Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of SunEdison Semiconductor Limited and subsidiaries (“SunEdison Semiconductor”, "SSL", the "Company”, “we”, “us”, and “our”) have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and, in the opinion of management, include all adjustments (consisting of normal, recurring items) necessary for the fair presentation of our financial position and results of operations and cash flows for the periods presented. We have presented our unaudited financial statements in accordance with the rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC") applicable to interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules and regulations. Results of operations for the nine months ended
September 30, 2016
are not necessarily indicative of results to be expected for the year ending December 31, 2016. These unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015, which contains SunEdison Semiconductor's audited financial statements for such year.
As of and after the closing of the secondary offering on July 1, 2015, in which SunEdison, Inc. ("SunEdison") sold all of its shares in the Company, transactions with SunEdison are no longer considered related party transactions. Historical affiliate amounts and transactions are shown on the condensed consolidated financial statements for the nine months ended September 30, 2015.
Use of Estimates
We use estimates and assumptions in preparing our condensed consolidated financial statements that may affect reported amounts and disclosures. Estimates are used when accounting for depreciation, amortization, impairments, leases, inventory valuation, accrued liabilities, restructuring, warranties, employee benefits, derivatives, stock-based compensation, income taxes, asset recoverability, including allowances, and certain other items. These estimates and assumptions are based on current facts, historical experience, and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities, and the recognition of revenue, costs, and other expenses that are not readily apparent from other sources. Our future results of operations would be affected to the extent there are material differences between these estimates and actual results.
Reclassifications
Certain amounts in prior periods have been reclassified to conform with the presentation adopted in the current period.
Accounting Standards Updates
The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, in May 2014, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard, as amended, is effective for us on January 1, 2018. Early application is permitted for fiscal years beginning after December 15, 2016 and interim periods within those years. The standard permits the use of either the retrospective or cumulative effect transition method. We are in the process of performing an assessment but have not determined which transition method we will adopt, but do not anticipate a material impact on our consolidated financial statements and related disclosures upon adoption of ASU 2014-09.
The FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which requires lessees to recognize most leases, including operating leases, on the balance sheet. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged under the new guidance. The new standard is effective for us on January 1, 2019, with early adoption permitted. The standard should be applied retrospectively, with elective reliefs, which requires application of the new guidance for all periods presented. We have not fully evaluated the impact of this standard, but do anticipate that it will have a material impact on our consolidated financial statements and disclosures related to our current operating leases.
The FASB issued ASU No. 2016-07,
Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
, which eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The new standard is effective for us on January 1, 2017, with early adoption permitted. The standard should be applied prospectively upon the effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. We have evaluated the impact of this standard and expect that it will not have a material impact on our consolidated financial statements and related disclosures upon adoption.
The FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for us on January 1, 2017, with early adoption permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. All amendments must be adopted in the same period. We have adopted this standard as of June 30, 2016 and its adoption did not have a material impact on our consolidated financial statements and related disclosures.
The FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new standard is effective for us on January 1, 2020, with early adoption permitted for us on January 1, 2019. The amendments must be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We have not fully evaluated the impact of this standard, but do not anticipate that it will have a material impact on our consolidated financial statements and disclosures related to our credit losses.
The FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which amends Topic 230 to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows by providing guidance on the following eight specific cash flow issues: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investments, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The new standard is effective for us on January 1, 2018, with early adoption permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied using a retrospective transition method to each period presented. We have not fully evaluated the impact of this standard, but do not anticipate it will have a material impact on our consolidated financial statements and related disclosures.
The FASB issued ASU No. 2016-16,
Accounting for Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory
, which eliminates the exception that the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset is sold to a third party or otherwise recovered through use. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new guidance does not apply to intra-entity transfers of inventory. The new standard is effective for us on January 1, 2018, with early adoption permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The modified retrospective approach will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. We have not fully evaluated the impact of this standard, but do not anticipate it will have a material impact on our consolidated financial statements and related disclosures.
2. IMPLEMENTATION AGREEMENT
We entered into an Implementation Agreement (the "Implementation Agreement") with GlobalWafers Co., Ltd. ("Globe") and GWafers Singapore Pte. Ltd. ("Acquiror") on August 17, 2016, that provides for the acquisition by the Acquiror of all issued and outstanding ordinary shares of the Company (other than those held by Globe, Acquiror, or their respective subsidiaries) (the "Transaction") for
$12.00
per share in cash (the "Transaction Price"). The Transaction will be structured as a Scheme of Arrangement under Singapore law, and is subject to the terms and conditions contained in the Implementation Agreement, including approval of the Company's shareholders. Globe has the right, however, subject to the prior written consent of the Company and required clearance from the Securities Industry Council of Singapore, to elect to effect the Transaction by way of a tender offer pursuant to the terms and conditions set forth in the Implementation Agreement.
