XNAS:AMKR Amkor Technology Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
Form 10-Q

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended March 31, 2012
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from          to          

Commission File Number 000-29472
AMKOR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
 
 
 
23-1722724
(I.R.S. Employer
Identification Number)
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):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
(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 27, 2012 was 168,287,882.
 




QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2012

TABLE OF CONTENTS






-1-


PART I. FINANCIAL INFORMATION


Item 1.        Financial Statements

AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands, except per share data)
Net sales
$
655,010

 
$
664,950

Cost of sales
550,029

 
538,264

Gross profit
104,981

 
126,686

Operating expenses:
 

 
 

Selling, general and administrative
57,255

 
64,558

Research and development
13,425

 
12,129

Total operating expenses
70,680

 
76,687

Operating income
34,301

 
49,999

Other expense (income):
 

 
 

Interest expense
18,586

 
18,789

Interest expense, related party
3,492

 
2,580

Interest income
(889
)
 
(587
)
Foreign currency loss
790

 
1,731

Equity in earnings of unconsolidated affiliate
(1,988
)
 
(1,518
)
Other income, net
(634
)
 
(144
)
Total other expense, net
19,357

 
20,851

Income before income taxes
14,944

 
29,148

Income tax expense
3,362

 
3,382

Net income
11,582

 
25,766

Net loss (income) attributable to noncontrolling interests
192

 
(663
)
Net income attributable to Amkor
$
11,774

 
$
25,103

Net income attributable to Amkor per common share:
 

 
 

Basic
$
0.07

 
$
0.13

Diluted
$
0.06

 
$
0.10

Shares used in computing per common share amounts:
 

 
 

Basic
167,866

 
194,067

Diluted
250,688

 
277,585


The accompanying notes are an integral part of these statements.


-2-


AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands)
Net income attributable to Amkor
$
11,774

 
$
25,103

Other comprehensive income, net of tax:
 
 
 
Adjustments to unrealized components of defined benefit pension plans, net of tax of ($35) and $13
1,347

 
103

Cumulative translation adjustment, net of tax of $915 and $0
(2,769
)
 
(567
)
Total other comprehensive loss
(1,422
)
 
(464
)
Comprehensive income attributable to Amkor
$
10,352

 
$
24,639


The accompanying notes are an integral part of these statements.


-3-


AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)


 
March 31,
2012
 
December 31,
2011
 
(In thousands, except per share data)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
381,132

 
$
434,631

Restricted cash
2,680

 
2,680

Accounts receivable:
 

 
 

Trade, net of allowances
345,764

 
298,543

Other
19,746

 
27,197

Inventories
205,400

 
198,427

Other current assets
37,683

 
35,352

Total current assets
992,405

 
996,830

Property, plant and equipment, net
1,691,540

 
1,656,214

Intangibles, net
7,260

 
8,382

Investments
36,567

 
36,707

Restricted cash
2,279

 
4,001

Other assets
74,161

 
70,913

Total assets
$
2,804,212

 
$
2,773,047

LIABILITIES AND EQUITY
Current liabilities:
 

 
 

Short-term borrowings and current portion of long-term debt
$
53,027

 
$
59,395

Trade accounts payable
424,163

 
424,504

Accrued expenses
173,572

 
158,287

Total current liabilities
650,762

 
642,186

Long-term debt
1,076,640

 
1,062,256

Long-term debt, related party
225,000

 
225,000

Pension and severance obligations
125,413

 
129,096

Other non-current liabilities
19,003

 
13,288

Total liabilities
2,096,818

 
2,071,826

Commitments and contingencies (see Note 16)


 


Equity:
 

 
 

Amkor stockholders’ equity:
 

 
 

Preferred stock, $0.001 par value, 10,000 shares authorized, designated Series A, none issued

 

Common stock, $0.001 par value, 500,000 shares authorized, 197,517 and 197,359 shares issued, and 167,760 and 168,628 shares outstanding, in 2012 and 2011, respectively
198

 
197

Additional paid-in capital
1,612,112

 
1,611,242

Accumulated deficit
(786,688
)
 
(798,462
)
Accumulated other comprehensive income
9,427

 
10,849

Treasury stock, at cost, 29,757 and 28,731 shares in 2012 and 2011, respectively
(135,418
)
 
(130,560
)
Total Amkor stockholders’ equity:
699,631

 
693,266

Noncontrolling interests in subsidiaries
7,763

 
7,955

Total equity
707,394

 
701,221

Total liabilities and equity
$
2,804,212

 
$
2,773,047

The accompanying notes are an integral part of these statements.


-4-


AMKOR TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
11,582

 
$
25,766

Depreciation and amortization
88,446

 
83,442

Other operating activities and non-cash items
(1,772
)
 
4,896

Changes in assets and liabilities
(42,150
)
 
6,123

Net cash provided by operating activities
56,106

 
120,227

Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(121,087
)
 
(113,881
)
Proceeds from the sale of property, plant and equipment
621

 
278

Financing lease payment from unconsolidated affiliate
7,914

 
3,020

Other investing activities
1,683

 
(1,057
)
Net cash used in investing activities
(110,869
)
 
(111,640
)
Cash flows from financing activities:
 

 
 

Borrowings under short-term debt
20,000

 
15,000

Payments of short-term debt
(15,000
)
 
(15,000
)
Proceeds from issuance of long-term debt
158,742

 

Payments of long-term debt
(156,357
)
 
(20,413
)
Payments for repurchase of common stock
(4,505
)
 

Proceeds from the issuance of stock through share-based compensation plans
69

 
627

Payments of tax withholding for restricted shares
(353
)
 
(696
)
Net cash provided by (used in) financing activities
2,596

 
(20,482
)
Effect of exchange rate fluctuations on cash and cash equivalents
(1,332
)
 
(152
)
Net decrease in cash and cash equivalents
(53,499
)
 
(12,047
)
Cash and cash equivalents, beginning of period
434,631

 
404,998

Cash and cash equivalents, end of period
$
381,132

 
$
392,951

Non cash investing and financing activities:
 

 
 

Common stock issuance for conversion of related party 6.25% convertible subordinated notes
$

 
$
100,000


The accompanying notes are an integral part of these statements.


-5-


AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1.    Interim Financial Statements

Basis of Presentation. The Consolidated Financial Statements and related disclosures as of March 31, 2012 and for the three months ended March 31, 2012 and 2011, are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The December 31, 2011, 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, 2011, filed on Form 10-K with the SEC on February 23, 2012. The results of operations for the three months ended March 31, 2012, 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.

2.    New Accounting Standards

Recently Adopted Standards

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04, Fair Value Measurement (Topic 820). This ASU updates certain requirements for measuring fair value and disclosure regarding fair value measurement. This ASU is effective for reporting periods beginning after December 15, 2011. Early adoption is not permitted. Our adoption of ASU 2011-04 on January 1, 2012, impacted our financial statement disclosure.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220). This ASU eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This ASU is effective for reporting periods beginning after December 15, 2011. Early adoption is permitted and full retrospective application is required. Our adoption of ASU 2011-05 on January 1, 2012, impacted our financial statement presentation.

3.    Share-Based Compensation Plans

The following table presents share-based compensation expense attributable to stock options and restricted shares. There is no deferred income tax benefit.
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands)
Stock options
$
390

 
$
579

Restricted shares
412

 
1,442

Total share-based compensation expense
$
802

 
$
2,021



-6-


AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)



The following table presents share-based compensation expense as included in the Consolidated Statements of Income:
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands)
Cost of sales
$
12

 
$
1

Selling, general and administrative
687

 
1,757

Research and development
103

 
263

Total share-based compensation expense
$
802

 
$
2,021


Stock Options

The following table summarizes our stock option activity for the three months ended March 31, 2012:
 
Number of
Shares
(In thousands)
 
Weighted
Average
Exercise Price
Per Share
 
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at December 31, 2011
6,052

 
$
9.97

 
 

 
 

Granted

 

 
 

 
 

Exercised
(18
)
 
3.93

 
 

 
 

Forfeited or expired
(634
)
 
12.59

 
 

 
 

Outstanding at March 31, 2012
5,400

 
$
9.68

 
2.98

 
$
1,185

Fully vested and expected to vest at March 31, 2012
5,384

 
$
9.69

 
2.97

 
$
1,185

Exercisable at March 31, 2012
5,073

 
$
9.83

 
2.70

 
$
1,130


There were no options granted during the three months ended March 31, 2012 and 2011. The intrinsic value of options exercised for the three months ended March 31, 2012 was insignificant and for the three months ended March 31, 2011, were $0.3 million. For the three months ended March 31, 2012 and 2011, cash received for stock option exercises was $0.1 million and $0.6 million, respectively. 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 $1.0 million as of March 31, 2012, which is expected to be recognized over a weighted-average period of 1.2 years beginning April 1, 2012. 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, 2012:
 
Number of
Shares
(In thousands)
 
Weighted
Average
Grant-Date
Fair Value
(Per share)
Nonvested at December 31, 2011
693

 
$
7.33

Awards granted

 

Awards vested
(140
)
 
7.65

Awards forfeited
(9
)
 
7.20

Nonvested at March 31, 2012
544

 
$
7.25


The fair value of shares vested during the three months ended March 31, 2012 was $1.0 million.


-7-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)



The unrecognized compensation cost, including a forfeiture estimate, was $3.3 million as of March 31, 2012, which is expected to be recognized over a weighted average period of approximately 2.4 years beginning April 1, 2012. 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.

4.    Income Taxes

Our income tax expense of $3.4 million for the three months ended March 31, 2012, primarily reflects $2.0 million of expense related to income taxes at certain of our foreign operations, $0.5 million of foreign withholding taxes and $0.9 million of deferred taxes on undistributed earnings from our investment in J-Devices Corporation ("J-Devices"). Our income tax expense reflects income taxed in foreign jurisdictions where we benefit from tax holidays. At March 31, 2012, we had U.S. net operating loss carryforwards totaling $375.5 million, which expire at various times through 2031. Additionally, at March 31, 2012, we had $69.7 million of non-U.S. net operating loss carryforwards, the majority of which will expire at various times through 2022.

