UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

 

 

Commission File Number 000-29472

 

AMKOR TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

 

1900 South Price Road
Chandler, AZ 85286
(Address of principal executive offices and zip code)

 

(480) 821-5000
(Registrant’s telephone number, including area code)

 

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 filing requirements for the past 90 days.  Yes þ     No o

 

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).  Yes þ     No o

 

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. (Check one):

 

(Do not check if a smaller reporting company)

 

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

 

The number of outstanding shares of the registrant’s Common Stock as of April 29, 2011 was 197,961,670.

 

 

QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2011

TABLE OF CONTENTS

 

 

AMKOR TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 

 

The accompanying notes are an integral part of these statements.

AMKOR TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)

 

 

The accompanying notes are an integral part of these statements.

AMKOR TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

 

The accompanying notes are an integral part of these statements.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Basis of Presentation.  The Consolidated Financial Statements and related disclosures as of March 31, 2011 and for the three months ended March 31, 2011 and 2010, are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The December 31, 2010 Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In our opinion, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the results for the interim periods. These financial statements should be read in conjunction with the financial statements included in our Annual Report for the year ended December 31, 2010, filed on Form 10-K with the SEC on February 24, 2011. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year. Unless the context otherwise requires, all references to “Amkor,” “we,” “us,” “our” or the “company” are to Amkor Technology, Inc. and our subsidiaries.

 

The U.S. dollar is our reporting currency and the functional currency for the majority of our foreign subsidiaries. For our subsidiaries and affiliate in Japan, the local currency is the functional currency.

 

Use of Estimates.  The Consolidated Financial Statements have been prepared in conformity with U.S. GAAP, using management’s best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.

 

 

Recently Adopted Standards

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements, which amended Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements, to require additional disclosures related to activity within Level 3 of the fair value hierarchy. These provisions of the ASU are effective for reporting periods beginning after December 15, 2010. Our adoption of these provisions on January 1, 2011, did not have an impact on our financial statements.

 

In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements, which supersedes certain guidance in ASC 605-25, Revenue Recognition – Multiple Element Arrangements. This topic requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. This ASU is effective for annual reporting periods beginning after June 15, 2010. Our adoption of ASU 2009-13 on January 1, 2011, did not have an impact on our financial statements.

 

 

All of our share-based compensation to employees, including grants of employee stock options and restricted shares, are measured at fair value and expensed over the service period (generally the vesting period). The following

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

table presents share-based compensation expense attributable to stock options and restricted shares. There is no deferred income tax benefit in either period.

 

 

The following table presents share-based compensation expense as included in the Consolidated Statements of Income:

 

 

Stock Options

 

The following table summarizes our stock option activity for the three months ended March 31, 2011:

 

 

The intrinsic value of options exercised for the three months ended March 31, 2011 and 2010, was $0.3 million and $0.1 million, respectively. For the three months ended March 31, 2011 and 2010, cash received for stock option exercises was $0.6 million and $0.4 million, respectively. There was no tax benefit realized. The related cash receipts are included in financing activities in the accompanying Condensed Consolidated Statements of Cash Flows. Total unrecognized compensation expense from stock options, including a forfeiture estimate, was approximately $2.6 million as of March 31, 2011, which is expected to be recognized over a weighted-average

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

period of 1.5 years beginning April 1, 2011. To the extent the actual forfeiture rate is different than what we have anticipated, share-based compensation related to these awards will be different from our expectations.

 

Restricted Shares

 

The following table summarizes our restricted share activity for the three months ended March 31, 2011:

 

 

Awards vested include 142,000 shares for retirement eligible recipients whose restricted shares are treated for accounting and tax purposes as if vested when they meet the retirement eligible date. The fair value of these shares upon vesting during 2011 was $1.1 million. Of those 142,000 shares, 51,000 shares were withheld to satisfy tax withholding obligations and are treated as treasury stock, at a cost of $0.4 million.

 

The valuation of restricted stock shares is determined based on the fair market value of the underlying shares on the date of grant and amortized on a straight-line basis over the four year vesting period. The unrecognized compensation cost, including a forfeiture estimate, was $5.3 million as of March 31, 2011, which is expected to be recognized over a weighted average period of approximately 3.2 years beginning April 1, 2011. To the extent that the actual forfeiture rate is different than what we have anticipated, the share-based compensation expense related to these awards will be different from our expectations.

 

 

Our income tax expense of $3.4 million for the three months ended March 31, 2011, primarily reflects $2.2 million of expense related to income taxes at certain of our foreign operations, $0.5 million of foreign withholding taxes, and $0.7 million of deferred taxes on our investment in J-Devices. Our income tax expense reflects income taxed in foreign jurisdictions where we benefit from tax holidays. At March 31, 2011, we had U.S. net operating loss carryforwards totaling $388.6 million, which expire at various times through 2030. Additionally, at March 31, 2011, we had $67.6 million of non-U.S. net operating loss carryforwards, the vast majority of which will expire at various times through 2018.

 

We maintain a valuation allowance on all of our U.S. net deferred tax assets, including our net operating loss carryforwards. We also have valuation allowances on deferred tax assets in certain foreign jurisdictions. Such valuation allowances are released as the related tax benefits are realized on our tax returns or when sufficient net positive evidence exists to conclude it is more likely than not that the deferred tax assets will be realized.

