31, 2013 and its Annual Report on Form 10-K for such period (the "2013 Form 10-K"), and the preparation and review of its financial statements for the quarterly periods ended March 31, 2014, June 30, 2014 and September 30, 2014. As a result, the Company cannot at this time provide specific financial information or operating results for such periods.

Subject to management's completion of the restated financial statements and related disclosures for the restatement periods as well as the reviews and audit to be conducted by Samil PwC, the Company currently anticipates filing its 2013 Form 10-K by January 30, 2015, with the quarterly reports on Form 10-Q for the first three quarters of 2014 to be filed as soon as practicable thereafter. However, because of the nature and amount of work that needs to be completed to file the 2013 Form 10-K, the Company cannot be certain how much time will ultimately be required to complete the restatement process and accordingly there remains a substantial risk that additional time will be required.

About MagnaChip Semiconductor

Headquartered in South Korea, MagnaChip is a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer applications. MagnaChip believes it has one of the broadest and deepest ranges of analog and mixed-signal semiconductor platforms in the industry, supported by its 30-year operating history, a large portfolio of registered and pending patents, and extensive engineering and manufacturing process expertise. For more information, please visit www.magnachip.com. Information on or accessible through MagnaChip's website is not a part of, and is not incorporated into, this release.

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