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 of $8.0 million as of March 31, 2012, did not change significantly since December 31, 2011. However, in April 2012 we received formal notification that a foreign tax authority accepted our ruling request related to revenue attribution. As a result, we will recognize a tax benefit of $4.0 million in the second quarter of 2012, which will have a favorable impact on our effective tax rate for that quarter and for 2012. Substantially all of the remaining balance of our unrecognized tax benefits at March 31, 2012, would also reduce our effective tax rate, if recognized. Our unrecognized tax benefits are subject to change as examinations of tax years are completed. Tax return examinations involve uncertainties, and there can be no assurances that the outcome of examinations will be favorable.



-8-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


5.    Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income 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 is reduced for 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 EPS pursuant to the two-class method. 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 EPS.

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:
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands, except per share data)
Net income attributable to Amkor
$
11,774

 
$
25,103

Income allocated to participating securities
(38
)
 
(116
)
Net income available to Amkor common stockholders
11,736

 
24,987

Adjustment for dilutive securities on net income:
 

 
 

Net income allocated to participating securities in basic calculation
38

 
116

Interest on 6.0% convertible notes due 2014, net of tax
4,026

 
4,026

Net income attributable to Amkor — diluted
$
15,800

 
$
29,129

 
 
 
 
Weighted average shares outstanding — basic
167,866

 
194,067

Effect of dilutive securities:
 

 
 

Stock options
164

 
417

Unvested restricted shares

 
443

6.0% convertible notes due 2014
82,658

 
82,658

Weighted average shares outstanding — diluted
250,688

 
277,585

Net income attributable to Amkor per common share:
 

 
 

Basic
$
0.07

 
$
0.13

Diluted
0.06

 
0.10


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:
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands)
Stock options and restricted share awards
4,408

 
5,531

2.5% convertible notes due 2011

 
2,918

6.25% convertible notes due 2013

 
2,819

Total potentially dilutive shares
4,408

 
11,268




-9-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


6.    Equity and Comprehensive Income

The following table reflects the changes in equity attributable to both Amkor and the noncontrolling interests:
 
Attributable
to Amkor
 
Attributable to
Noncontrolling
Interests
 
Total
 
(In thousands)
Equity at December 31, 2011
$
693,266

 
$
7,955

 
$
701,221

Net income
11,774

 
(192
)
 
11,582

Other comprehensive loss
(1,422
)
 

 
(1,422
)
Treasury stock acquired through surrender of shares for tax withholding
(353
)
 

 
(353
)
Issuance of stock through employee share-based compensation plans
69

 

 
69

Share-based compensation expense
802

 

 
802

Repurchase of common stock
(4,505
)
 

 
(4,505
)
Equity at March 31, 2012
$
699,631

 
$
7,763

 
$
707,394


 
Attributable
to Amkor
 
Attributable to
Noncontrolling
Interests
 
Total
 
(In thousands)
Equity at December 31, 2010
$
630,013

 
$
6,668

 
$
636,681

Net income
25,103

 
663

 
25,766

Other comprehensive loss
(464
)
 

 
(464
)
Treasury stock acquired through surrender of shares for tax withholding
(696
)
 

 
(696
)
Issuance of stock through employee share-based compensation plans
627

 

 
627

Share-based compensation expense
2,021

 

 
2,021

Conversion of debt to common stock
100,497

 

 
100,497

Equity at March 31, 2011
$
757,101

 
$
7,331

 
$
764,432


7.    Inventories

Inventories consist of the following:
 
March 31,
2012
 
December 31, 2011
 
(In thousands)
Raw materials and purchased components
$
155,628

 
$
158,656

Work-in-process
49,772

 
39,771

Total inventories
$
205,400

 
$
198,427




-10-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


8.    Property, Plant and Equipment

Property, plant and equipment consist of the following:
 
March 31,
2012
 
December 31, 2011
 
(In thousands)
Land
$
106,338

 
$
106,338

Land use rights
19,945

 
19,945

Buildings and improvements
890,981

 
871,970

Machinery and equipment
3,086,200

 
3,016,430

Software and computer equipment
187,508

 
186,378

Furniture, fixtures and other equipment
19,454

 
19,736

Construction in progress
18,394

 
26,818

 
4,328,820

 
4,247,615

Less accumulated depreciation and amortization
(2,637,280
)
 
(2,591,401
)
Total property, plant and equipment, net
$
1,691,540

 
$
1,656,214


The following table presents depreciation expense as included in the Consolidated Statements of Income:
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands)
Cost of sales
$
80,097

 
$
75,254

Selling, general and administrative
5,107

 
5,626

Research and development
2,080

 
1,441

Total depreciation expense
$
87,284

 
$
82,321


The following table reconciles our activity related to property, plant and equipment additions as reflected on the Consolidated Balance Sheets to purchases of property, plant and equipment as presented on the Condensed Consolidated Statements of Cash Flows:
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands)
Property, plant and equipment additions
$
123,935

 
$
104,993

Net change in related accounts payable and deposits
(2,848
)
 
8,888

Purchases of property, plant and equipment
$
121,087

 
$
113,881




-11-


AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


9.    Intangible Assets

Intangibles as of March 31, 2012, consist of the following:
 
Gross
 
Accumulated
Amortization
 
Net
 
(In thousands)
Patents and technology rights
$
27,306

 
$
(23,953
)
 
$
3,353

Customer relationships
13,625

 
(9,718
)
 
3,907

Total intangibles
$
40,931

 
$
(33,671
)
 
$
7,260


Intangibles as of December 31, 2011, consist of the following:
 
Gross
 
Accumulated
Amortization
 
Net
 
(In thousands)
Patents and technology rights
$
29,774

 
$
(26,158
)
 
$
3,616

Customer relationships
13,625

 
(8,859
)
 
4,766

Total intangibles
$
43,399

 
$
(35,017
)
 
$
8,382


Amortization of identifiable intangible assets for the three months ended March 31, 2012 and 2011 was $1.2 million and $1.3 million, respectively. Based on the amortizing assets recognized in our balance sheet at March 31, 2012, amortization for each of the next five years is estimated as follows:
 
(In thousands)
2012 remaining
$
2,567

2013
3,368

2014
656

2015
354

2016
125

Thereafter
190

Total amortization
$
7,260


10.    Investments

Investments consist of the following:
 
March 31,
2012
 
December 31,
2011
 
Carrying
Value
(In thousands)
 
Ownership
Percentage
 
Carrying
Value
(In thousands)
 
Ownership
Percentage
Investment in unconsolidated affiliate
$
36,567

 
30.0
%
 
$
36,707

 
30.0
%

J-Devices Corporation

During 2009, Amkor and Toshiba Corporation (“Toshiba”) invested in Nakaya Microdevices Corporation (“NMD”) and formed a joint venture to provide semiconductor packaging and test services in Japan. As a result of the transaction, NMD is now owned 60% by the former 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 under the equity method as an unconsolidated affiliate.


-12-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)



Our investment includes our 30% equity interest and options to acquire additional equity interests. The options, exercisable at our discretion, permit us to increase our percentage ownership of J-Devices on the anniversary date up to 60% in 2012, 66% in 2014 and 80% in 2015. In 2014 and beyond, Toshiba has the option, at its discretion, to sell shares it owns to us if we have exercised any of our options. After we own 80% or more shares, the former shareholders of NMD have a put option which allows them to sell their shares to us. The exercise price for all options is payable in cash and is to be determined using a formula based primarily upon the financial position of J-Devices at the time of exercise.

Under the equity method of accounting, we recognize our 30% proportionate share of J-Devices' net income or loss, which is after J-Devices' income taxes in Japan, during each accounting period as a change in our investment in unconsolidated affiliate. For the three months ended March 31, 2012 and 2011, our equity in earnings in J-Devices, net of J-Devices' income taxes in Japan, was $2.0 million and $1.5 million, respectively.

In addition, as a change in our investment in unconsolidated affiliate, 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 as well as other adjustments required by the equity method.

In conjunction with entering into the joint venture, one of our existing subsidiaries in Japan purchased packaging and test equipment from Toshiba and leased the equipment to J-Devices under an agreement which is accounted for as a direct financing lease. For the three months ended March 31, 2012 and 2011, we recognized interest income of $0.1 million and $0.2 million, respectively. Our lease receivable, net was $16.4 million and $20.2 million as of March 31, 2012, and December 31, 2011, respectively, and was recorded as a component of other accounts receivable.