 

Our gross unrecognized tax benefits increased from $10.5 million at December 31, 2010, to $10.8 million as of March 31, 2011 primarily due to a change in the reserve resulting from the evaluation of new information obtained during the quarter. At March 31, 2011, substantially all of our unrecognized tax benefits would reduce our effective tax rate, if recognized. We are seeking rulings from local taxing authorities to confirm the availability of unrecognized tax benefits related to revenue attribution and eligibility for certain tax incentives. The rulings are currently expected within the next twelve months, at which time our unrecognized tax benefits may be reduced by up to $8.2 million. Our unrecognized tax benefits are subject to change as examinations of tax years are

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

completed. Tax return examinations involve uncertainties and there can be no assurances that the outcome of examinations will be favorable.

 

 

Basic earnings per share (“EPS”) is computed by dividing net income (loss) attributable to Amkor common shareholders by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding includes restricted shares held by retirement eligible recipients and excludes treasury stock. Unvested share-based compensation awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of earnings per share pursuant to the two-class method. As discussed in Note 3, we grant restricted shares which entitle recipients to voting and nonforfeitable dividend rights from the date of grant. As a result, we have applied the two-class method to determine earnings per share.

 

Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares include outstanding stock options, unvested restricted shares and convertible debt. The following table summarizes the computation of basic and diluted EPS:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The following table summarizes the potential shares of common stock that were excluded from diluted EPS, because the effect of including these potential shares was antidilutive:

 

 

 

The following table reflects the changes in equity and comprehensive income attributable to both Amkor and the noncontrolling interests:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

 

Inventories consist of the following:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

Property, plant and equipment consist of the following:

 

 

The following table reconciles our activity related to property, plant and equipment additions as reflected on the Consolidated Balance Sheets to property, plant and equipment purchases as presented on the Condensed Consolidated Statements of Cash Flows:

 

 

 

Acquired intangibles as of March 31, 2011, consist of the following:

 

 

Acquired intangibles as of December 31, 2010, consist of the following:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Amortization of identifiable intangible assets for the three months ended March 31, 2011 and 2010, was $1.3 million and $1.2 million, respectively. Based on the amortizing assets recognized in our balance sheet at March 31, 2011, amortization for each of the next five years is estimated as follows:

 

 

 

Investments consist of the following:

 

 

J-Devices Corporation

 

On October 30, 2009, Amkor and Toshiba Corporation (“Toshiba”) invested in Nakaya Microdevices Corporation (“NMD”) and formed a joint venture to provide semiconductor assembly and final testing services in Japan. As a result of the transaction, NMD is now owned 60% by the existing shareholders of NMD, 30% by Amkor and 10% by Toshiba and has changed its name to J-Devices. J-Devices is a variable interest entity, but as we are not the primary beneficiary, the investment is accounted for as an unconsolidated affiliate.

 

Our investment includes our 30% equity interest and call options to acquire additional equity interests. Under the equity method of accounting, we recognize our 30% proportionate share of J-Devices’ net income or loss which includes J-Devices’ income taxes in Japan, during each accounting period. In addition, we record equity method adjustments for the amortization of a basis difference as our carrying value exceeded our equity in the net assets of J-Devices at the date of investment and other adjustments required by the equity method. For the three months ended March 31, 2011 and 2010, our equity in earnings in J-Devices, net of J-Devices’ income taxes in Japan, was $1.5 million and $1.1 million, respectively.

 

In conjunction with entering into the joint venture, one of our existing subsidiaries in Japan purchased assembly and test equipment from Toshiba and leased the equipment to J-Devices under an agreement which is

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

accounted for as a direct financing lease. For the three months ended March 31, 2011 and 2010, we recognized $0.2 million and $0.3 million, respectively, in interest income. Our lease receivables consist of the following:

 

 

 

Accrued expenses consist of the following:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

Following is a summary of short-term borrowings and long-term debt:

 

 

There have been no borrowings under our senior secured credit facility as of March 31, 2011; however, we have utilized $0.4 million of the available letter of credit sub-limit of $25.0 million. The borrowing base for the revolving credit facility is based on the amount of our eligible accounts receivable, which exceeded $100.0 million as of March 31, 2011. This facility includes a number of affirmative and negative covenants, which could restrict our operations. If we were to default under the first lien revolving credit facility, we would not be permitted to draw additional amounts, and the banks could accelerate our obligation to pay all outstanding amounts.

 

In November 2005, we issued $100.0 million of our 6.25% Convertible Subordinate Notes due December 2013 (the “December 2013 Notes”) in a private placement to Mr. James J. Kim, our Executive Chairman of the Board of Directors, and certain Kim family members. When they became callable in December 2010, we announced a call

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

for redemption of the entire $100.0 million aggregate principal amount of the December 2013 Notes. Holders of all $100.0 million of the outstanding December 2013 Notes converted their notes into an aggregate of 13,351,131 shares of our common stock in January 2011. There was no gain or loss recorded as a result of the conversion. Forfeited accrued interest of $0.9 million and unamortized deferred debt costs of $0.4 million were included in the net carrying amount of the debt recorded to our capital accounts upon conversion.