The Implementation Agreement provides for cash payments in respect of equity securities in the form of options and RSUs which were previously granted by the Company to its employees and directors under the Company's equity incentive plans. At the effective time of the Transaction, (i) each unexercised and outstanding option to acquire Company ordinary shares will be deemed fully vested and be converted into the right to receive cash equal to the excess, if any, of the Transaction Price per share over the exercise price per share for each such option, and (ii) each issued and outstanding RSU will vest and be converted into the right to receive cash equal to the Transaction Price per ordinary share covered by such RSUs, in each case with such amounts to be paid less any required withholding taxes. Performance-vesting RSUs will be deemed to vest at
100%
of target level.
The Transaction is subject to the approval of SunEdison Semiconductor shareholders to be held on November 7, 2016, customary regulatory approvals, and the approval of the Singapore Court. We expect the Transaction to close before the end of 2016.
3. RESTRUCTURING ACTIVITIES
2015 Ipoh Plan
On July 30, 2015, the Board of Directors of the Company authorized the closure of our Ipoh, Malaysia facility ("2015 Ipoh Plan"), which produces 200 millimeter semiconductor wafers. This action was taken to consolidate the Company’s manufacturing footprint and is consistent with our continued efforts to improve operational efficiencies, maximize capacity utilization across the Company's geographic platforms, and lower costs. The consolidation will include the transitioning of 200 millimeter wafering activities from our Ipoh facility to Novara, Italy and other operating facilities. This closure will affect approximately
650
employees at the Ipoh facility and will be largely complete by the end of 2016. Charges related to the 2015 Ipoh Plan are included within restructuring charges (reversals) and long-lived impairment charges in the condensed consolidated statements of operations.
Details of the
2016
expenses, cash payments, and expected costs incurred related to the 2015 Ipoh Plan are set out in the following table:
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As of September 30, 2016
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In millions
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Accrued
December 31, 2015
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Year-to-date Restructuring Charges
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Cash Payments
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Currency
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Accrued
September 30, 2016
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Cumulative Costs Incurred
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Total Costs Expected to be Incurred
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2015 Ipoh Plan
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Severance and employee benefits
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$
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2.9
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$
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2.2
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$
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(1.6
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)
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$
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(0.2
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)
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$
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3.3
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$
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5.3
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$
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5.3
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Contract termination
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—
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—
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—
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—
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—
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—
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0.6
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Other
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—
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0.4
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(0.4
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)
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—
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—
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0.4
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7.7
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Total
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$
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2.9
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$
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2.6
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$
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(2.0
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)
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$
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(0.2
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)
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$
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3.3
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$
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5.7
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$
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13.6
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The decision to close the Ipoh facility triggered an interim impairment analysis, resulting in the recording of
$56.7 million
of long-lived asset impairment charges for the three and nine months ended September 30, 2015. The impairment charges included
$36.9 million
related to buildings,
$16.0 million
related to machinery and equipment, and
$3.8 million
related to our inventory of supplies and spare parts for machinery and equipment. These charges are recognized as long-lived asset impairment charges in our condensed consolidated statements of operations. Impairment charges were measured based on the amount by which the carrying value of these assets exceeded their estimated fair value after consideration of their future cash flows using management's assumptions and an independent valuation report for the buildings (Level 3 assumptions).
2014 Consolidation of Crystal and Other Activities
We announced a plan to consolidate our crystal operations during the first quarter of 2014. The consolidation includes transitioning small diameter crystal activities from our St. Peters, Missouri facility to our other crystal facilities in South Korea, Taiwan, and Italy. The consolidation of crystal activities affected approximately
120
employees in St. Peters. No restructuring charges were recorded for the three months ended September 30, 2016 while
$1.0 million
of net restructuring charges were recorded for the nine months ended September 30, 2016, compared to net restructuring reversals of
$1.5
million and
$0.9 million
for the three and nine months ended September 30, 2015, respectively. These amounts are included within restructuring charges (reversals) in the condensed consolidated statements of operations. We also recorded long-lived asset impairment charges of
$1.3 million
for the nine months ended September 30, 2015 related to the consolidation of the Semiconductor crystal operations.
We initiated the termination of certain personnel as part of a workforce restructuring plan on December 18, 2014. The plan was designed to realign our workforce, improve profitability, and support new growth opportunities. The plan resulted in a total reduction of approximately
120
employees, a majority of which were employed outside of the U.S. This plan was substantially complete as of December 31, 2015. We recorded immaterial restructuring charges for the three and nine months ended September 30, 2016 and
$0.2 million
and
$1.2 million
for the three and nine months ended September 30, 2015, respectively, in connection with this workforce restructuring.
2011 Global Plan
The semiconductor industry experienced a downturn during the second half of 2011. In response, we committed to a series of actions in December 2011 to reduce our global workforce, right-size production capacity, and accelerate operating cost reductions in 2012 and beyond (the "2011 Global Plan") in order to better align our business to then-current and expected market conditions in the semiconductor market, as well as to improve our overall cost competitiveness and cash flows.