11.    Accrued Expenses

Accrued expenses consist of the following:
 
March 31,
2012
 
December 31,
2011
 
(In thousands)
Payroll and benefits
$
56,657

 
$
59,928

Customer advances and deferred revenue
40,877

 
34,672

Accrued interest
28,271

 
11,941

Income taxes payable
7,483

 
4,446

Accrued severance plan obligations (Note 13)
7,224

 
7,476

Other accrued expenses
33,060

 
39,824

Total accrued expenses
$
173,572

 
$
158,287





-13-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


12.    Debt

Following is a summary of short-term borrowings and long-term debt:
 
March 31,
2012
 
December 31,
2011
 
(In thousands)
Debt of Amkor Technology, Inc.:
 

 
 

Senior secured credit facilities:
 

 
 

$100 million revolving credit facility, LIBOR plus 2.25%-2.75%, due April 2015
$

 
$

Senior notes:
 

 
 

7.375% Senior notes, due May 2018
345,000

 
345,000

6.625% Senior notes, due June 2021, $75 million related party
400,000

 
400,000

Senior subordinated notes:
 

 
 

6.0% Convertible senior subordinated notes, due April 2014, $150 million related party
250,000

 
250,000

Debt of subsidiaries:
 

 
 

Amkor Technology Korea, Inc.:
 
 
 
₩50 billion revolving credit facility, CD base interest rate plus 2.20%, due June 2012

 

Term loan, bank funding rate-linked base rate plus 1.99%, due May 2013 (1)

 
103,000

Term loan, bank base rate plus 0.5%, due April 2014
107,140

 
107,140

Term loan, bank base rate plus 1.06% or 1.16%, due July 2014
50,000

 
50,000

Term loan, foreign currency funding-linked base rate plus 2.30%, due March 2015 (1)
100,000

 

Term loan, bank funding rate-linked base rate plus 1.7%, due March 2016
21,214

 
12,512

Other:
 
 
 
¥1 billion revolving credit facility, TIBOR plus 0.6%, due September 2012 (Japan)

 

Term loan, TIBOR plus 0.8%, due September 2012 (Japan)
6,273

 
9,495

Term loan, LIBOR plus 2.8%, due April 2012 and January 2013 (China)
25,000

 
20,000

Term loan, TAIFX plus 2.0%, due April 2015 (Taiwan) (2)
50,040

 
49,504

 
1,354,667

 
1,346,651

Less: Short-term borrowings and current portion of long-term debt
(53,027
)
 
(59,395
)
Long-term debt (including related party)
$
1,301,640

 
$
1,287,256

(1)
In March 2012, Amkor Technology Korea, Inc., a Korean subsidiary (“ATK”) repaid the remaining outstanding balance due May 2013 by entering into a $100.0 million term loan with the same Korean bank, which is due upon maturity in March 2015. The term loan bears interest at a foreign currency funding-linked base rate plus 2.30% (5.47% as of March 31, 2012) to be paid monthly. The term loan is collateralized by substantially all the land, factories and equipment located at our ATK facilities.
(2)
In January 2012, Amkor Technology Taiwan Ltd, a Taiwanese subsidiary, converted the existing NT$1.5 billion term loan from a Taiwanese to a U.S. dollar denominated term loan (approximately $50.0 million). The term loan bears interest at the Taipei Foreign Exchange ("TAIFX") six month U.S. dollar rate plus 2.0% (3.35% as of March 31, 2012). All other terms and conditions remain the same.


-14-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


The debt of Amkor Technology, Inc. is structurally subordinated in right of payment to all existing and future debt and other liabilities of our subsidiaries. Our collateralized 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, 2012.

13.    Pension and Severance Plans

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:
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands)
Components of net periodic pension cost and total pension expense:
 

 
 

Service cost
$
1,701

 
$
1,628

Interest cost
821

 
909

Expected return on plan assets
(783
)
 
(875
)
Amortization of transition obligation
2

 
2

Amortization of prior service cost
70

 
78

Recognized actuarial loss
51

 
22

Net periodic pension cost
1,862

 
1,764

Curtailment loss
1,089

 

Settlement gain
(100
)
 

Total pension expense
$
2,851

 
$
1,764


During the three months ended March 31, 2012, we recognized net curtailment and settlement losses of $1.0 million resulting from the remeasurement of our defined benefit plan in Japan due to reductions in workforce (See Note 18).

For the three months ended March 31, 2012, we contributed $0.1 million to the pension plans. We expect to contribute approximately $3.2 million to the pension plans during the remainder of 2012. For the three months ended March 31, 2011, our contributions to the pension plans were not significant.

Korean Severance Plan

Our Korean subsidiary participates in an accrued severance plan that covers employees and directors with at least one year of service. To the extent eligible employees are terminated, our Korean subsidiary would be required to make lump-sum severance payments on behalf of these eligible employees based on their length of service, seniority and rate of pay 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.



-15-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


The provision recorded for severance benefits for the three months ended March 31, 2012 and 2011, was $0.4 million and $5.7 million, respectively. The balance of our Korean severance obligation consists of the following:
 
March 31,
2012
 
December 31,
2011
 
(In thousands)
Current (Accrued expenses)
$
7,224

 
$
7,476

Non-current (Pension and severance obligations)
100,135

 
99,000

Total Korean severance obligation
$
107,359

 
$
106,476


14.    Treasury Stock

Stock Repurchase Program

Our Board of Directors previously authorized the repurchase of up to $300.0 million of our common stock, $150.0 million in August 2011 and $150.0 million in February 2012, exclusive of any fees, commissions or other expenses. The purchase of stock under the program may be made in the open market or through privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, the cash needs and investment opportunities for the business, price, applicable legal requirements and other factors. Our stock repurchase program may be suspended or discontinued at any time.

During the three months ended March 31, 2012, we purchased 1.0 million shares of common stock for an aggregate purchase price of $4.5 million, net of an insignificant amount of commissions, for an average price of $4.62. Since inception of the program, we have purchased a total of 29.5 million shares at an aggregate purchase price of $133.4 million, net of $0.6 million of commissions. At March 31, 2012, approximately $166.6 million was available to repurchase common stock pursuant to the stock repurchase program.

Shares for Tax Withholding

During each of the three months ended March 31, 2012 and 2011, we withheld 0.1 million shares from restricted shares that vested during the respective period to satisfy tax withholding obligations. Minimum tax withholding obligations that arose on the vesting of restricted shares were $0.4 million and $0.7 million for the three months ended March 31, 2012 and 2011, respectively.

15.    Fair Value Measurements

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.

Our assets and liabilities recorded at fair value on a recurring basis include cash and cash equivalents and current restricted cash. Cash and cash equivalents and current 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. We also measure certain assets and liabilities, including property,


-16-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


plant and equipment, intangible assets and an equity investment, at fair value on a nonrecurring basis. For the three months ended March 31, 2012, such measurements included the consideration of third party valuation reports based on a combination of market and cost approach valuation techniques. The valuation reports contained various inputs including semiconductor industry data, dealer listings, replacement costs, price lists, cost indices and general information regarding the assets being evaluated. Nonrecurring fair value measurements related to property, plant and equipment impairments reflect the fair value of the assets at the dates the impairments were taken during the period. Our fair value measurements consist of the following:
 
For the Three Months Ended March 31,
2012
 
March 31,
2012
 
For the Three Months Ended March 31,
2011
 
December 31,
2011
 
Gains
(Losses)
 
Fair
Value
 
Gains
(Losses)
 
Fair
Value
 
(In thousands)
Recurring fair value measurements:
 
 
 
 
 
 
 
Cash equivalent money market funds (Level 1)
 
 
$
173,251

 
 
 
$
165,540

Restricted cash money market funds (Level 1)
 
 
2,680

 
 
 
2,680

 
 
 
 
 
 
 
 
Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Long-lived assets held for use or disposal (Level 3)
$
(235
)
 
$
434

 
$
(1,014
)
 
 

We measure the fair value of our debt on a quarterly basis for disclosure purposes. The following table presents the fair value of financial instruments that are not recorded at fair value on a recurring basis:
 
March 31, 2012
 
December 31, 2011
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
(In thousands)
Senior notes (Level 1)
$
792,600

 
$
745,000

 
$
737,049

 
$
745,000

Convertible senior subordinated notes (Level 1)
533,750

 
250,000

 
405,625

 
250,000

Subsidiary term loans (Level 2)
368,582

 
359,667

 
352,679

 
351,651

Total debt
$
1,694,932

 
$
1,354,667

 
$
1,495,353

 
$
1,346,651


The estimated fair value of the debt is based primarily on quoted market prices reported on the balance sheet date 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.

16.    Commitments and Contingencies

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, 2012, we have $0.3 million of standby letters of credit outstanding and have an additional $24.7 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.



-17-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


Legal Proceedings

We are involved in claims and legal proceedings and 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. We have not recorded any accrual for contingent liabilities associated with the legal proceedings described below, except where noted otherwise, based on our belief that liabilities, while possible, are not probable. Further, except where noted otherwise, any possible range of loss cannot be reasonably estimated at this time.

Arbitration Proceedings with Tessera, Inc.

On March 2, 2006, Tessera, Inc. (“Tessera”) 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.

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.

Following Tessera's favorable decision in the U.S International Trade Commission (the “ITC”) in May 2009 against some of our customers, Tessera began making repeated statements to customers and others claiming that we were in breach of the royalty provisions of the License Agreement. We informed Tessera that we believed we were 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. (the “Arbitration”). We 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 also included a claim 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 denied Amkor's claims. Tessera also alleged 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 has since dropped its claims on five of those patents. Tessera also alleged that Amkor tortiously interfered with Tessera's prospective business relationships and seeks damages. On February 17, 2011, Tessera sent Amkor a notice of termination of the License Agreement.



-18-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


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 was held in December 2010, and in July 2011, the panel issued its decision in the first phase of the Arbitration. The panel found that we do not owe any of the approximately $18 million of additional royalties claimed by Tessera for packages assembled by us for customers who had been involved in proceedings with Tessera before the ITC. The panel also did not grant Tessera's request to terminate the License Agreement in the first phase of the Arbitration and deferred making any determination regarding termination until the full Arbitration is completed.

Our request for a declaration confirming that we are in compliance with the License Agreement and that our royalty calculations from the previous arbitration were correct was denied. The panel found that we had materially breached the License Agreement by not paying the full amount of royalties due and by failing to satisfy the audit provisions of the License Agreement. The final amount of royalties and interest owed relating to the first phase of the Arbitration was approximately $0.5 million, which has been fully paid.

The hearing on Tessera's assertion of infringement on additional patents (now ten U.S. and four foreign patents) and the payment of additional royalties under the License Agreement relating to the additional asserted patents was held in August 2011. Prior to the hearing, Tessera and Amkor agreed to dismiss their respective claims for tortious interference. Post-hearing oral arguments were heard in November 2011. Tessera initially claimed that the amount in dispute in the Arbitration was approximately $100 million and is now claiming more than $400 million of royalties under the License Agreement for the additional patents. We believe this amount is speculative and strongly dispute these claims. However, the outcome of this matter is uncertain, and an adverse decision could have a material adverse effect on our results of operations, financial condition and cash flows.