 

In January 2009, Amkor Assembly & Test (Shanghai) Co, Ltd. (“AATS”), a Chinese subsidiary, entered into a $50.0 million U.S. dollar denominated working capital facility agreement with a Chinese bank maturing in January 2011. The facility was collateralized with certain real property and buildings in China. Principal amounts borrowed were required to be repaid within twelve months of the drawdown date and could be prepaid at any time without penalty. In January 2011, the outstanding balance of $15.0 million was repaid at maturity. In January 2011, AATS entered into a new $50.0 million U.S. dollar denominated working capital facility agreement with the same Chinese bank maturing in January 2013. The new facility bears interest at LIBOR plus 2.8% (3.25% as of March 31, 2011), which is payable in semi-annual payments. All other terms and conditions are consistent with the prior facility. At March 31, 2011, $15.0 million was outstanding under the facility. In April 2011, an additional $5.0 million was drawn on the facility. The working capital facility contains certain affirmative and negative covenants, which could restrict our operations. If we were to default on our obligations under any of these facilities, we would not be permitted to draw additional amounts, and the lenders could accelerate our obligation to pay all outstanding amounts.

 

In April 2010, Amkor Technology Taiwan Ltd, a Taiwanese subsidiary, entered into a 1.5 billion Taiwan dollar (approximately $47 million at inception) term loan with a Taiwanese bank due April 2015. The term loan accrues interest at the 90-day commercial paper rate plus 0.835%. The interest rate at March 31, 2011, was 2.293%. The term loan is collateralized with certain land, buildings, and equipment in Taiwan. In March 2011, we amended the principal repayment schedule. As a result, semiannual principal payments of 150 million Taiwan dollars (approximately $5.1 million) will begin in April 2012 and the remaining 600 million Taiwan dollars (approximately $20.4 million) will be due on the final maturity date.

 

Our secured bank debt agreements and the indentures governing our outstanding notes contain a number of affirmative and negative covenants which could restrict our operations. We were in compliance with all of our covenants as of March 31, 2011.

 

 

Foreign Pension Plans

 

Our Philippine, Taiwanese and Japanese subsidiaries sponsor defined benefit pension plans that cover substantially all of their respective employees who are not covered by statutory plans. Charges to expense are based upon actuarial analyses. The components of net periodic pension cost for these defined benefit plans are as follows:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

For the three months ended March 31, 2011, we contributed less than $0.1 million to the pension plans. We expect to contribute approximately $3.5 million during the remainder of 2011.

 

Korean Severance Plan

 

Our Korean subsidiary participates in an accrued severance plan that covers employees and directors with at least one year of service. Eligible employees are entitled to receive a lump-sum payment upon termination of employment, based on their length of service, seniority and average monthly wages at the time of termination. Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date. Our contributions to the National Pension Plan of the Republic of Korea are deducted from accrued severance benefit liabilities.

 

The provision recorded for severance benefits for the three months ended March 31, 2011 and 2010 was $5.7 million and $4.2 million, respectively. The balance recorded in non-current pension and severance obligations for accrued severance at our Korean subsidiary was $88.2 million and $82.5 million at March 31, 2011 and December 31, 2010, respectively.

 

 

The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows: Level 1, defined as quoted market prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3, defined as unobservable inputs that are not corroborated by market data.

 

Assets and Liabilities that are Measured at Fair Value on a Recurring basis

 

Our financial assets and liabilities recorded at fair value on a recurring basis include cash and cash equivalents and restricted cash. Cash and cash equivalents and restricted cash are invested in U.S. money market funds and various U.S. and foreign bank operating and time deposit accounts, which are due on demand or carry a maturity date of less than three months when purchased. No restrictions have been imposed on us regarding withdrawal of balances with respect to our cash and cash equivalents as a result of liquidity or other credit market issues affecting the money market funds we invest in or the counterparty financial institutions holding our deposits. Money market funds and restricted cash are valued using quoted market prices in active markets for identical assets as summarized in the following table:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

 

We measure certain assets and liabilities, including property, plant and equipment, intangible assets and an equity investment, at fair value on a nonrecurring basis. Such measurements are generally obtained from third party appraisal reports. Impairment losses on property, plant and equipment included in cost of sales for the three months ended March 31, 2011 and 2010, were $1.0 million and $0.6 million, respectively.

 

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

 

We measure the fair value of our debt on a quarterly basis for disclosure purposes. The following table presents the financial instruments that are not recorded at fair value but which require fair value disclosure as of March 31, 2011 and December 31, 2010:

 

 

The estimated fair value of the debt is based primarily on quoted market prices reported on the respective balance sheet dates for our senior and senior subordinated notes. The estimated fair value for the debt of our subsidiaries is based on market based assumptions including current borrowing rates for similar types of borrowing arrangements adjusted for duration, optionality, and risk profile.

 

 

We have a $100.0 million senior secured revolving credit facility that matures in April 2015. The facility has a letter of credit sub-facility of $25.0 million. As of March 31, 2011, we have $0.4 million of standby letters of credit outstanding and have an additional $24.6 million available for letters of credit. Such standby letters of credit are used in the ordinary course of our business and are collateralized by our cash balances.

 

We generally warrant that our services will be performed in a professional and workmanlike manner and in compliance with our customers’ specifications. We accrue costs for known warranty issues. Historically, our warranty costs have been immaterial.

 

Legal Proceedings

 

We are involved in claims and legal proceedings and we may become involved in other legal matters arising in the ordinary course of our business. We evaluate these claims and legal matters on a case-by-case basis to make a determination as to the impact, if any, on our business, liquidity, results of operations, financial condition or cash flows. Except as indicated below, we currently believe that the ultimate outcome of these claims and proceedings, individually and in the aggregate, will not have a material adverse impact to us. Our evaluation of the potential impact of these claims and legal proceedings on our business, liquidity, results of operations, financial condition or cash flows could change in the future. Attorney fees related to legal matters are expensed as incurred.