Details of the
2016
expenses, cash payments, and expected costs incurred related to the 2011 Global Plan are set out in the following table:
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As of September 30, 2016
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In millions
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Accrued December 31, 2015
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Year-to-date Restructuring (Reversals) Charges
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Cash Payments
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Non-Cash Settlements
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Currency
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Accrued
September 30, 2016
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Cumulative Costs Incurred
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Total Costs Expected to be Incurred
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2011 Global Plan
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Severance and employee benefits
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$
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0.7
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$
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—
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$
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—
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|
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$
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—
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|
|
$
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—
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|
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$
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0.7
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|
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$
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22.9
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$
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22.9
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Contract termination
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—
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—
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—
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—
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—
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—
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106.5
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106.5
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Other
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8.1
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(0.2
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)
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(0.2
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)
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(5.2
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)
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0.1
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2.6
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36.6
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36.6
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Total
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$
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8.8
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$
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(0.2
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)
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$
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(0.2
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)
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$
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(5.2
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)
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$
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0.1
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$
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3.3
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$
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166.0
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$
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166.0
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We were notified by the buyer of our Merano, Italy polysilicon and chlorosilane facilities that it was experiencing a severe liquidity crisis during the second quarter of 2016, which led to the stoppage of operations at these facilities. This deterioration in liquidity and the resulting halt in operations are indicators of asset impairment. We accounted for the original sale of these facilities under the deposit method of real estate accounting, which resulted in the assets acquired and liabilities assumed by the buyer being recorded on our consolidated balance sheets, and which requires us to test for impairment whenever events or changes in circumstances indicate that the carrying value of these net assets may not be recoverable. As a result of this impairment analysis, we recorded
$14.7 million
of non-cash charges to write these net assets down to their estimated fair value, which was determined to be
zero
at June 30, 2016. These charges consist of the remaining assets of
$19.9 million
, primarily land, property, plant, and equipment, offset by
$5.2 million
of liabilities related to restructuring accruals transferred to the buyer as part of the sale of these facilities. These charges were recognized as long-lived asset impairment charges in our consolidated statement of operations. Impairment charges were measured based on the amount by which the carrying value of these net assets exceeded their estimated fair value after consideration of their future cash flows using management's assumptions (Level 3).
4. INVENTORIES
Inventories consist of the following:
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As of September 30, 2016
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As of December 31, 2015
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In millions
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Raw materials and supplies
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$
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34.8
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$
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33.3
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Goods in process
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39.7
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43.6
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Finished goods
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40.6
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32.4
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Total inventories
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$
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115.1
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$
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109.3
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5. EQUITY METHOD INVESTMENT
We have an equity method investment in SMP, Ltd. ("SMP") that owns a polysilicon manufacturing facility in South Korea. Our ownership interest decreased from
30.02%
to
28.32%
on February 5, 2016 as a result of a capital call by SMP in which we did not participate.
During the third quarter of 2015, we entered into a definitive agreement to sell approximately
30%
of our SMP investment for
$35.0
million to SunEdison, which was subject to a third party consent. In March 2016, we received the third party consent to complete the partial sale of our SMP investment, representing approximately
8.56%
of SMP's total shares outstanding. We had previously received an advance payment of
$35.0
million, representing the purchase price, which was recorded as a deposit for investment distribution within current liabilities on our balance sheet at December 31, 2015. For the three months ended March 31, 2016, we recorded a loss of
$6.1 million
on this sale because the carrying amount of the SMP shares sold, including the effects of currency translation adjustments, exceeded the proceeds from the sale. This loss is recorded within other, net in our statements of operations. Our ownership interest decreased from
28.32%
to
19.76%
as a result of the sale. While our equity ownership decreased below 20.00%, we continued to account for SMP as an equity method investment under applicable accounting standards.
On May 3, 2016, SMP filed an application for rehabilitation under Korean law, which is similar to a reorganization under U.S. bankruptcy law, due to liquidity issues. The uncertainties resulting from this filing and the filing by SMP’s largest shareholder and customer, SunEdison, for Chapter 11 bankruptcy protection in the United States Bankruptcy Court, Southern District of New York on April 21, 2016, triggered an interim impairment analysis, resulting in the recording of an
$86.9 million
other-than-temporary impairment charge, net of tax, for the three months ended March 31, 2016 and nine months ended September 30, 2016. This impairment loss is recorded in equity in loss of equity method investments in our consolidated statement of operations. Impairment charges were measured based on the amount by which the carrying value of this investment exceeded its estimated fair value based on management's Level 3 assumptions. As a result of this impairment, our investment in SMP recorded on our balance sheet as of September 30, 2016 is
zero
.
We have lost significant influence over the operating and financial decisions of SMP as a result of the legal process related to SMP’s rehabilitation application filing, which was approved on June 13, 2016 by the Korean bankruptcy court. Most operational and financial decisions are now under the purview of the Korean bankruptcy court. This loss of significant influence resulted in our changing the accounting for our investment in SMP from the equity method to the cost method in accordance with U.S. GAAP. This change to cost method accounting resulted in the recognition of the remaining
$11.0 million
of accumulated currency translation losses related to this investment which is recorded in our consolidated statement of operations for the three months ended June 30, 2016 and nine months ended September 30, 2016 as equity in loss of equity method investments.