In connection with the Arbitration, we deposited $17.0 million in an escrow account during 2011 and 2010, which was previously classified as restricted cash. This amount represented our good faith estimate of the disputed amount of royalties that we expected Tessera to allege that we owed on packages assembled by us for one of our customers involved in proceedings with Tessera before the ITC related to the patents at issue in the prior arbitration. As a result of the panel's decision in the first phase of the Arbitration, the full $17.0 million held in escrow was returned to us in December 2011.

In May 2011, Tessera filed a new request for arbitration against Amkor seeking undisclosed damages and a declaration that the License Agreement has been terminated. Amkor disputes that Tessera has a right to terminate the License Agreement or that the License Agreement has been terminated. We believe that Tessera's claims in this new arbitration are without merit.

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 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.



-19-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


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 ITC. 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 ITC 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 ITC 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 ITC remanded the investigation to the ALJ to make further findings in light of the ITC'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 ITC issued a Notice of Commission Final Determination, in which the ITC determined that there is no violation of Section 337 of the Tariff Act and terminated the investigation. We have appealed the ITC's ruling to the U.S. Court of Appeals for the Federal Circuit, and oral arguments were heard in November 2011.



-20-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)



17.
    
Business Segments

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.

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 includes corporate adjustments, gross property, plant and equipment of our corporate and sales offices and capital additions that do not directly support manufacturing operations, such as research and development and infrastructure projects.
 
Packaging
 
Test
 
Other
 
Total
 
(In thousands)
Three months ended March 31, 2012
 
 
 
 
 
 
 
Net sales
$
581,511

 
$
73,499

 
$

 
$
655,010

Depreciation expense
57,920

 
22,177

 

 
80,097

Gross profit
87,303

 
17,678

 

 
104,981

Capital additions
53,551

 
49,082

 
21,302

 
123,935

Three months ended March 31, 2011
 
 
 
 
 
 
 
Net sales
$
597,807

 
$
67,132

 
$
11

 
$
664,950

Depreciation expense
54,799

 
20,418

 
37

 
75,254

Gross profit
111,305

 
15,487

 
(106
)
 
126,686

Capital additions
65,984

 
21,636

 
17,373

 
104,993

Gross property, plant and equipment
 
 
 
 
 
 
 
March 31, 2012
$
3,246,362

 
931,009

 
151,449

 
$
4,328,820

December 31, 2011
3,217,308

 
880,611

 
149,696

 
4,247,615




-21-



AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


18.    Exit Activities and Reductions in Force

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 efforts. “Charges” represents the initial charge related to the exit activity. “Cash Payments” consists of the utilization of “Charges.” “Non-cash Amounts” consists of pension plan curtailments and settlements and foreign currency adjustments.
 
Employee
Separation Costs
 
(In thousands)
Accrual at December 31, 2011
$

Charges
7,160

Cash Payments
(3,398
)
Non-cash Amounts
(1,066
)
Accrual at March 31, 2012
$
2,696

 
Employee
Separation Costs
 
(In thousands)
Accrual at December 31, 2010
$
670

Charges
38

Cash Payments
(565
)
Accrual at March 31, 2011
$
143


Reduction in Force

During the three months ended March 31, 2012, we reduced our workforce by approximately 120 employees at our manufacturing operations in Japan. We recorded $7.2 million in charges for one-time termination benefits including $1.0 million in net curtailment and settlement charges, of which $5.5 million, $1.6 million and $0.1 million were charged to cost of sales; selling, general and administrative expenses and research and development expenses, respectively. All amounts accrued at March 31, 2012, are classified in current liabilities.

Singapore Manufacturing Operations

In June 2009, we communicated to our employees the decision to wind-down and exit our manufacturing operations in Singapore. We 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. In June 2011, we sold the facility in Singapore for $13.3 million in cash, net of goods and services tax. The gain on the sale of facility was not significant and had no net tax effect.



-22-



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

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 amount, 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, the repayment of debt and the repurchase of common stock, (7) our repurchase or repayment of outstanding debt or the conversion of debt in the future, (8) payment of dividends, (9) compliance with our covenants, (10) expected contributions to foreign 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 related to implementation of a new enterprise resource planning (“ERP”) system and (15) 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, 2012, 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 wirebonding to a substrate or leadframe, or to a substrate in the case of flip chip interconnect, and then encased in a protective material to create a package. 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 interconnect technology employed, size, thickness and electrical, mechanical and thermal performance. We are able to provide turnkey packaging and test services including semiconductor wafer bump, wafer probe, wafer backgrind, package design, packaging, test and drop shipment services.

Our customers include, among others: Altera Corporation; Analog Devices, Inc.; Broadcom Corporation; Infineon Technologies AG; International Business Machines Corporation; LSI Corporation; Qualcomm Incorporated; ST Microelectronics N.V.; Texas Instruments Incorporated 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.

Our net sales decreased $9.9 million or 1.5% to $655.0 million for the three months ended March 31, 2012, from $665.0 million for the three months ended March 31, 2011. The decrease was driven by a decline of $16.3 million or 2.7% in packaging net sales as a result of weakness in the consumer, auto/industrial and networking end markets, partially offset by strength in the communications end market. The decrease in packaging net sales was partially offset by a $6.4 million or 9.5% increase in our test net sales. The increase in test net sales was the result of strength in the communications end market.



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Gross margin for the three months ended March 31, 2012, decreased to 16.0% from 19.1% for the three months ended March 31, 2011. The decrease in gross margin was primarily due to weakness in demand for some of our packaging services and the corresponding lower level of utilization for the related manufacturing assets, restructuring activities at our manufacturing operations in Japan, increased depreciation expense as a result of our continued investment in property, plant and equipment and the increased cost of gold used in many of our wirebond packages. These costs were partially offset by a decline in our severance obligation in Korea driven by lower bonus payments, as well as labor savings from our restructuring activities.

Our capital additions totaled $123.9 million or 18.9% of net sales for the three months ended March 31, 2012, compared to $105.0 million or 15.8% of net sales for the three months ended March 31, 2011. During the three months ended March 31, 2012, 43.2% of our capital additions were made in packaging, 39.6% in test and 17.2% for research and development and infrastructure projects.

As part of our continued focus on driving greater factory and administrative efficiencies, we reduced employee and contractor headcount at our manufacturing operations in Japan during the three months ended March 31, 2012. These reductions resulted in charges for voluntary termination benefits of $7.2 million.

For the three months ended March 31, 2012, we were free cash flow negative, primarily due to increased accounts receivable, lower gross profit and increased purchases of property, plant and equipment. Cash provided by operating activities was $56.1 million for the three months ended March 31, 2012, as compared to cash provided by operating activities of $120.2 million for the three months ended March 31, 2011. The decrease was primarily attributable to an increase in accounts receivable and the decrease in gross profit. We define free cash flow as net cash provided by operating activities less purchases 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.

We believe our financial position and liquidity are sufficient to fund our operating activities for at least the next twelve months. At March 31, 2012, our cash and cash equivalents totaled approximately $381.1 million, and we have an aggregate of $22.3 million of debt due through the end of 2012. In March 2012, we refinanced the remaining outstanding balance of our Korean loan due May 2013 by entering into a $100.0 million term loan due upon maturity in March 2015.

Our Board of Directors previously authorized the repurchase of up to $300.0 million of our common stock, exclusive of any fees, commissions or other expenses. During the three months ended March 31, 2012, we repurchased 1.0 million shares for $4.5 million under this program. Our stock repurchase program may be suspended or discontinued at any time.



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Results of Operations

The following table sets forth certain operating data as a percentage of net sales for the periods indicated:
 
For the Three Months Ended
March 31,
 
2012
 
2011
Net sales
100.0
%
 
100.0
%
Gross profit
16.0
%
 
19.1
%
Depreciation and amortization
13.5
%
 
12.5
%
Operating income
5.2
%
 
7.5
%
Income before income taxes
2.3
%
 
4.4
%
Net income attributable to Amkor
1.8
%
 
3.8
%

Net Sales
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
Change
 
(In thousands, except percentages)
Net sales
$
655,010

 
$
664,950

 
$
(9,940
)
 
(1.5
)%
Packaging net sales
581,511

 
597,807

 
(16,296
)
 
(2.7
)%
Test net sales
73,499

 
67,132

 
6,367

 
9.5
 %

Net Sales. Net sales in the three months ended March 31, 2012, decreased compared to the three months ended March 31, 2011 as a result of lower net sales of our packaging services. The decrease in packaging net sales was driven by weakness in the consumer, auto/industrial and networking end markets. These decreases were partially offset by strength in the communications end market along with other advanced packaging services. The overall decline in net sales was partially offset by an increase in test net sales due to the strength in the communications end market.

Packaging Net Sales. Packaging net sales in the three months ended March 31, 2012, decreased compared to the three months ended March 31, 2011. The decrease was primarily driven by weakness in sales of our ball grid array packaging services supporting networking, home electronics and gaming applications. This decrease was partially offset by increased sales of our chip scale packaging services for computing and communications. Packaging unit volume decreased 0.2 billion units to 1.9 billion units during the three months ended March 31, 2012, compared to 2.1 billion units during the three months ended March 31, 2011, primarily due to a decrease in unit demand for our leadframe packaging services and wirebond chip scale packages.

Test Net Sales.   Test net sales in the three months ended March 31, 2012, increased compared to the three months ended March 31, 2011. The increase was primarily attributable to higher test services for wireless communications products.