 

Arbitration Proceedings with Tessera, Inc.

 

On March 2, 2006, Tessera, Inc. filed a request for arbitration with the International Court of Arbitration of the International Chamber of Commerce (the “ICC”), captioned Tessera, Inc. v. Amkor Technology, Inc. The subject matter of the arbitration was a license agreement (“License Agreement”) entered into between Tessera and our predecessor in 1996.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

On October 27, 2008, the arbitration panel in that proceeding issued an interim order in this matter. While the panel found that most of the packages accused by Tessera were not subject to the patent royalty provisions of the License Agreement, the panel did find that past royalties were due to Tessera as damages for some infringing packages. The panel also denied Tessera’s request to terminate the License Agreement.

 

On January 9, 2009, the panel issued the final damage award in this matter awarding Tessera $60.6 million in damages for past royalties due under the License Agreement. The award was for the period March 2, 2002 through December 1, 2008. The final award, plus interest, and the royalties through December 2008 amounting to $64.7 million, was expensed in 2008 and paid when due in February 2009.

 

We have been calculating, accruing and paying royalties under the License Agreement for periods subsequent to December 1, 2008, using the same methodology specified in the panel’s interim order for calculating damages for past royalties. Tessera has made repeated statements to customers and others claiming that we are in breach of the royalty provisions of the License Agreement. We informed Tessera that we are in full compliance with the License Agreement and of our intent to continue making the royalty payments when due in accordance with the terms of the License Agreement.

 

On August 7, 2009, we filed a request for arbitration in the ICC against Tessera, captioned Amkor Technology, Inc. v. Tessera, Inc. We have instituted this action in order to obtain declaratory relief confirming that we are a licensee in good standing under our 1996 License Agreement with Tessera and that the License Agreement remains in effect. We are also seeking damages and injunctive relief regarding Tessera’s tortious interference with our contractual relations and prospective economic advantage, including Tessera’s false and misleading statements questioning our status as a licensee under the License Agreement.

 

On November 2, 2009, Tessera filed an answer to our request for arbitration and counterclaims in the ICC. In the answer and counterclaims, Tessera denies Amkor’s claims. Tessera also alleges breach of contract, seeking termination of the License Agreement and asserting that Amkor owes Tessera additional royalties under the License Agreement, including royalties for use of thirteen U.S. and six foreign patents that Tessera did not assert in the previous arbitration. Tessera also alleges that Amkor has tortiously interfered with Tessera’s prospective business relationships and seeks damages. Tessera claims that the amount in dispute is approximately $100 million. On February 17, 2011, Tessera sent Amkor a notice of termination of the License Agreement.

 

We filed our response to Tessera’s answer on January 15, 2010, denying Tessera’s claims and filed a motion with the panel seeking priority consideration and phased early determination of issues from the previous arbitration decision, including the proper method for calculating royalties under the License Agreement for periods subsequent to December 1, 2008. On March 28, 2010, the panel granted our request for priority consideration and phased early determination. The first hearing regarding the issues from the previous arbitration of royalty calculations, including the proper method for calculating royalties under the License Agreement, was held in December 2010 and a decision is expected in the first half of 2011. The hearing on Tessera’s assertion of infringement on additional patents and the payment of additional royalties under the License Agreement relating to the additional asserted patents is currently scheduled for August 2011.

 

While we believe we are a licensee in good standing and are paying all royalties to Tessera due under the License Agreement, the outcome of this matter is uncertain and an adverse decision could have a material adverse effect on our results of operations, cash flows and financial condition.

 

In connection with the new arbitration proceeding, we have deposited $17.0 million in an escrow account, which is classified as restricted cash in current assets at March 31, 2011. This amount represents our good faith estimate of the disputed amount of royalties that we expected Tessera to allege that we owe on packages assembled by us for one of our customers for the period from December 2, 2008 through December 31, 2010. We do not believe that the funds held in escrow are owed to Tessera and these funds may only be distributed upon the order of the panel in the current arbitration proceeding.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Amkor Technology, Inc. v. Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc.

 

On November 17, 2003, we filed a complaint against Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc. (collectively “Carsem”) with the International Trade Commission (“ITC”) in Washington, D.C., alleging infringement of our United States Patent Nos. 6,433,277; 6,455,356 and 6,630,728 (collectively the “Amkor Patents”) and seeking, under Section 337 of the Tariff Act of 1930, an exclusion order barring the importation by Carsem of infringing products. We allege that by making, using, selling, offering for sale, or importing into the U.S. the Carsem Dual and Quad Flat No-Lead Packages, Carsem has infringed on one or more of our MicroLeadFrame packaging technology claims in the Amkor Patents.

 

On November 18, 2003, we also filed a complaint in the U.S. District Court for the Northern District of California, alleging infringement of the Amkor Patents and seeking an injunction enjoining Carsem from further infringing the Amkor Patents, compensatory damages, and treble damages due to willful infringement plus interest, costs and attorney’s fees. This District Court action has been stayed pending resolution of the ITC case.

 

The ITC Administrative Law Judge (“ALJ”) conducted an evidentiary hearing during July and August of 2004 in Washington D.C. and, on November 18, 2004, issued an Initial Determination that Carsem infringed some of our patent claims relating to our MicroLeadFrame package technology, that some of our 21 asserted patent claims are valid, that we have a domestic industry in our patents, and that all of our asserted patent claims are enforceable. However, the ALJ did not find a statutory violation of Section 337 of the Tariff Act.