6. REFUNDABLE CUSTOMER DEPOSITS
We entered into an agreement on October 29, 2015 with a customer who agreed to make a prepayment (the "Deposit") to us of up to approximately
$40 million
as payment in advance for the purchase of wafers. The Deposit is to be made in three separate installments, with our use of the cash restricted to the enhancement of manufacturing capabilities at one of our facilities. As of December 31, 2015, none of the agreed-upon Deposit had been received. By June 30, 2016, we had received all installments of this refundable customer deposit which is recorded as a long-term liability on our consolidated balance sheet. We have used approximately
$30 million
of the Deposit to fund our capital expenditures, with the remainder recorded as restricted cash within other long term assets on our consolidated balance sheet. The customer will recover the Deposit by making 36 consecutive monthly deductions against accounts receivable due to the Company, or by repayments in cash by the Company, beginning January 31, 2018 and ending December 31, 2020. That portion of the Deposit for which the restricted purpose has been met is reflected in the financing activities section of the statements of cash flows. The repayment of the Deposit to the customer is secured by a surety bond guaranteeing
100%
of the Deposit. The surety bond and the agreements related to the Deposit are excluded from covenant calculations in our senior secured credit facility discussed in Note 7 below.
7. DEBT
Debt outstanding consists of the following:
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As of September 30, 2016
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|
As of December 31, 2015
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Total Principal
|
|
Current Portion
|
|
Long-Term
|
|
Total Principal
|
|
Current Portion
|
|
Long-Term
|
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In millions
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Long-term debt
|
$
|
205.9
|
|
|
$
|
11.7
|
|
|
$
|
194.2
|
|
|
$
|
198.6
|
|
|
$
|
6.7
|
|
|
$
|
191.9
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|
Senior Secured Credit Facility
The Company and its direct subsidiary, SunEdison Semiconductor B.V. ("SSBV" or the “Borrower”), entered into a credit agreement on May 27, 2014, which was subsequently amended on December 29, 2015 as discussed below ("Amendment of and Prepayment under Credit Agreement"), with Goldman Sachs Bank USA, as administrative agent, sole lead arranger, and sole syndication agent, and, together with Macquarie Capital (USA) Inc., as joint bookrunners, Citibank, N.A., as letter of credit issuer, and the lenders party thereto (the “Credit Facility”). The Credit Facility provided for: (i) a senior secured term loan facility in an aggregate principal amount up to
$210.0 million
(the “Term Facility”); and (ii) a senior secured revolving credit facility in an aggregate principal amount up to
$50.0 million
(the “Revolving Facility”). The Borrower may obtain, under the Revolving Facility, (i) letters of credit and bankers’ acceptances in an aggregate stated amount up to
$15.0 million
; and (ii) swing line loans in an aggregate principal amount up to
$15.0 million
.
The Term Facility has a five-year term, ending May 27, 2019
, and the Revolving Facility has a three-year term, ending May 27, 2017. The full amount of the Term Facility was drawn on May 27, 2014. No amounts were outstanding under the Revolving Facility as of September 30, 2016, but
$8.0 million
of third party letters of credit were outstanding which reduced the available borrowing capacity. The principal amount of the Term Facility was originally to be repaid in quarterly installments of
$525,000
beginning September 30, 2014, with the remaining balance paid at maturity. The principal repayment schedule was adjusted after the prepayment discussed below.
The Term Facility was issued at a discount of
1.00%
, or
$2.1 million
, which is being amortized as an increase in interest expense over the term of the Term Facility. We incurred
$10.2 million
of financing fees related to the Credit Facility that were capitalized and are being amortized over the term of the respective Term Facility and Revolving Facility. In connection with our adoption of ASU No. 2015-03 effective December 31, 2015, the capitalized financing fees are presented in the consolidated balance sheet as a direct deduction from the carrying amount of the Term Facility.
The Borrower’s obligations under the Credit Facility are guaranteed by the Company and certain of its direct and indirect subsidiaries. The Borrower’s obligations, and the guaranty obligations of the Company and its subsidiaries, are secured by first-priority liens on, and security interests in, certain present and future assets of the Company, the Borrower, and the subsidiary guarantors, including pledges of the capital stock of certain of the Company’s subsidiaries.
Borrowings under the Credit Facility bear interest (i) at a base rate plus
4.50%
per annum or (ii) at a reserve-adjusted eurocurrency rate plus
5.50%
per annum. The eurocurrency base rate for the Term Facility shall at no time be less than
1.00%
per annum. Interest is paid quarterly in arrears, and at the maturity date of each facility for loans bearing interest with reference to the base rate. Interest is paid on the last day of selected interest periods (which will be one, three, and six months), and at the maturity date of each facility for loans bearing interest with reference to the reserve-adjusted eurocurrency rate (and at the end of every three months, in the case of any interest period longer than three months). A fee equal to
5.50%
per annum is payable by the Borrower, quarterly in arrears, in respect of the daily amount available to be drawn under outstanding letters of credit and bankers’ acceptances. As of September 30, 2016, the interest rate on the Credit Facility was
6.50%
.
The Credit Facility contains customary representations, covenants, and events of default typical for credit arrangements of comparable size, including our maintenance of a consolidated leverage ratio of not greater than 2.5 to 1.0 for quarters ending after September 30, 2015. Pursuant to the Credit Facility, a change of control (as defined in the Credit Facility) constitutes an event of default. The Credit Facility also contains customary material adverse effects and cross-default clauses. The cross-default clause is applicable to defaults on other indebtedness in excess of $30 million.