Cost of Sales
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
Change
 
(In thousands, except percentages)
Cost of sales
$
550,029

 
$
538,264

 
$
11,765

 
2.2
%

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.



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Material costs as a percentage of net sales increased to 44.9% for the three months ended March 31, 2012, from 42.8% for the three months ended March 31, 2011. The increase as a percentage of sales was primarily due to the increased cost of gold used in many of our wirebond packages and a shift to a mix of packaging services with a higher material content as a percentage of net sales. Material costs in absolute dollars over the same periods also increased primarily due to the increased cost of gold used in many of our wirebond packages.

Labor costs as a percentage of net sales decreased to 14.0% for the three months ended March 31, 2012, from 14.2% for the three months ended March 31, 2011. Labor costs as a percentage of sales, and in absolute dollars, decreased due to a decline in our severance obligation in Korea, as well as labor savings from our restructuring activities. These costs savings were partially offset by a $5.5 million charge for the restructuring activities at our manufacturing operations in Japan for the three months ended March 31, 2012.

Other manufacturing costs as a percentage of net sales increased to 25.0% for the three months ended March 31, 2012, from 23.9% for the three months ended March 31, 2011. The increase in other manufacturing costs as a percentage of sales was primarily attributable to increased depreciation expense as a result of our continued investments in property, plant and equipment.

Gross Profit
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
Change
 
(In thousands, except percentages)
Gross profit
$
104,981

 
$
126,686

 
$
(21,705
)
Gross margin
16.0
%
 
19.1
%
 
(3.1
)%

Gross profit and gross margin for the three months ended March 31, 2012, decreased compared to the three months ended March 31, 2011. The decline in gross profit and gross margin was primarily due to weakness in demand for some of our packaging services and the corresponding lower level of utilization of our manufacturing assets primarily related to our ball grid array packaging services. Gross profit and gross margin were also negatively impacted by restructuring activities at our manufacturing operations in Japan, increased depreciation expense as a result of our continued investment in property, plant and equipment and the increased cost of gold used in many of our wirebond packages. These reductions in gross profit and gross margin were partially offset by a decline in our severance obligation in Korea, as well as labor savings from our restructuring activities.
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
Change
 
(In thousands, except percentages)
Packaging gross profit
$
87,303

 
$
111,305

 
$
(24,002
)
Packaging gross margin
15.0
%
 
18.6
%
 
(3.6
)%

Packaging Gross Profit.   Gross profit and gross margin for packaging net sales for the three months ended March 31, 2012, decreased compared to the three months ended March 31, 2011. The decrease in gross profit and margin was primarily attributable to weakness in demand for our ball grid array packaging services and the corresponding lower level of utilization for the related manufacturing assets. Packaging gross profit and gross margin were also negatively impacted by restructuring activities at our manufacturing operations in Japan, increased depreciation expense as a result of our continued investment in property, plant and equipment and the increased cost of gold used in many of our wirebond packages. These reductions in gross profit and gross margin were partially offset by a decline in our severance obligation in Korea, as well as labor savings from our restructuring activities.


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For the Three Months Ended
March 31,
 
2012
 
2011
 
Change
 
(In thousands, except percentages)
Test gross profit
$
17,678

 
$
15,487

 
$
2,191

Test gross margin
24.1
%
 
23.1
%
 
1.0
%

Test Gross Profit.   Gross profit and gross margin for test net sales for the three months ended March 31, 2012, increased compared to the three months ended March 31, 2011. The increase in gross profit and margin was primarily a result of increased customer demand for test services and higher utilization of our test assets during the three months ended March 31, 2012.

Selling, General and Administrative Expenses
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
Change
 
(In thousands, except percentages)
Selling, general and administrative
$
57,255

 
$
64,558

 
$
(7,303
)
 
(11.3
)%

Selling, general and administrative expenses for the three months ended March 31, 2012, decreased compared to the three months ended March 31, 2011. The decrease was mainly attributable to lower professional fees and reduced compensation expense.

Research and Development
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
Change
 
(In thousands, except percentages)
Research and development
$
13,425

 
$
12,129

 
$
1,296

 
10.7
%

Research and development activities are focused on developing new package interconnect and test services and improving the efficiency and capabilities of our existing production processes. Areas of focus include 3D packaging, including silicon interposers and Through Silicon Via technologies, fine pitch copper pillar packaging and wafer level processing. The increase in research and development expenses for the three months ended March 31, 2012, compared to the three months ended March 31, 2011, was primarily attributable to increased headcount and increased depreciation from research and development capital additions as a result of our continued investment in property, plant and equipment.

Other Expense, Net
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
Change
 
(In thousands, except percentages)
Interest expense, net
$
21,189

 
$
20,782

 
$
407

 
2.0
 %
Foreign currency loss
790

 
1,731

 
(941
)
 
(54.4
)%
Equity in earnings of unconsolidated affiliate
(1,988
)
 
(1,518
)
 
(470
)
 
31.0
 %
Other income, net
(634
)
 
(144
)
 
(490
)
 
340.3
 %
Total other expense, net
$
19,357

 
$
20,851

 
$
(1,494
)
 
(7.2
)%

Other expense, net for the three months ended March 31, 2012, decreased compared to the three months ended March 31, 2011. This decrease was primarily a result of reductions in foreign currency losses and increases in our equity in earnings


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of J-Devices. The reduction in foreign currency losses of $0.9 million during the three months ended March 31, 2012, was primarily attributable to lower net monetary liabilities denominated in foreign currencies. In addition, our equity in earnings of J-Devices increased by $0.5 million during the three months ended March 31, 2012.

Income Tax Expense
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
Change
 
(In thousands, except percentages)
Income tax expense
$
3,362

 
$
3,382

 
$
(20
)
 
(0.6
)%

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, 2012 and 2011, was attributable to income tax on profits earned in certain foreign jurisdictions, foreign withholding taxes and deferred taxes on undistributed earnings from our investment in J-Devices.

Despite a decrease in profits, income tax expense for the three months ended March 31, 2012, remained consistent with the three months ended March 31, 2011, primarily as a result of higher tax rates in Korea where our tax rates during the tax holiday period have started to increase.

During 2012, our subsidiaries in China, Korea, the Philippines and Taiwan have operated under tax holidays which will continue to expire in whole or in part at various dates through 2017. We expect our effective tax rate to increase as the tax holidays expire as income earned in these jurisdictions will be subject to higher statutory income tax rates.

At March 31, 2012, we had U.S. net operating loss carryforwards totaling $375.5 million, which expire at various times through 2031. Additionally, at March 31, 2012, we had $69.7 million of non-U.S. net operating loss carryforwards, the vast majority of which will expire at various times through 2022. 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 facilities, 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, other uses of our cash including any purchases of stock under our stock repurchase program and our ability to either repay debt out of operating cash flow or refinance at or prior to maturity with the proceeds of debt or equity offerings. There can be 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 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 and proceeds from any additional debt or equity financings. As of March 31, 2012, we had cash and cash equivalents of $381.1 million and availability of $99.7 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, the repurchase of common stock and for other corporate purposes.



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We operate in a capital intensive industry. Servicing our current and future customers may require 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 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. If we retain our existing severance plan, the deduction for severance expenses will be primarily limited to severance payments made to retired employees, which results in a larger current income tax liability in Korea. If we decide to adopt a new plan, we would be required to fund a significant portion of the existing liability, which would provide a current tax deduction upon funding. Our Korean severance liability was $107.4 million as of March 31, 2012.

Included in our cash balance as of March 31, 2012, is $204.3 million held offshore by our foreign subsidiaries. If we were to distribute this offshore cash to the U.S. as repatriated earnings of our foreign subsidiaries, we would incur foreign withholding taxes; however, we would not incur a significant amount of U.S. federal income taxes, due to the availability of tax loss carryovers and foreign tax credits.

Our Board of Directors previously authorized the repurchase of up to $300.0 million of our common stock, exclusive of any fees, commissions or other expenses. During the three months ended March 31, 2012, we had repurchased 1.0 million shares for $4.5 million, net of an insignificant amount of commissions, leaving a balance of $166.6 million available at March 31, 2012, for stock repurchases under this program. The purchase of stock may be made in the open market or through privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, the cash needs and investment opportunities for the business, price, applicable legal requirements and other factors. Our stock repurchase program may be suspended or discontinued at any time.

We have a 30% equity interest and options to acquire additional equity interests in J-Devices, a joint venture to provide semiconductor packaging and test services in Japan. The options are exercisable at our discretion and permit us to increase our percentage ownership of J-Devices on the anniversary date up to 60% in 2012, 66% in 2014 and 80% in 2015. The exercise price for all options is payable in cash and is to be determined using a formula based primarily upon the financial position of J-Devices at the time of exercise.

We have debt of $1,354.7 million outstanding at March 31, 2012, of which $53.0 million is current. Our indebtedness requires us to dedicate a substantial portion of our cash flow from operations to pay our debt and interest. We refer you to “Contractual Obligations” below for a summary of principal and interest payments.

In January 2012, we converted our NT$1.5 billion term loan from Taiwan dollars to U.S. dollars (approximately $50.0 million) to mitigate our foreign currency exposure. The term loan bears interest at the Taipei Foreign Exchange ("TAIFX") six month U.S. dollar rate plus 2.0% (3.35% as of March 31, 2012). All other terms and conditions remain the same.

In March 2012, we repaid the remaining outstanding balance of our Korean loan due May 2013 by entering into a $100.0 million term loan due upon maturity in March 2015. The new term loan bears interest at a foreign currency funding-linked base rate plus 2.30% (5.47% as of March 31, 2012) to be paid monthly. The remaining proceeds from the term loan were used to fund capital expenditures.

In order to reduce leverage and future cash interest payments, we may from time to time repurchase our outstanding notes for cash or exchange shares of our common stock for our outstanding notes. Any such transaction may be made in the open market or through privately negotiated transactions and is subject to the terms of our indentures and other debt agreements, market conditions and other factors.