 

We filed a petition in November 2004 to have the ALJ’s ruling reviewed by the full International Trade Commission. On March 31, 2005, the ITC ordered a new claims construction related to various disputed claim terms and remanded the case to the ALJ for further proceedings. On November 9, 2005, the ALJ issued an Initial Determination on remand finding that Carsem infringed some of our patent claims and that Carsem had violated Section 337 of the Tariff Act.

 

On remand, the ITC had also authorized the ALJ to reopen the record on certain discovery issues related to a subpoena of documents from a third party. An order by the U.S. District Court for the District of Columbia enforcing the subpoena became final on January 9, 2009, and the third party produced documents pursuant to the subpoena.

 

On July 1, 2009, the Commission remanded the investigation for a second time to the ALJ to reopen the record to admit into evidence documents and related discovery obtained from the enforcement of the above-referenced third-party subpoena.

 

Following a two-day hearing, on October 30, 2009, the ALJ issued an Initial Determination reaffirming his prior ruling that the Carsem Dual and Quad Flat No-Lead Packages infringe some of Amkor’s patent claims relating to MicroLeadFrame package technology, that all of Amkor’s asserted patent claims are valid, and that Carsem violated Section 337 of the Tariff Act.

 

On December 16, 2009, the Commission ordered a review of the ALJ’s Initial Determination. On February 18, 2010, the Commission reversed a finding by the ALJ on the issue of whether a certain invention constitutes prior art to Amkor’s asserted patents. The Commission remanded the investigation to the ALJ to make further findings in light of the Commission’s ruling. On March 22, 2010, the ALJ issued a Supplemental Initial Determination. Although the ALJ’s ruling did not disturb the prior finding that Carsem Dual and Quad Flat No-Lead Packages infringe some of Amkor’s patent claims relating to MicroLeadFrame technology, the ALJ found that some of Amkor’s patent claims are invalid and, as a result, the ALJ did not find a statutory violation of the Tariff Act. On July 20, 2010, the Commission issued a Notice of Commission Final Determination, in which the Commission determined that there is no violation of Section 337 of the Tariff Act and terminated the investigation. We have appealed the Commission’s ruling to the U.S. Court of Appeals for the Federal Circuit.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

We have two reportable segments, packaging and test. Packaging and test are integral steps in the process of manufacturing semiconductor devices and our customers will engage with us for both packaging and test services, or just packaging or test services.

 

Packaging Services

 

We offer a broad range of package formats and services designed to provide our customers with a full array of packaging solutions. The differentiating characteristics of package formats can include: (1) size, (2) number of electrical connections, (3) thermal and electrical characteristics, (4) number of chips incorporated, (5) types of interconnect technologies employed, and (6) integration of active and passive components.

 

Test Services

 

We provide a complete range of semiconductor testing services including wafer testing or probe, various types of final testing, strip testing and complete end-of-line test services up to and including final shipping. Testing solutions vary depending upon the complexity of the device.

 

The accounting policies for segment reporting are the same as those for our Consolidated Financial Statements as a whole. We evaluate our operating segments based on gross profit and gross property, plant and equipment. We do not specifically identify and allocate total assets by operating segment. Summarized financial information concerning reportable segments is shown in the following table. The “other” column reflects other corporate adjustments to net sales and gross profit and the property, plant and equipment of our sales and corporate offices.

 

 

 

As part of our ongoing efforts to improve our manufacturing operations and manage costs, we regularly evaluate our staffing levels and facility requirements compared to business needs. The following table summarizes our exit activities and reduction in force initiatives associated with these activities. “Charges” represents the initial

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

charge related to the exit activity. “Cash Payments” consists of the utilization of “Charges”. “Non-cash Amounts” for the three months ended March 31, 2010, consist of asset impairments.

 

 

 

Singapore Manufacturing Operations

 

In June 2009, we communicated to our employees the decision to wind-down and exit our manufacturing operations in Singapore. We have completed our exit as of December 31, 2010. This wind-down affected approximately 600 employees and enabled us to improve our cost structure by consolidating factories. The majority of the machinery and equipment was relocated to and utilized in other factories. We own a facility in Singapore which is being actively marketed for sale. At March 31, 2011, the related net book value of $13.1 million is classified as held for sale and included in other current assets.

 

The liability for one-time involuntary termination benefits for employees that provided service beyond a minimum retention period was recognized over the service period. During the three months ended March 31, 2011, charges for termination benefits were not significant. During the three months ended March 31, 2010, we recorded charges for termination benefits of $0.9 million, of which $0.6 million, and $0.3 million were recorded in cost of sales and selling, general and administrative expenses, respectively.

 

Contractual obligation costs, asset impairments and other costs are included in costs of goods sold. In January 2010, we made a final payment related to the early termination of our lease of one of our facilities that was vacated and relief from our existing $1.1 million asset retirement obligation related to the leased property. Asset impairments of $0.3 million during the three months ended March 31, 2010, relate to non-transferable machinery and equipment.