We were in compliance with all covenants of the Credit Facility as of
September 30, 2016
.
MKC Financing
Effective December 30, 2015, MEMC Korea Company, Ltd. ("MKC") entered into term loan agreements for an aggregate principal amount of
50 billion
South Korean Won ("KRW") with three banks as follows (the "MKC Financing"): (i) Shinhan Bank - term loan with a principal amount of KRW
20 billion
at an interest rate equal to the
average 91-day CD rate plus 2.10%
(the "Shinhan Term Loan"), (ii) Hana Bank - term loan with a principal amount of KRW
20 billion
at an interest rate equal to the
average 91-day CD rate plus 2.13%
(the "Hana Term Loan"), and (iii) Korea Development Bank - term loan with a principal amount of KRW
10 billion
at an interest rate of the
average 91-day CD rate plus 2.18%
(the "KDB Term Loan" and, together with the Shinhan Term Loan and the Hana Term Loan, collectively, the "Korean Term Loans"). As of December 31, 2015, KRW
5 billion
of the KDB Term Loan remained unfunded, but was funded in January 2016. As of September 30, 2016, the weighted average interest rate on the Korean Term Loans was approximately
3.50%
.
Each of the Korean Term Loans has a term of 36 months and is secured by a mortgage of MKC’s real property and equipment. In addition, the Hana Term Loan is secured by a pledge of MKC funds on deposit at Hana Bank in the amount of KRW
3.1 billion
. The proceeds of the Korean Term Loans were used to make a prepayment of the outstanding principal of the Term Facility, as outlined below.
Shinhan Bank, Hana Bank, and Korea Development Bank, and their respective affiliates, have performed, and may in the future perform, various commercial banking, investment banking and other financial advisory services for the Company and its affiliates for which they have received, or will receive, customary fees and expenses.
Amendment of and Prepayment under Credit Agreement
Concurrent with the MKC Financing, the Company and SSBV, entered into the First Amendment to Credit Agreement (the “First Amendment”), by and among the Borrower, the Company, the other guarantors party thereto, the lenders party thereto, and Goldman Sachs Bank USA, as administrative agent (in such capacity, the “Administrative Agent”), thereby amending the Credit Agreement, dated as of May 27, 2014 (as amended, the "Credit Agreement"). On December 29, 2015, the Company and the Borrower executed and delivered the First Amendment, which is dated as of December 22, 2015 and, pursuant to its terms, became effective on December 29, 2015.
The First Amendment provides, in part, for the termination, release and discharge of all of the obligations of MKC (a subsidiary of the Borrower and formerly a guarantor under the Credit Facility) under the Credit Facility and other loan documents, and the release of the Administrative Agent’s liens on MKC’s assets and the equity interests in MKC. In connection with such release, certain covenants were added to the Credit Facility with respect to MKC, including (i) a requirement that the Borrower cause MKC to utilize a portion of any cash available for distribution to pay an annual dividend to the Borrower or one of our other subsidiaries, (ii) limits on our rights to make future investments in MKC, as well as our ability to settle historical intercompany trade balances, and the level of future net intercompany trade balances between MKC and the Company and its other subsidiaries, and (iii) restrictions on MKC’s incurrence of future indebtedness.
In connection with the First Amendment, the Borrower made a
$40 million
prepayment of the outstanding principal under the Term Facility (the “Prepayment”) and, in accordance with the terms of the Credit Agreement, also paid a
1%
call premium with the proceeds of the MKC Financing. The Prepayment was completed by the Borrower on December 30, 2015. The Borrower will be obligated to make two additional prepayments, each in an amount of
$5 million
, on the dates that are 10 months and 13 months after the effective date of the First Amendment (October 31, 2016 and January 31, 2017, respectively). Also, as part of the First Amendment, the lenders’ aggregate commitment under the Borrower’s Revolving Facility was reduced from
$50 million
to
$40 million
.
Other Financing Arrangements
In addition to the borrowing capacity under the
$40 million
Revolving Facility, we have other committed financing arrangements totaling
$28.9 million
at
September 30, 2016
. There was
$9.5 million
in short-term borrowings outstanding under these committed financing arrangements as of
September 30, 2016
that bear variable interest rates of between
1%
to
3%
. In addition to the
$9.5 million
outstanding,
$7.8 million
was unavailable because it relates to the issuance of third party letters of credit and bank guarantees, which are excluded from the definition of indebtedness under the Credit Facility. Interest rates are negotiated at the time of the borrowings.
The estimated fair value of our debt was $
213.9 million
and
$203.5 million
as of
September 30, 2016
and
December 31, 2015
, respectively. The fair value of this debt is estimated using a discounted cash flow model (Level 2 assumptions) with consideration for our non-performance risk (Level 3 assumptions).
