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

Form 10-Q

 

 

Commission File Number 000-29472

 

AMKOR TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

 

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

 

(480) 821-5000

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

(Do not check if a smaller reporting company)

 

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

 

The number of outstanding shares of the registrant’s Common Stock as of October 30, 2009 was 183,114,424.

 

 

QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2009

TABLE OF CONTENTS

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

The accompanying notes are an integral part of these statements.

 

 

The accompanying notes are an integral part of these statements.

 

AMKOR TECHNOLOGY, INC.

 

 

Basis of Presentation.  The Consolidated Financial Statements and related disclosures as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 are unaudited, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The December 31, 2008 Consolidated Balance Sheet data was derived from audited financial statements (other than as it relates to the revised presentation of noncontrolling interests, previously referred to as minority interests, as described in Note 2), 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, 2008 filed on Form 10-K with the SEC on February 24, 2009. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year. All references to “Amkor,” “we,” “us,” “our” or the “company” are to Amkor Technology, Inc. and its subsidiaries.

 

The U.S. dollar is our reporting currency and the functional currency for the majority of our foreign subsidiaries. Effective July 1, 2009, we changed the functional currency for our Taiwanese operations to the U.S. dollar primarily due to an increase in the mix of our U.S. dollar denominated sales. The change in functional currency is applied on a prospective basis. The U.S dollar-translated amounts of nonmonetary assets and liabilities at June 30, 2009 became the historical accounting basis for those assets and liabilities at July 1, 2009. The change in functional currency in Taiwan did not have a material effect on our consolidated results of operations for the three months ended September 30, 2009 or our financial condition at September 30, 2009. For our subsidiaries in Japan, the local currency continues to be the functional currency.

 

Subsequent events have been evaluated up to and including November 5, 2009, which is the date these financial statements were issued.

 

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

 

 

Recently Adopted Standards

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. The issued guidance establishes the Accounting Standards Codification (“ASC”) as the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC and its staff are not included in the ASC but will continue to apply to SEC registrants. The guidance, which is now codified as ASC Topic 105, Generally Accepted Accounting Principles (“ASC Topic 105”), is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Our adoption of ASC Topic 105 did not have any impact on our financial position, results of operations or cash flows.

 

In December 2007, the FASB issued amended disclosure requirements for noncontrolling interests in consolidated financial statements, which has been codified as ASC Topic 810, Consolidation. ASC Topic 810

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

requires that (1) noncontrolling (minority) interests be reported as a component of stockholders’ equity, (2) net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations, (3) changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, (4) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value and (5) sufficient disclosures are provided that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. ASC Topic 810 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We adopted the provisions of ASC Topic 810 on January 1, 2009 and, as required, we have adjusted prior periods for comparative purposes. Minority interests reported in our December 31, 2008 Consolidated Balance Sheet were retrospectively adjusted to comply with ASC Topic 810 and are now reported as a component of equity identified as noncontrolling interests. The caption “Net income (loss)” in our Consolidated Statements of Operations represents the consolidated operating results for Amkor including noncontrolling interests. In addition, earnings or losses attributable to the minority interests are separately disclosed on the face of the Consolidated Statements of Operations for all periods presented in the manner prescribed by ASC Topic 810. See Note 6 for disclosure of the changes in equity and comprehensive (loss) income attributable to Amkor and our noncontrolling interests.

 

Recently Issued Standards

 

In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value (“ASU 2009-05”), which amends ASC Topic 820, Fair Value Measurements. ASU 2009-05 clarifies the application of certain valuation techniques in circumstances when a quoted price in an active market for the identical liability is not available and clarifies that when estimating the fair value of a liability, the fair value is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. The guidance provided in this ASU is effective for us beginning October 1, 2009. We do not expect ASU 2009-05 to have a material impact on our financial statements once adopted.

 

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which has not yet been reflected in ASC. SFAS No. 167 amends the consolidation guidance applicable to variable interest entities and will affect the overall consolidation analysis under FASB Interpretation No. 46(R). This statement is effective for fiscal years beginning after November 15, 2009. We do not expect SFAS No. 167 to have a material impact on our financial statements once adopted.

 

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 (“SFAS No. 166”), which has not yet been reflected in ASC. SFAS No. 166 amends the derecognition guidance in FASB Statement No. 140, eliminates the exemption from consolidation for qualifying special-purpose entities, and requires additional disclosures about a transferor’s continuing involvement in transferred financial assets. This statement is effective for fiscal years beginning after November 15, 2009, and applies to financial asset transfers occurring on or after the effective date. We do not expect SFAS No. 166 to have a material impact on our financial statements once adopted.