Certain debt agreements have restrictions on dividend payments and the repurchase of stock and subordinated securities, including our convertible notes. These restrictions are determined by calculations based upon cumulative net income. We have never paid a dividend to our stockholders, and we do not have any present plans for doing so. Amkor Technology, Inc. also guarantees certain debt of our subsidiaries.



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We were in compliance with all debt covenants at March 31, 2012, and expect to remain in compliance with these covenants for at least the next twelve months.

Capital Additions

Our capital additions for the three months ended March 31, 2012, were $123.9 million. Our spending was focused primarily on new capacity for flip chip packaging and test services in support of the communications end market. We currently expect our total 2012 capital additions will be approximately $550 million. Our expected capital additions for the remainder of 2012 primarily support increasing customer demand for packaging and test services related to smartphones and tablets. Ultimately, the amount of our 2012 capital additions will depend on several factors including, among others, the performance of our business, the need for additional capacity to service anticipated customer demand and the availability of cash flow from operations or financing. The following table reconciles our activity related to property, plant and equipment additions as presented on the Consolidated Balance Sheets to purchases of property, plant and equipment reflected on the Condensed Consolidated Statements of Cash Flows:
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands)
Property, plant and equipment additions
$
123,935

 
$
104,993

Net change in related accounts payable and deposits
(2,848
)
 
8,888

Purchases of property, plant and equipment
$
121,087

 
$
113,881


Contractual Obligations

The following table summarizes our contractual obligations at March 31, 2012, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
 
 
 
Payments Due for Year Ending December 31,
 
Total
 
2012 -
Remaining
 
2013
 
2014
 
2015
 
2016
 
Thereafter
 
(In thousands)
Total debt
$
1,354,667

 
$
22,313

 
$
78,160

 
$
381,355

 
$
126,071

 
$
1,768

 
$
745,000

Scheduled interest payment obligations (1)
482,642

 
78,808

 
81,351

 
65,904

 
53,646

 
51,966

 
150,967

Purchase obligations (2)
144,680

 
144,680

 

 

 

 

 

Operating lease obligations
31,591

 
7,617

 
7,792

 
7,239

 
5,157

 
829

 
2,957

Severance obligations (3)
107,359

 
5,488

 
6,944

 
6,475

 
6,023

 
5,622

 
76,807

Total contractual obligations
$
2,120,939

 
$
258,906

 
$
174,247

 
$
460,973

 
$
190,897

 
$
60,185

 
$
975,731

(1)
Scheduled interest payment obligations were calculated using stated coupon rates for fixed rate debt and interest rates applicable at March 31, 2012, for variable rate debt.
(2)
Represents capital-related purchase obligations outstanding at March 31, 2012, for capital additions.
(3)
Represents estimated benefit payments for our Korean subsidiary severance plan.
In addition to the obligations identified in the table above, other non-current liabilities recorded in our Consolidated Balance Sheet at March 31, 2012, include:
$25.3 million of net foreign pension plan obligations for which the timing and actual amount of funding required is uncertain. We expect to contribute approximately $3.2 million to the defined benefit pension plans during the remainder of 2012.
$6.1 million net liability associated with unrecognized tax benefits. Due to the uncertainty regarding the amount and the timing of any future cash outflows associated with our unrecognized tax benefits, we are unable to reasonably estimate the amount and period of ultimate settlement, if any, with the various taxing authorities.


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Off-Balance Sheet Arrangements

As of March 31, 2012, we had no off-balance sheet guarantees or other off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, other than our operating lease obligations described above in “Contractual Obligations.”

Contingencies, Indemnifications and Guarantees

We refer you to Note 16 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report for a discussion of our contingencies related to litigation and other legal matters. If an unfavorable ruling were to occur in these matters, there exists the possibility of a material adverse impact on our business, liquidity, results of operations, financial position and cash flows in the period in which the ruling occurs. The potential impact from legal proceedings on our business, liquidity, results of operations, financial position and cash flows could change in the future.

Critical Accounting Policies

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011. During the three months ended March 31, 2012, there have been no significant changes in our critical accounting policies as reported in our 2011 Annual Report on Form 10-K.

New Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 2 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.

Cash Flows

Cash provided by operating activities was $56.1 million for the three months ended March 31, 2012, compared to cash provided by operating activities of $120.2 million for the three months ended March 31, 2011. We were free cash flow negative for the three months ended March 31, 2012. Free cash flow decreased $71.3 million to $(65.0) million from the prior year comparable period primarily due to increased accounts receivable, lower gross profit and increased purchases of property, plant and equipment.

Net cash provided by (used in) operating, investing and financing activities for the three months ended March 31, 2012 and 2011, were as follows:
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands)
Operating activities
$
56,106

 
$
120,227

Investing activities
(110,869
)
 
(111,640
)
Financing activities
2,596

 
(20,482
)

Operating activities:   Our cash flow provided by operating activities for the three months ended March 31, 2012, decreased by $64.1 million compared to the three months ended March 31, 2011. Operating income for the three months ended March 31, 2012, adjusted for depreciation and amortization, other operating activities and non-cash items, decreased by $17.4 million. The decrease is primarily attributable to decreased gross profit and the related decrease in net income.

Changes in assets and liabilities decreased operating cash flow for the three months ended March 31, 2012 compared to an increase in the three months ended March 31, 2011 as a result of an increase in accounts receivable. For the three months ended March 31, 2011, inventory and accounts receivable decreased from December 31, 2010, reflecting usage of existing inventories and decreased demand, respectively. The decrease in inventory and accounts receivable were offset by decreases in accounts payable and accrued expenses compared to December 31, 2010.



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Investing activities:   Our cash flows used in investing activities for the three months ended March 31, 2012, decreased by $0.8 million. The decrease in the three months ended March 31, 2012 was primarily due to a $7.2 million increase in purchases of property, plant and equipment partially offset by $4.1 million in proceeds from the sale of leased packaging and test equipment to J-Devices. Our capital additions in 2012 were focused primarily on support for specific business for customers in smartphones and tablets, facilities expansion and research and development.

Financing activities:   Our cash flows provided by financing activities for the three months ended March 31, 2012, increased by $23.1 million. The net cash provided by financing activities for the three months ended March 31, 2012 primarily resulted from the refinancing of a Korean term loan, the conversion of our Taiwanese dollar denominated loan to a US dollar denominated loan and was partially offset by foreign amortizing debt repayments and the repurchase of $4.5 million of common stock under our authorized stock repurchase program.

Our net cash used in financing activities for the three months ended March 31, 2011, was $20.5 million which was primarily a result of $20.4 million of repayments on our term loans at our Korean subsidiary and other foreign amortizing debt.

We provide the following supplemental data to assist our investors and analysts in understanding our liquidity and capital resources. We define free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. Free cash flow is not defined by U.S. GAAP. However, we believe free cash flow to be relevant and useful information to our investors because it provides them with additional information in assessing our liquidity, capital resources and financial operating results. Our management uses free cash flow in evaluating our liquidity, our ability to service debt and our ability to fund capital additions. However, free cash flow has certain limitations, including that it does not represent the residual cash flow available for discretionary expenditures since other, non-discretionary expenditures, such as mandatory debt service, are not deducted from the measure. The amount of mandatory versus discretionary expenditures can vary significantly between periods. This measure should be considered in addition to, and not as a substitute for, or superior to, other measures of liquidity or financial performance prepared in accordance with U.S. GAAP, such as net cash provided by operating activities. Furthermore, our definition of free cash flow may not be comparable to similarly titled measures reported by other companies.
 
For the Three Months Ended
March 31,
 
2012
 
2011
 
(In thousands)
Net cash provided by operating activities
$
56,106

 
$
120,227

Purchases of property, plant and equipment
(121,087
)
 
(113,881
)
Free cash flow
$
(64,981
)
 
$
6,346


Item 3.        Quantitative and Qualitative Disclosures about Market Risk

Market Risk Sensitivity

We are exposed to market risks, primarily related to foreign currency and interest rate fluctuations. In the normal course of business, we employ established policies and procedures to manage the exposure to fluctuations in foreign currency values and changes in interest rates. Our use of derivative instruments, including forward exchange contracts, has been historically insignificant; however, we continue to evaluate the use of hedging instruments to manage currency and other risks. We did not enter into any derivative transactions in the three months ended March 31, 2012, and have no outstanding contracts as of March 31, 2012.

Foreign Currency Risk
 

We currently do not have forward contracts or other instruments to reduce our exposure to foreign currency gains and losses, although we do use natural hedging techniques to reduce foreign currency rate risk.

The U.S. dollar is our reporting currency and the functional currency for the majority of our foreign subsidiaries including our largest subsidiaries in Korea and the Philippines and also our subsidiaries in Taiwan, China and Singapore. For our subsidiaries and affiliate in Japan, the local currency is the functional currency.


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We have foreign currency exchange rate risk associated with the remeasurement of monetary assets and monetary liabilities on our Consolidated Balance Sheets that are denominated in currencies other than the functional currency. We performed a sensitivity analysis of our foreign currency exposure as of March 31, 2012, to assess the potential impact of fluctuations in exchange rates for all foreign denominated assets and liabilities. Assuming a 10% adverse movement for all currencies against the U.S. dollar as of March 31, 2012, our income before income taxes would have been approximately $8.4 million lower.