 

All amounts accrued at March 31, 2011, are classified in current liabilities.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report contains forward-looking statements within the meaning of the federal securities laws, including but not limited to statements regarding: (1) the amounts, timing and focus of our expected capital investments, (2) our ability to fund our operating activities for the next twelve months, (3) the effect of capacity utilization rates on our gross margin, (4) the expiration of tax holidays in jurisdictions in which we operate and expectations regarding our effective tax rate, (5) the release of valuation allowances related to taxes in the future, (6) the expected use of future cash flows, if any, for the expansion of our business, capital expenditures and the repayment of debt, (7) our repurchase or repayment of outstanding debt or the conversion of convertible debt in the future, (8) payment of dividends, (9) compliance with our covenants, (10) expected contributions to defined benefit pension plans, (11) liability for unrecognized tax benefits, (12) the effect of foreign currency exchange rate exposure on our financial results, (13) the volatility of the trading price of our common stock, (14) changes to our internal controls, (15) expectations regarding supply chain disruptions due to the Japan earthquake and (16) other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intend” or the negative of these terms or other comparable terminology. Because such statements include risks and uncertainties, actual results may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the following discussion as well as in Part II, Item 1A “Risk Factors” of this Quarterly Report. The following discussion provides information and analysis of our results of operations for the three months ended March 31, 2011 and our liquidity and capital resources. You should read the following discussion in conjunction with Item 1, “Financial Statements” in this Quarterly Report as well as other reports we file with the Securities and Exchange Commission (“SEC”).

 

Overview

 

Amkor is one of the world’s leading providers of outsourced semiconductor packaging and test services. Packaging and test are integral steps in the process of manufacturing semiconductor devices. The semiconductor manufacturing process begins with the fabrication of tiny transistor elements into complex patterns of electronic circuitry on silicon wafers, thereby creating large numbers of individual semiconductor devices or integrated circuits on each wafer (generally referred to as “chips” or “die”). Each device on the wafer is tested and the wafer is cut into pieces called chips. The chips are attached through wire bonding to a substrate or leadframe, or to a substrate in the case of flip chip interconnect, and then encased in a protective material. For a wafer-level package, the electrical interconnections are created directly on the surface of the wafer without a substrate or leadframe. The packages are then tested using sophisticated equipment to ensure that each packaged chip meets its design and performance specifications.

 

Our packages are designed based on application and chip specific requirements including the type of interconnection technology employed, size, thickness, and electrical, mechanical and thermal performance. We are able to provide turnkey packaging and test solutions including semiconductor wafer bump, wafer probe, wafer backgrind, package design, assembly, test and drop shipment services.

 

Our customers include, among others: Altera Corporation; Broadcom Corporation; Infineon Technologies, AG; International Business Machines Corporation (“IBM”); LSI Corporation; Qualcomm Incorporated; Sony Corporation; ST Microelectronics, Pte.; Texas Instruments, Inc. and Toshiba Corporation. The outsourced semiconductor packaging and test market is very competitive. We also compete with the internal semiconductor packaging and test capabilities of many of our customers.

 

On March 11, 2011, operations at our facility in Kitakami, Japan, were interrupted by the Tohoku earthquake near Sendai. Our Kitakami facility is located approximately 90 miles from Sendai and 130 miles north of the Fukushima Daiichi nuclear power plant. The facility suffered some minor damage to buildings and equipment during the earthquake, but is well inland and was not affected by the tsunami. However, there was a complete shutdown of power and other utilities. Repairs and clean-up began shortly after the earthquake, and the facility is

now fully operational. Our facility in Kitakami is our smallest operation in both units and revenue, generating approximately $10 million of monthly sales prior to the earthquake. The facility provides services to a few Japan-based customers.

 

Japan is a major supplier of semiconductors, silicon wafers, specialty chemicals, substrates, equipment and other supplies to the electronics industry. Since the earthquake, we have been working closely with our customers and suppliers to analyze the situation, identify the potential exposure, and mitigate the risk, where possible. Despite these efforts, we currently expect that supply chain disruptions, particularly relating to the availability of substrates and wafers, may negatively impact our second quarter results.

 

Our net sales for the three months ended March 31, 2011, were $665.0 million compared to $645.7 million for the three months ended March 31, 2010. The growth was driven primarily by demand for products in our communications end market, with notable strength in flip chip packages. Our unit demand decreased to 2.1 billion units during the three months ended March 31, 2011, compared to 2.5 billion units during the three months ended March 31, 2010. The decrease in units is primarily attributable to a shift in our product mix, with sales growth attributed to chip scale packaging solutions with a higher average sales price per unit, while our other package types declined. In addition, net sales in the three months ended March 31, 2011, were reduced by approximately $6 million due to the impact of the Japan earthquake.

 

Gross margin of 19.1% for the three months ended March 31, 2011, was down from 21.2% for the three months ended March 31, 2010. Gross margin in the three months ended March 31, 2011, decreased from the prior year period due to several factors, including decreased utilization of our packaging assets, the increased cost of gold used in many of our wirebond packages and the negative impact of foreign currency exchange rate movements. Also affecting gross margin in the three months ended March 31, 2011, were increased labor and other manufacturing costs.

 

Our net income for the three months ended March 31, 2011, was $25.1 million, or $0.10 per diluted share, compared with net income of $44.3 million, or $0.18 per diluted share, for the three months ended March 31, 2010. The decrease is primarily attributable to the decrease in gross profit and increases in selling, general and administrative expenses and income tax expense during the three months ended March 31, 2011. Partially offsetting these increased expenses was a decline in interest expense.

 

Our capital additions totaled $105.0 million for the three months ended March 31, 2011, compared to $72.7 million for the three months ended March 31, 2010. Our spending was focused primarily on new capacity for flip chip assembly and test services in support of communications. We expect our capital additions for the full year 2011 will be approximately $450 million.