8. SHAREHOLDERS' EQUITY
Ordinary Shares
Effective concurrently with the secondary public offering of our shares by SunEdison on January 20, 2015, the Company and SunEdison agreed to replace
25%
of the equity-based compensation awards relating to SunEdison stock that were unvested and held by our employees (including our non-US employees, subject to applicable local laws) with adjusted stock options and restricted stock units ("RSUs"), as applicable, for the Company’s ordinary shares, each of which generally preserves the value of the original awards. SunEdison agreed to maintain the balance of the awards (
75%
). The Company issued options to purchase an aggregate of
442,790
ordinary shares with a weighted-average exercise price of
$5.19
per share and an aggregate of
170,115
RSUs, in each case based on applicable SunEdison equity awards outstanding, and the Company’s and SunEdison’s share prices, as of market close on January 20, 2015. Each of the foregoing replacement awards was issued pursuant to the SunEdison Semiconductor Limited 2014 Long-Term Incentive Plan. The remaining
75%
of the unvested SunEdison options and RSUs, as well as all vested SunEdison options, continue to vest in accordance with their terms, with employment by us to be deemed employment by SunEdison. We have included the stock-based compensation expense related to these awards granted to our employees in our condensed consolidated financial statements.
Stock-Based Compensation
We have equity incentive plans that provide for the award of non-qualified stock options, performance shares, and RSUs to employees and non-employee directors. There were
3.5 million
shares remaining available for future grant under these plans as of
September 30, 2016
.
The following table presents information regarding outstanding stock options as of
September 30, 2016
, and related changes during the
nine
months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Aggregate Intrinsic Value (in millions)
|
|
Weighted-Average Remaining Contractual Life (in years)
|
|
Outstanding at December 31, 2015
|
2,932,614
|
|
|
$
|
15.83
|
|
|
|
|
|
|
Granted
|
1,560,550
|
|
|
6.27
|
|
|
|
|
|
|
Exercised
|
(18,176
|
)
|
|
4.03
|
|
|
|
|
|
|
Forfeited
|
(286,133
|
)
|
|
13.76
|
|
|
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
4,188,855
|
|
|
$
|
12.46
|
|
|
$
|
9.5
|
|
|
8.3
|
|
Options exercisable at September 30, 2016
|
1,323,790
|
|
|
$
|
13.91
|
|
|
$
|
2.0
|
|
|
7.0
|
The weighted-average fair value of stock options on the date of grant was
$2.54
for the
nine
months ended
September 30, 2016
.
The following table presents information regarding outstanding RSUs as of
September 30, 2016
, and related changes during the
nine
months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Aggregate Intrinsic Value (in millions)
|
|
Weighted-Average Remaining Contractual Life (in years)
|
|
Outstanding at December 31, 2015
|
1,814,957
|
|
|
|
|
|
|
Granted
|
1,132,613
|
|
|
|
|
|
|
Converted
|
(469,117
|
)
|
|
|
|
|
|
Forfeited
|
(151,981
|
)
|
|
|
|
|
|
Outstanding at September 30, 2016
|
2,326,472
|
|
|
$
|
26.5
|
|
|
1.6
|
The weighted-average fair value of RSUs on the date of grant was $
6.28
for the nine months ended
September 30, 2016
.
Stock-based compensation expense for the three and
nine
months ended
September 30, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
In millions
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
3.3
|
|
|
$
|
3.1
|
|
|
Marketing and administration
|
1.9
|
|
|
2.1
|
|
|
6.3
|
|
|
5.4
|
|
|
Research and development
|
0.7
|
|
|
0.9
|
|
|
2.1
|
|
|
2.6
|
|
|
Stock-based employee compensation
|
$
|
3.7
|
|
|
$
|
4.1
|
|
|
$
|
11.7
|
|
|
$
|
11.1
|
|
The amount of stock-based compensation cost capitalized into inventory and fixed assets was not material for the three and
nine
months ended
September 30, 2016
and
2015
. Further, the recognition of excess tax benefits from share-based payment arrangements was not material for the three and
nine
months ended
September 30, 2016
and
2015
.
9. LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the number of weighted-average ordinary shares outstanding during the period. Diluted loss per share is computed using the weighted-average ordinary shares outstanding and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares represent the incremental ordinary shares issuable for RSUs and stock option exercises. The Company calculates the dilutive effect of outstanding RSUs and stock options on loss per share by application of the treasury stock method.
Basic and diluted loss per share for the three month periods ended
September 30, 2016
and
2015
was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Three Months Ended September 30, 2015
|
|
In millions, except per share amounts
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(25.4
|
)
|
|
$
|
(25.4
|
)
|
|
$
|
(80.8
|
)
|
|
$
|
(80.8
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
42.4
|
|
|
42.4
|
|
|
41.9
|
|
|
41.9
|
|
|
Loss per share
|
$
|
(0.60
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(1.93
|
)
|
|
$
|
(1.93
|
)
|
Basic and diluted loss per share for the nine month periods ended
September 30, 2016
and
2015
was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2015
|
|
In millions, except per share amounts
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(191.0
|
)
|
|
$
|
(191.0
|
)
|
|
$
|
(105.6
|
)
|
|
$
|
(105.6
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
42.1
|
|
|
42.1
|
|
|
41.7
|
|
|
41.7
|
|
|
Loss per share
|
$
|
(4.54
|
)
|
|
$
|
(4.54
|
)
|
|
$
|
(2.53
|
)
|
|
$
|
(2.53
|
)
|
The computations for diluted loss per share for the three and
nine
months ended
September 30, 2016
exclude options to purchase approximately
4.2 million
shares and
2.3 million
RSUs, respectively, because the effect would have been anti-dilutive. The computations for diluted loss per share for the three and
nine
months ended
September 30, 2015
exclude options to purchase approximately
3.0 million
shares and
1.9 million
RSUs, respectively, because the effect would have been anti-dilutive.