In addition, we have foreign currency exchange rate exposure on our results of operations. For the three months ended March 31, 2012, approximately 90% of our net sales were denominated in U.S. dollars. Our remaining net sales were principally denominated in Japanese yen and Korean won for local country sales. For the three months ended March 31, 2012, approximately 58% of our cost of sales and operating expenses were denominated in U.S. dollars and largely consisted of raw materials and factory supplies. The remaining portion of our cost of sales and operating expenses was principally denominated in the Asian currency where our production facilities are located and largely consisted of labor and utilities. To the extent that the U.S. dollar weakens against these Asian-based currencies, similar foreign currency denominated transactions in the future will result in higher sales and higher operating expenses, with operating expenses having the greater impact on our financial results. Similarly, our sales and operating expenses will decrease if the U.S. dollar strengthens against these foreign currencies. We performed a sensitivity analysis of our foreign currency exposure as of March 31, 2012, to assess the potential impact of fluctuations in exchange rates for all foreign denominated sales and expenses. Assuming a 10% adverse movement from the three months ended March 31, 2012, exchange rates of the U.S. dollar compared to all of these Asian-based currencies as of March 31, 2012, our operating income would have been approximately $19.4 million lower.

There are inherent limitations in the sensitivity analysis presented, primarily due to the assumption that foreign exchange rate movements across multiple jurisdictions are similar and would be linear and instantaneous. As a result, the analysis is unable to reflect the potential effects of more complex market or other changes that could arise which may positively or negatively affect our results of operations.

We have foreign currency exchange rate exposure on our stockholders' equity as a result of the translation of our subsidiaries and an affiliate where the local currency is the functional currency. To the extent the U.S. dollar strengthens against the local currency, the translation of these foreign currency denominated transactions will result in reduced sales, operating expenses, assets and liabilities. Similarly, our sales, operating expenses, assets and liabilities will increase if the U.S. dollar weakens against the local currencies. The effect of foreign exchange rate translation on our Consolidated Balance Sheets for the three months ended March 31, 2012 and 2011, was a net foreign translation loss of $2.8 million and a loss of $0.6 million, respectively, and was recognized as an adjustment to equity through other comprehensive loss.

Interest Rate Risk

We have interest rate risk with respect to our long-term debt. As of March 31, 2012, we had a total of $1,354.7 million of debt of which 73.4% was fixed rate debt and 26.6% was variable rate debt. The fixed rate debt consists of senior notes and senior subordinated notes. Our variable rate debt principally relates to our foreign borrowings and revolving lines of credit and any amounts outstanding under our $100.0 million senior secured revolving credit facility, of which no amounts were drawn as of March 31, 2012. As of December 31, 2011, we had a total of $1,346.7 million of debt of which 73.9% was fixed rate debt and 26.1% was variable rate debt. Changes in interest rates have different impacts on the fixed and variable rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the fair value of the debt instrument but has no impact on interest expense or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows but does not generally impact the fair value of the instrument. The fair value of the convertible notes is also impacted by changes in the market price of our common stock.



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The table below presents the interest rates, maturities and fair value of our fixed and variable rate debt as of March 31, 2012:
 
2012 -
Remaining
 
2013
 
2014
 
2015
 
2016
 
Thereafter
 
Total
 
Fair Value
Long term debt:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed rate debt (In thousands)
$

 
$

 
$
250,000

 
$

 
$

 
$
745,000

 
$
995,000

 
$
1,326,350

Average interest rate
%
 
%
 
6.0
%
 
%
 
%
 
7.0
%
 
6.7
%
 
 
Variable rate debt (In thousands)
$
22,313

 
$
78,160

 
$
131,355

 
$
126,071

 
$
1,768

 
$

 
$
359,667

 
$
368,582

Average interest rate
2.8
%
 
4.3
%
 
4.4
%
 
5.1
%
 
5.1
%
 
%
 
4.5
%
 
 

For information regarding the fair value of our long-term debt, see Note 15 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.

Equity Price Risk

We have convertible notes that are convertible into our common stock. If investors were to decide to convert their notes to common stock, our future earnings would benefit from a reduction in interest expense and our common stock outstanding would be increased. If we paid a premium to induce such conversion, our earnings could include an additional charge.

Further, the trading price of our common stock has been and is likely to continue to be highly volatile and could be subject to wide fluctuations. Such fluctuations could impact our decision or ability to utilize the equity markets as a potential source of our funding needs in the future.

Item 4.        Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended. In designing and evaluating the disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2012 and concluded those disclosure controls and procedures were effective as of that date.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As previously reported, we are implementing a new enterprise resource planning system in a multi-year program on a world-wide basis. During 2012, we expect to roll out additional modules at a foreign subsidiary.



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PART II. OTHER INFORMATION

Item 1.        Legal Proceedings

Information about legal proceedings is set forth in Note 16 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.

Item 1A.    Risk Factors

The factors discussed below are cautionary statements that identify important factors and risks that could cause actual results to differ materially from those anticipated by the forward-looking statements contained in this report. For more information regarding the forward-looking statements contained in this report, see the introductory paragraph to Part I, Item 2 of this Quarterly Report. You should carefully consider the risks and uncertainties described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing Amkor. Additional risks and uncertainties not presently known to us may also impair our business operations. The occurrence of any of the following risks could affect our business, liquidity, results of operations, financial condition or cash flows.

Dependence on the Highly Cyclical Semiconductor and Electronic Products Industries - We Operate in Volatile Industries and Industry Downturns and Declines in Global Economic and Financial Conditions Could Harm Our Performance.

Our business is impacted by market conditions in the semiconductor industry, which is cyclical by nature and impacted by broad economic factors, such as world-wide gross domestic product and consumer spending. The semiconductor industry has experienced significant and sometimes prolonged downturns in the past. For example, the recent financial crisis and global recession resulted in a downturn in the semiconductor industry that adversely affected our business and results of operations in late 2008 and in 2009. Although the world economy recovered somewhat in 2010, economic growth slowed in 2011 in the U.S. and internationally. In view of this slow growth and the recent economic uncertainty in Europe, consumer demand in the U.S. and globally may be adversely impacted which may harm the semiconductor industry and our business.

Since our business is, and will continue to be, dependent on the requirements of semiconductor companies for subcontracted packaging and test services, any downturn in the semiconductor industry or any other industry that uses a significant number of semiconductor devices, such as consumer electronic products, telecommunication devices or computing devices, could have a material adverse effect on our business and operating results. It is difficult to predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, which, in turn, makes it more challenging for us to forecast our operating results, make business decisions and identify risks that may affect our business, sources and uses of cash, financial condition and results of operations. Additionally, if industry conditions deteriorate, we could suffer significant losses, as we have in the past, which could materially impact our business, liquidity, results of operations, financial condition and cash flows.

Fluctuations in Operating Results and Cash Flows - Our Operating Results and Cash Flows Have Varied and May Vary Significantly as a Result of Factors That We Cannot Control.

Many factors, including the impact of adverse economic conditions, could have a material adverse effect on our net sales, gross profit, operating results and cash flows, or lead to significant variability of quarterly or annual operating results. Our profitability and ability to generate cash from operations is principally dependent upon demand for semiconductors, the utilization of our capacity, semiconductor package mix, the average selling price of our services, our ability to manage our capital expenditures in response to market conditions and our ability to control our costs including labor, material, overhead and financing costs. The downturn in demand for semiconductors in late 2008 and in 2009 resulted in significant declines in our operating results and cash flows as capacity utilization declined. Although the world economy recovered somewhat in 2010, the slow rate of economic growth in 2011 and the recent economic uncertainty in Europe could adversely affect consumer demand in the U.S. and globally, which may negatively impact our operating results.



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Our net sales, gross profit, operating income and cash flows have historically fluctuated significantly from quarter to quarter as a result of many of the following factors, over which we have little or no control and which we expect to continue to impact our business:
fluctuation in demand for semiconductors and conditions in the semiconductor industry;
changes in our capacity utilization rates;
changes in average selling prices;
changes in the mix of semiconductor packages;
evolving packaging and test technology;
absence of backlog and the short-term nature of our customers’ commitments and the impact of these factors on the timing and volume of orders relative to our production capacity;
changes in costs, availability and delivery times of raw materials and components;
changes in labor costs to perform our services;
wage and commodity price inflation, including precious metals;
the timing of expenditures in anticipation of future orders;
changes in effective tax rates;
the availability and cost of financing;
intellectual property transactions and disputes;
high leverage and restrictive covenants;
warranty and product liability claims and the impact of quality excursions and customer disputes and returns;
costs associated with litigation judgments, indemnification claims and settlements;
international events, political instability, civil disturbances or environmental or natural events, such as earthquakes, that impact our operations;
pandemic illnesses that may impact our labor force and our ability to travel;
difficulties integrating acquisitions and the failure of our joint ventures to operate in accordance with business plans;
our ability to attract and retain qualified employees to support our global operations;
loss of key personnel or the shortage of available skilled workers;
fluctuations in foreign exchange rates and the cost of materials used in our packaging services such as gold and copper;
delay, rescheduling and cancellation of large orders;
fluctuations in our manufacturing yields and
dependence on key customers or concentration of customers in certain market segments, such as wireless communications.
It is often difficult to predict the impact of these factors upon our results for a particular period. The downturn in the global economy and the semiconductor industry increased the risks associated with the foregoing factors as customer forecasts became more volatile, and there was less visibility regarding future demand and significantly increased uncertainty regarding


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the economy, credit markets and consumer demand. Although the world economy recovered somewhat in 2010, the slow rate of economic growth in 2011 and the recent economic uncertainty in Europe could continue to cause volatility in customer forecasts and reduce our visibility regarding future demand in the semiconductor industry. These factors may have a material and adverse effect on our business, liquidity, results of operations, financial condition and cash flows or lead to significant variability of quarterly or annual operating results. In addition, these factors may adversely affect our credit ratings which could make it more difficult and expensive for us to raise capital and could adversely affect the price of our securities.

High Fixed Costs - Due to Our High Percentage of Fixed Costs, We Will Be Unable to Maintain Our Gross Margin at Past Levels if We Are Unable to Achieve Relatively High Capacity Utilization Rates.