 

Cash provided by operating activities was $120.2 million for the three months ended March 31, 2011, as compared with cash provided by operating activities of $103.7 million for the three months ended March 31, 2010. We experienced positive free cash flow of $6.3 million for the three months ended March 31, 2011, which decreased $30.3 million from the prior year comparable period. The decrease in free cash flow was primarily due to increased purchases of property, plant and equipment which were partially offset by increased collections on accounts receivable. We define free cash flow as net cash provided by operating activities less investing activities related to the acquisition of property, plant and equipment. Free cash flow is not defined by U.S. generally accepted accounting principles (“U.S. GAAP”) and a reconciliation of free cash flow to net cash provided by operating activities is set forth under the caption “Cash Flows” below. Please see “Liquidity and Capital Resources” and “Cash Flows” below for a further analysis of the change in our balance sheet and cash flows during the first three months of 2011.

 

We believe our financial position and liquidity are sufficient to fund our operating activities for at least the next twelve months. At March 31, 2011, our cash and cash equivalents totaled approximately $393.0 million with an aggregate of $99.1 million of debt due through the end of 2011.

Results of Operations

 

The following table sets forth certain operating data as a percentage of net sales for the periods indicated:

 

 

Net Sales

 

 

Net Sales.  Net sales in the three months ended March 31, 2011, increased compared to the three months ended March 31, 2010. Communications continued to drive our sales growth in the current period, supported by notable strength in flip chip packages. The strength in this area was partially offset by a decrease in sales for consumer electronics and networking. In addition, net sales in the three months ended March 31, 2011, were reduced by approximately $6 million due to the impact of the Japan earthquake on our facility in Kitakami, Japan.

 

Packaging Net Sales.  Packaging net sales in the three months ended March 31, 2011, increased compared to the three months ended March 31, 2010. Packaging unit volume decreased 0.4 billion units in the three months ended March 31, 2011 to 2.1 billion units, compared to 2.5 billion units in the three months ended March 31, 2010. Sales in absolute dollars increased despite a decrease in units. This is primarily attributable to growth in chip scale packaging solutions with higher average sales prices per unit, while our other package types declined.

 

Test Net Sales.  Test net sales in the three months ended March 31, 2011, increased compared to the three months ended March 31, 2010. The increase is primarily attributable to a shift in the mix of test services provided. Wafer probe, which has a higher average sales price per unit, increased in the current period. This increase was partially offset by a decrease in striptest, with lower average sales prices per unit.

 

Cost of Sales

 

 

Our cost of sales consists principally of materials, labor, depreciation and manufacturing overhead. Since a substantial portion of the costs at our factories is fixed, relatively modest increases or decreases in capacity utilization rates can have a significant effect on our gross margin.

 

Material costs as a percentage of net sales increased to 42.8% for the three months ended March 31, 2011, from 41.9% for the three months ended March 31, 2010. Material costs in absolute dollars also increased in the three months ended March 31, 2011. The increase is primarily due to a higher mix of flip chip packages with higher material content as a percentage of net sales and the increased cost of gold used in many of our wirebond packages.

Labor costs as a percentage of net sales increased to 14.2% for the three months ended March 31, 2011, from 13.2% for the three months ended March 31, 2010. Labor costs in absolute dollars also increased in the three months ended March 31, 2011. Labor costs were negatively impacted by foreign currency exchange rate movements in the three months ended March 31, 2011, compared to the three months ended March 31, 2010, as substantially all of our manufacturing operations workforce is paid in local currencies. Also contributing to the increase was higher headcount during the current period, as we increased our headcount in support of increased customer demand.

 

Other manufacturing costs as a percentage of net sales increased to 23.9% for the three months ended March 31, 2011, from 23.7% for the three months ended March 31, 2010. Other manufacturing costs in absolute dollars also increased in the three months ended March 31, 2011. The increase is primarily attributable to increased depreciation as a result of the increase in our property, plant and equipment in the current period due to capital spending during 2010. Other manufacturing costs were also negatively impacted by foreign currency exchange rate movements in the three months ended March 31, 2011, compared to the three months ended March 31, 2010.

 

Gross Profit

 

 

Gross profit and gross margin for the three months ended March 31, 2011, decreased compared to the three months ended March 31, 2010. While net sales increased, our cost of sales was negatively impacted by several factors which decreased gross profit and gross margin. Utilization of our packaging assets in the three months ended March 31, 2011, was lower than the three months ended March 31, 2010; however, we controlled costs across the company to minimize the impact of decreased utilization on our gross margin. Material costs were impacted by the increased cost of gold used in many of our wirebond packages. Headcount was higher in the current period compared to the prior period, resulting in increased labor costs. Other manufacturing costs were impacted by increased depreciation expense resulting from increased property, plant and equipment. In addition, gross profit and gross margin were negatively impacted by foreign currency exchange rate movements in the three months ended March 31, 2011.

 

 

Packaging Gross Profit.  Gross profit and gross margin for packaging for the three months ended March 31, 2011, decreased compared to the three months ended March 31, 2010. The decrease in gross profit was primarily attributable to lower utilization, the increased cost of gold used in many of our wirebond packages, the mix of packaging services provided, and increased labor costs related to higher headcount in the current period. To minimize the impact of decreased utilization on our gross margin, we controlled costs across the company.

 

 

Test Gross Profit.  Gross profit and gross margin for test for the three months ended March 31, 2011, remained consistent with the three months ended March 31, 2010. The test services with a higher than average sales price per unit that contributed to the increase in test net sales also have a higher cost per unit, which offset the increase in sales.