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
Comprehensive loss represents a measure of all changes in equity that result from recognized transactions and economic events other than transactions with owners in their capacity as owners. Other comprehensive income (loss) includes adjustments related to currency translation and pension and post-employment liabilities.
The following table presents the changes in each component of accumulated other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
In millions
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
(114.0
|
)
|
|
$
|
(143.1
|
)
|
|
$
|
(154.7
|
)
|
|
$
|
(116.5
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
11.9
|
|
|
(13.1
|
)
|
|
34.4
|
|
|
(39.7
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
18.2
|
|
|
—
|
|
|
Net other comprehensive income (loss)
|
11.9
|
|
|
(13.1
|
)
|
|
52.6
|
|
|
(39.7
|
)
|
|
Balance at September 30
|
$
|
(102.1
|
)
|
|
$
|
(156.2
|
)
|
|
$
|
(102.1
|
)
|
|
$
|
(156.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Pension and post-employment liabilities
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
(49.4
|
)
|
|
$
|
(57.1
|
)
|
|
$
|
(50.2
|
)
|
|
$
|
(57.6
|
)
|
|
Other comprehensive loss before reclassifications
|
—
|
|
|
0.2
|
|
|
—
|
|
|
(0.3
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
0.4
|
|
|
5.3
|
|
|
1.2
|
|
|
6.3
|
|
|
Net other comprehensive income
|
0.4
|
|
|
5.5
|
|
|
1.2
|
|
|
6.0
|
|
|
Balance at September 30
|
$
|
(49.0
|
)
|
|
$
|
(51.6
|
)
|
|
$
|
(49.0
|
)
|
|
$
|
(51.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss at September 30
|
$
|
(151.1
|
)
|
|
$
|
(207.8
|
)
|
|
$
|
(151.1
|
)
|
|
$
|
(207.8
|
)
|
The following table presents reclassifications from accumulated other comprehensive loss and the affected line in the condensed consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
In millions
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Condensed Consolidated Statement of Operations
|
|
Currency translation loss on SMP investment due to change to cost method accounting
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11.0
|
)
|
|
$
|
—
|
|
|
Equity in loss of equity method investments, net of tax
|
|
Currency translation loss on partial sale of SMP investment
|
|
—
|
|
|
—
|
|
|
(7.2
|
)
|
|
—
|
|
|
Other, net
|
|
Amortization of net actuarial loss and prior service cost
|
|
(0.4
|
)
|
|
(0.5
|
)
|
|
(1.2
|
)
|
|
(1.5
|
)
|
|
Marketing and administration
|
|
Pension settlement charge
|
|
—
|
|
|
(2.0
|
)
|
|
—
|
|
|
(2.0
|
)
|
|
Cost of goods sold
|
|
Pension settlement charge
|
|
—
|
|
|
(1.7
|
)
|
|
—
|
|
|
(1.7
|
)
|
|
Marketing and administration
|
|
Pension settlement charge
|
|
—
|
|
|
(1.1
|
)
|
|
—
|
|
|
(1.1
|
)
|
|
Research and development
|
|
|
|
$
|
(0.4
|
)
|
|
$
|
(5.3
|
)
|
|
$
|
(19.4
|
)
|
|
$
|
(6.3
|
)
|
|
|
11. DERIVATIVES AND HEDGING INSTRUMENTS
SunEdison Semiconductor's derivatives and hedging activities consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (Liabilities) at Fair Value
|
|
In millions
|
Balance Sheet Classification
|
|
As of September 30, 2016
|
|
As of December 31, 2015
|
|
Derivatives not designated as hedging:
|
|
|
|
|
|
|
|
|
|
|
Currency forward contracts
(1)
|
Prepaid and other current assets
|
|
$
|
1.1
|
|
|
$
|
0.5
|
|
|
Currency forward contracts
(1)
|
Accrued liabilities
|
|
$
|
(0.1
|
)
|
|
$
|
(0.6
|
)
|
|
(1)
Currency forward contracts are recorded on the condensed consolidated balance sheet at fair value using Level 1 inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
In millions
|
Statement of Operations Classification
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Derivatives not designated as hedging:
|
|
|
|
|
|
|
|
|
|
|
Currency forward contracts
|
Other, net
|
|
$
|
(4.7
|
)
|
|
$
|
(3.8
|
)
|
|
$
|
3.7
|
|
|
$
|
(3.9
|
)
|
We utilize currency forward contracts to mitigate the financial market risks of fluctuations in currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. Gains and losses on non-U.S. currency exposures are generally offset by corresponding losses and gains on the related hedging instruments, reducing the net exposure to the Company. A substantial portion of our revenue and capital spending is transacted in the U.S. dollar. However, we do enter into transactions in other currencies, primarily the South Korean won, new Taiwan dollar, Japanese yen, euro, and Malaysian ringgit. We have established transaction-based hedging programs to protect against reductions in value and volatility of future cash flows caused by changes in currency exchange rates. Our hedging programs reduce, but do not always eliminate, the impact of currency exchange rate movements. We may have outstanding contracts with several major financial institutions for these hedging transactions at any point in time. Our maximum risk of credit loss is limited to any gain on our outstanding contracts with these institutions. These currency forward contracts had net notional amounts of
$139.2 million
and
$115.7 million
as of
September 30, 2016
and
December 31, 2015
, respectively, and are accounted for as economic hedges, for which hedge accounting is not applied.