Our operations are characterized by relatively high fixed costs. Our profitability depends in part not only on pricing levels for our packaging and test services, but also on the utilization of our human resources and packaging and test equipment. In particular, increases or decreases in our capacity utilization can significantly affect gross margins since the unit cost of packaging and test services generally decreases as fixed costs are allocated over a larger number of units. In periods of low demand, we experience relatively low capacity utilization in our operations, which leads to reduced margins during that period. For example, we experienced lower than optimum utilization in late 2008 and in 2009 due to a decline in world-wide demand for our packaging and test services which impacted our gross margin. Transitions between different packaging technologies, such as the transition from gold wirebond to flip chip and copper wirebond packages, can also impact our capacity utilization if we do not efficiently redeploy our equipment assets. For example, in 2011 the migration of some customer demand from wirebond to flip chip packages resulted in under-utilized wirebond assets which negatively impacted our capacity utilization and gross margin. Although our capacity utilization at times has been strong, we cannot assure you that we will be able to achieve consistently high capacity utilization, and if we fail to do so, our gross margins may decrease. If our gross margins decrease, our business, liquidity, results of operations, financial condition and cash flows could be materially adversely affected.

In addition, our fixed operating costs have increased in recent years in part as a result of our efforts to expand our capacity through significant capital additions. Forecasted customer demand for which we have made capital investments may not materialize, especially if industry conditions deteriorate. As a result, our sales may not adequately cover our substantial fixed costs resulting in reduced profit levels or causing significant losses, both of which may adversely impact our liquidity, results of operations, financial condition and cash flows.

Guidance - Our Failure to Meet Our Guidance or Analyst Projections Could Adversely Impact the Trading Prices of Our Securities.

We periodically provide guidance to investors with respect to certain financial information for future periods. Securities analysts also periodically publish their own projections with respect to our future operating results. As discussed above under “Fluctuations in Operating Results and Cash Flows - Our Operating Results and Cash Flows Have Varied and May Vary Significantly as a Result of Factors That We Cannot Control,” our operating results and cash flows vary significantly and are difficult to accurately predict. Volatility in customer forecasts and reduced visibility caused by economic uncertainty and fluctuations in global consumer demand make it particularly difficult to predict future results. To the extent we fail to meet or exceed our own guidance or the analyst projections for any reason, the trading prices of our securities may be adversely impacted. Moreover, even if we do meet or exceed that guidance or those projections, if analysts and investors do not react favorably, or if analysts were to discontinue providing coverage of our company, the trading prices of our securities may be adversely impacted.

Declining Average Selling Prices - The Semiconductor Industry Places Downward Pressure on the Prices of Our Packaging and Test Services.

Prices for packaging and test services have generally declined over time. Historically, we have been able to partially offset the effect of price declines by successfully developing and marketing new packages with higher margins, such as advanced leadframe and laminate packages, by negotiating lower prices with our material vendors, recovering material cost increases from our customers and by driving engineering and technological changes in our packaging and test processes, which resulted in reduced manufacturing costs. We expect downward pressure on average selling prices for our packaging and test services to continue in the future. If we are unable to offset a decline in average selling prices, by developing and marketing new packages with higher prices, reducing our purchasing costs, recovering more of our material cost increases


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from our customers and reducing our manufacturing costs, our business, liquidity, results of operations, financial condition and cash flows could be materially adversely affected.

Decisions by Our Integrated Device Manufacturer Customers to Curtail Outsourcing May Adversely Affect Our Business.

Historically, we have been dependent on the trend in outsourcing of packaging and test services by integrated device manufacturers, or IDMs. Our IDM customers continually evaluate the need for outsourced services against their own in-house packaging and test services. As a result, at any time and for a variety of reasons, IDMs may decide to shift some or all of their outsourced packaging and test services to internally sourced capacity.

The reasons IDMs may shift their internal capacity include:
their desire to realize higher utilization of their existing packaging and test capacity, especially during downturns in the semiconductor industry;
their unwillingness to disclose proprietary technology;
their possession of more advanced packaging and test technologies and
the guaranteed availability of their own packaging and test capacity.
In addition, to the extent we limit capacity commitments for certain customers, these customers may increase their level of in-house packaging and test capabilities, which could make it more difficult for us to regain their business when we have available capacity.

In a downturn in the semiconductor industry, IDMs could respond by shifting some outsourced packaging and test services to internally serviced capacity on a short term basis. Also, the IDMs could curtail or reverse the trend of outsourcing packaging and test services. If we experience a significant loss of IDM business, it could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows, especially during a prolonged industry downturn.

Our Substantial Indebtedness Could Adversely Affect Our Financial Condition and Prevent Us from Fulfilling Our Obligations.

We have a significant amount of indebtedness. As of March 31, 2012, our total debt balance was $1,354.7 million, of which $53.0 million was classified as a current liability. In addition, despite current debt levels, the terms of the indentures governing our indebtedness allow us and our subsidiaries to incur more debt, subject to certain limitations. If new debt is added to our consolidated debt level, the related risks that we now face could intensify. 

Our substantial indebtedness could: 
make it more difficult for us to satisfy our obligations with respect to our indebtedness, including our obligations under our indentures to purchase notes tendered as a result of a change in control of Amkor;
increase our vulnerability to general adverse economic and industry conditions;
limit our ability to fund future working capital, capital expenditures, research and development and other business opportunities;
require us to dedicate a substantial portion of our cash flow from operations to service payments on our debt;
increase the volatility of the price of our common stock;
limit our flexibility to react to changes in our business and the industry in which we operate;
place us at a competitive disadvantage to any of our competitors that have less debt and
limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds.


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We May Have Difficulty Funding Liquidity Needs.

We operate in a capital intensive industry. Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures, which are generally made in advance of the related revenues and without any firm customer commitments. During the three months ended March 31, 2012, we had capital additions of $123.9 million and for the full year 2012, we currently expect to make capital additions of approximately $550 million primarily in support of increasing customer demand for packaging and test services related to smartphones and tablets. The actual amount of our 2012 capital additions may vary materially and will depend on several factors including, among others, whether, when and to what extent any capital projects not yet planned, including those currently under senior-level review and any others, are approved, commenced and completed in 2012, the performance of our business, economic and market conditions, the cash needs and investment opportunities for the business, the need for additional capacity and facilities to service customer demand and the availability of cash flow from operations or financing.

In addition, we have a significant level of debt, with $1,354.7 million outstanding at March 31, 2012, $53.0 million of which is current. The terms of such debt require significant scheduled principal payments in the coming years, including $22.3 million due in 2012, $78.2 million due in 2013, $381.4 million due in 2014, $126.1 million due in 2015, $1.8 million due in 2016 and $745.0 million due thereafter. The interest payments required on our debt are also substantial. For example, in 2011, we paid $81.3 million of interest. The sources funding our operations, including making capital expenditures and servicing principal and interest obligations with respect to our debt, are cash flows from our operations, current cash and cash equivalents, borrowings under available debt facilities or proceeds from any additional debt or equity financing. As of March 31, 2012, we had cash and cash equivalents of $381.1 million and availability of $99.7 million under our $100.0 million senior secured revolving credit facility, which matures in April 2015.

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 flows from operating activities together with existing cash and cash equivalents 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, the performance of our business, our capital expenditure levels and our ability to repay debt out of our operating cash flows or refinance the debt with the proceeds of debt or equity offerings at or prior to maturity. Moreover, the health of the worldwide banking system and financial markets affects the liquidity in the global economic environment. Volatility in fixed income, credit and equity markets could make it difficult for us to maintain our existing credit facilities or refinance our debt. If our performance or access to the capital markets differs materially from our expectations, our liquidity may be adversely impacted.

In addition, if we fail to 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 this “Risk Factors” section, our liquidity would be adversely affected.

Our Ability To Draw On Our Current Loan Facilities May Be Adversely Affected by Conditions in the U.S. and International Capital Markets.

If financial institutions that have extended credit commitments to us are adversely affected by the conditions of the U.S. and international capital and credit markets, they may be unable to fund borrowings under their credit commitments to us. For example, we currently have a $100.0 million senior secured revolving credit facility with three banks in the U.S. If any of these banks are adversely affected by capital and credit market conditions and are unable to make loans to us when requested, there could be a corresponding adverse impact on our financial condition and our ability to borrow additional funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other corporate purposes.

Restrictive Covenants in the Indentures and Agreements Governing Our Current and Future Indebtedness Could Restrict Our Operating Flexibility.

The indentures and agreements governing our existing debt, and debt we may incur in the future, contain, or may contain, affirmative and negative covenants that materially limit our ability to take certain actions, including our ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and


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consolidations, engage in sale leaseback transactions and encumber and dispose of assets. In addition, our future debt agreements may contain financial covenants and ratios.

The breach of any of these covenants by us or the failure by us to meet any of the financial ratios or conditions could result in a default under any or all of such indebtedness. If a default occurs under any such indebtedness, all of the outstanding obligations thereunder could become immediately due and payable, which could result in a default under our other outstanding debt and could lead to an acceleration of obligations related to other outstanding debt. The existence of such a default or event of default could also preclude us from borrowing funds under our revolving credit facilities. Our ability to comply with the provisions of the indentures, credit facilities and other agreements governing our outstanding debt and indebtedness we may incur in the future can be affected by events beyond our control and a default under any debt instrument, if not cured or waived, could have a material adverse effect on us.

We Have Significant Severance Plan Obligations Associated With Our Manufacturing Operations in Korea Which Could Reduce Our Cash Flow and Negatively Impact Our Financial Condition.

We sponsor an accrued severance plan for our Korean subsidiary, under which we have an accrued liability of $107.4 million as of March 31, 2012. Existing tax laws in Korea limit our ability to currently deduct severance expenses associated with the current plan. These limitations are designed to encourage companies to migrate to a defined contribution or defined benefit plan. If we adopt a ne