Selling, General and Administrative Expenses

 

 

Selling, general and administrative expenses for the three months ended March 31, 2011, increased compared to the three months ended March 31, 2010. The increase was primarily driven by increased employee compensation and benefit costs, including share-based compensation, as well as an increase in depreciation expense associated with the implementation of our global enterprise resource planning information system and increased professional fees.

 

Research and Development

 

 

Research and development activities are currently focused on developing new package interconnect solutions and test services and improving the efficiency and capabilities of our existing production processes. Our key areas for research and development initiatives are focused on 3D packaging, advanced flip chip packaging, advanced micro-electromechanical system packaging and testing, fine pitch copper pillar bumping and packaging, laminate and leadframe packaging, Through Mold Via and Through Silicon Via technologies, wafer level fan out technology, wafer level processing, and manufacturing cost reduction initiatives. Research and development expenses for the three months ended March 31, 2011, remained consistent with the three months ended March 31, 2010, both in dollars and as a percentage of net sales of 1.8%.

 

Other Expense, Net

 

 

Other expense, net for the three months ended March 31, 2011, decreased compared to the three months ended March 31, 2010. This decrease was driven by a $4.8 million reduction in interest expense, including related party interest expense, during the current period resulting from reduced debt levels in 2011, debt refinanced with lower interest rate instruments during the second quarter of 2010, and the conversion in January 2011 of our 6.25% Convertible Notes due 2013. Partially offsetting the decrease is a $0.8 million increase in foreign currency loss in the current period from the remeasurement of certain subsidiaries’ balance sheet items.

 

Income Tax Expense (Benefit)

 

 

Generally, our effective tax rate is substantially below the U.S. federal tax rate of 35% because we have experienced taxable losses in the U.S. and our income is taxed in foreign jurisdictions where we benefit from tax holidays or tax rates lower than the U.S. statutory rate. Income tax expense for the three months ended March 31, 2011, is attributable to income tax on profits earned in certain foreign jurisdictions, foreign withholding taxes, and deferred taxes on our investment in J-Devices. The tax benefit for the three months ended March 31, 2010, is attributable to $1.1 million of tax expense in certain foreign jurisdictions, foreign withholding taxes, and minimum taxes offset by reductions in unrecognized tax benefits.

During 2011, our subsidiaries in China, Korea, the Philippines and Taiwan operated under tax holidays which will expire in whole or in part at various dates through 2015. We expect our effective tax rate to increase as the tax holidays expire so that the income earned in these jurisdictions will be subject to higher statutory income tax rates.

 

At March 31, 2011, we had U.S. net operating loss carryforwards totaling $388.6 million which expire at various times through 2030. Additionally, at March 31, 2011, we had $67.6 million of non-U.S. net operating loss carryforwards, which expire at various times through 2018. We maintain a valuation allowance on all of our U.S. net deferred tax assets, including our net operating loss carryforwards, and on deferred tax assets in certain foreign jurisdictions. We will release such valuation allowances as the related tax benefits are realized on our tax returns or when sufficient positive evidence exists to conclude that it is more likely than not that the deferred tax assets will be realized.

 

Liquidity and Capital Resources

 

We assess our liquidity based on our current expectations regarding sales, operating expenses, capital spending and debt service requirements. Based on this assessment, we believe that our cash flow from operating activities together with existing cash and cash equivalents and availability under our revolving credit facility will be sufficient to fund our working capital, capital expenditure and debt service requirements for at least the next twelve months. Thereafter, our liquidity will continue to be affected by, among other things, volatility in the global economy and credit markets, the performance of our business, our capital expenditure levels and our ability to either repay debt out of operating cash flow or refinance debt at or prior to maturity with the proceeds of debt or equity offerings. There is no assurance that we will generate the necessary net income or operating cash flows to meet the funding needs of our business beyond the next twelve months due to a variety of factors, including the cyclical nature of the semiconductor industry and the other factors discussed in Part II, Item 1A “Risk Factors” of this Quarterly Report.

 

Our primary source of cash and the source of funds for our operations are cash flows from our operations, current cash and cash equivalents, borrowings under available debt facilities, or proceeds from any additional debt or equity financings. As of March 31, 2011, we had cash and cash equivalents of $393.0 million and availability of $99.6 million under our $100.0 million first lien senior secured revolving credit facility. We expect cash flows to be used in the operation and expansion of our business, making capital expenditures, paying principal and interest on our debt and for other corporate purposes.

 

We sponsor an accrued severance plan for our Korean subsidiary which under existing tax laws in Korea, limits our ability to currently deduct related severance expenses accrued under that plan. The purpose of these limitations is to encourage companies to migrate to a defined contribution or defined benefit plan; however, if we retain our existing severance plan, we will be required to pay increased taxes. If we decide to adopt a new plan, we would be required to significantly fund the existing liability. Our Korean severance liability was $94.7 million as of March 31, 2011.

 

We operate in a capital intensive industry. Servicing our current and future customers requires that we incur significant operating expenses and make significant capital expenditures, which are generally made in advance of the related revenues and without any firm customer commitments.

 

We have debt of $1,243.5 million outstanding at March 31, 2011, of which $132.6 million is current. This includes $250.0 million of our 6.0% Convertible Notes due 2014, which we expect will be converted into equity rather than being paid at maturity. At March 31, 2011, we have an aggregate of $99.1 million of debt coming due through the end of 2011, and $97.2 million of debt due in 2012.