12. CONTINGENCIES
Legal Proceedings
We are involved in various legal proceedings, claims, investigations, and other legal matters which arise in the ordinary course of business. Although it is not possible to predict the outcome of these matters, we believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, cash flows, or results of operations.
13. INCOME TAXES
We record income tax expense (benefit) each quarter based on our best estimate of the full year effective tax rate. This estimated tax expense (benefit) is reported based on a pro-ration of the actual income (loss) recorded in the period divided by the full year forecasted income (loss). There are certain items, however, which are given discrete period treatment, and the tax effects of those items are reported in the quarter that such events arise. Items that give rise to discrete recognition include (but are not limited to) finalizing tax authority examinations, changes in statutory tax rates, and the expiration of statutes of limitations.
Deferred income taxes arise primarily because of differences in the bases of assets or liabilities between financial accounting and tax accounting which are known as temporary differences. We record the tax effect of these temporary differences as deferred tax assets (generally items that can be used as a tax deduction or credit in future periods) and deferred tax liabilities (generally items for which we receive a tax deduction, but have not yet been recorded in the condensed consolidated statement of operations). We regularly review our deferred tax assets for realizability, taking into consideration all available evidence, both positive and negative, including historical pre-tax and taxable income (losses), projected future taxable income (losses), and the expected timing of the reversals of existing temporary differences. In arriving at these judgments, the weight given to the potential effect of all positive and negative evidence is commensurate with the extent to which it can be objectively verified. Our total deferred tax assets, net of valuation allowances, as of September 30, 2016 and December 31, 2015, were
$29.9 million
and
$30.3 million
, respectively. We believe that it is more likely than not, based on our projections of future taxable income in certain jurisdictions, that we will generate sufficient taxable income to realize the benefits of the net deferred tax assets that have not been offset by a valuation allowance at September 30, 2016.
We believe our tax positions are in compliance with applicable tax laws and regulations. Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. Uncertain tax benefits, including accrued interest and penalties, are included as a component of other long-term liabilities because we do not anticipate that settlement of the liabilities will require payment of cash within the next 12 months. The accrual of interest begins in the first reporting period that interest would begin to accrue under the applicable tax law. Penalties, when applicable, are accrued in the financial reporting period in which the uncertain tax position is taken on a tax return. We recognize interest and penalties related to uncertain tax positions in income tax expense, which is consistent with our historical policy. We believe that our accrued income tax liabilities, including related interest, are adequate in relation to the potential for additional tax assessments. There is a risk, however, that the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and, therefore, could have a material impact on our tax provision, net income (loss), and cash flows. We review our accrued tax liabilities quarterly, and we may adjust such liabilities due to proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law, negotiations between tax authorities of different countries concerning our transfer prices between our subsidiaries, the resolution of entire audits, or the expiration of statutes of limitations. Adjustments are most likely to occur in the year during which major audits are closed. The income tax expense related to uncertain tax positions for the nine month period ended September 30, 2016 was
$1.1 million
, which included an increase to the reserve for uncertain tax positions of
$0.6 million
related to the potential loss of treaty benefits for withholding tax on intercompany transactions and an increase of
$0.6 million
related to the expected closure of an ongoing tax authority examination. These increases were offset by a favorable reduction of
$0.1 million
related to the closure of a foreign tax examination. The accrual for uncertain tax positions as of September 30, 2016 and December 31, 2015 was
$6.7 million
and
$5.6 million
, respectively.
We are domiciled in Singapore. Management reviewed its repatriation policy during 2016 with respect to our planned legal structure. Recognition of Singapore or local withholding taxes on undistributed non-Singapore earnings would be triggered by a management decision to repatriate those earnings. During the first quarter of 2016, management concluded that the undistributed earnings of one wholly-owned non-Singapore subsidiary would be distributed in the foreseeable future. These earnings were previously considered permanently reinvested in the business and we have recognized the tax impacts related to this decision as a discrete tax expense of
$1.2 million
through the third quarter 2016. There is no current intention to repatriate the earnings of any other non-Singapore subsidiaries. We plan foreign remittance amounts based on projected cash flow needs as well as the working capital and long-term investment requirements of our worldwide subsidiaries and operations, and after concluding that such remittances can be done in a tax-efficient manner. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable. However, we currently believe that any additional repatriation tax effects would have minimal impact on future cash flows. Of our cash and cash equivalents as of September 30, 2016,
$53.1 million
was held by our non-Singapore subsidiaries, a portion of which may be subject to repatriation tax effects.