 

In December 2008, the FASB issued amended disclosure requirements for postretirement benefit plan assets, which has been codified at ASC Topic 715-20-65, Compensation — Retirement Benefits. ASC Topic 715-20-65 amends the required disclosures regarding plan assets in an employer’s defined benefit pension or other postretirement plan, including investment allocation decisions, inputs and valuation techniques used to measure the fair value of plan assets and significant concentrations of risks within plan assets. The disclosure requirements are effective for fiscal years ending after December 15, 2009. The adoption of ASC Topic 715-20-65 will require additional disclosures in the financial statements related to the assets of our foreign defined benefit pension plans and will not impact our financial results.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

 

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

 

The following table presents stock-based compensation expense included in the Consolidated Statements of Operations:

 

 

The following is a summary of all common stock option activity for the nine months ended September 30, 2009:

 

 

There were no option grants during the three months ended September 30, 2009 and 2008. The following assumptions were used in the Black-Scholes option pricing model to calculate weighted average fair values of the options granted for the nine months ended September 30, 2009 and 2008:

 

 

The intrinsic value of options exercised for the three months ended September 30, 2009 and 2008 was $0.1 million and $0.2 million, respectively. The intrinsic value of options exercised for the nine months ended September 30, 2009 and 2008 was $0.1 million and $4.1 million, respectively.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Total unrecognized compensation expense from stock options, excluding any forfeiture estimate, was $6.8 million as of September 30, 2009, which is expected to be recognized over a weighted-average period of 2.8 years beginning October 1, 2009.

 

For the nine months ended September 30, 2009 and 2008, cash received under all share-based payment arrangements was $0.3 million and $10.2 million, respectively. There was no tax benefit realized. The related cash receipts are included in financing activities in the accompanying Condensed Consolidated Statements of Cash Flows.

 

 

Our income tax benefit of $25.9 million for the nine months ended September 30, 2009 reflects the release of a $28.1 million valuation allowance on net deferred tax assets of our subsidiary in Korea, offset by $2.2 million of expense primarily related to income taxes at certain of our profitable foreign operations, foreign withholding taxes and minimum taxes. At September 30, 2009, we had U.S. net operating loss carryforwards totaling $311.7 million, which expire at various times through 2029. Additionally, at September 30, 2009, we had $64.9 million of non-U.S. net operating loss carryforwards, which expire at various times through 2017.

 

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.

 

The release of the valuation allowance at our subsidiary in Korea was primarily the result of sustained profitability through the most recent economic downturn which provided sufficient positive evidence it was more likely than not the deferred tax assets would be realized in the future. In Korea, we have tax holidays which begin to phase-out in 2011. We have deductible temporary differences, primarily related to accruals for our severance plan in Korea and depreciation differences, which we expect to reverse in periods beyond 2010 where we do not have a 100% tax exemption. Partially offsetting these deferred tax assets are taxable temporary differences which will also reverse in future periods. The positive evidence considered included: (i) the taxable income reported by our Korean subsidiary in 2008 and for the first nine months of 2009 during a period of global economic weakness; (ii) the cumulative profitability of our Korean subsidiary since 2002 through two economic downturns in the semiconductor industry; and (iii) the ability of management to forecast taxable income for all of 2009 based on visibility of customer demand obtained during the third quarter of 2009. The negative evidence considered included: (i) the decline in operating results of the subsidiary in the fourth quarter of 2008 and the first quarter of 2009; (ii) the reduction in customer demand in the fourth quarter of 2008 and the first quarter of 2009; and (iii) the worldwide economic downturn and its potential negative impact on the subsidiary’s future operating results.

 

Our gross unrecognized tax benefits decreased from $20.9 million at December 31, 2008 to $17.4 million as of September 30, 2009 primarily because of changes to estimates related to tax positions taken in prior years. Of the September 30, 2009 balance, $5.3 million, if recognized, would affect the effective tax rate. It is reasonably possible that the total amount of unrecognized tax benefits will decrease by up to $10.8 million within the next twelve months due to the expiration of statutes of limitations related to revenue attribution and eligibility for certain tax incentives. 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 regarding the outcome of examinations.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

 

Basic earnings per share (“EPS”) is computed by dividing net income attributable to Amkor by the weighted average number of common shares outstanding during the period. 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 employee stock options and convertible debt. The following table summarizes the computation of basic and diluted EPS:

 

 

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:

 

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

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

 

 

 

Inventories consist of the following:

 

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

 

Property, plant and equipment consist of the following:

 

 

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

 

 

 

Acquired intangibles as of September 30, 2009 consist of the following:

 

 

In January 2009, we purchased from a customer certain machinery and equipment and entered into a three year supply agreement in exchange for $9.9 million in cash. The fair value assigned to the supply agreement was $5.6 million.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Acquired intangibles as of December 31, 2008 consist of the following:

 

 

Amortization of identifiable intangible assets for the three months ended September 30, 2009 and 2008 was $1.3 million and $2.5 million, respectively. Amortization of identifiable intangible assets for the nine months ended September 30, 2009 and 2008 was $5.8 million and $7.4 million, respectively. Based on the amortizing assets recognized in our balance sheet at September 30, 2009, amortization for each of the next five years is estimated as follows:

 

 

 

Accrued expenses consist of the following:

 

 

In February 2009, we paid $64.7 million in connection with the resolution of a patent license dispute.

 

In accordance with Korean severance plan regulations, employers may pay employees earned benefits prior to terminating their employment. In January 2009, we paid $31.6 million of voluntary interim benefits using cash on hand which was accrued as of December 31, 2008. The September 30, 2009 accrued severance plan obligation reported as a current liability includes an estimated $40 million for voluntary interim benefits which we expect to pay during the three months ended December 31, 2009 (see Note 12). The amount of the voluntary interim benefit payment in the three months ended December 31, 2009 may vary depending upon employee response.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

 

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

 

 

In the three months ended September 30, 2009, we repurchased in open market transactions $49.2 million aggregate principal amount of our 7.75% senior notes due May 2013. We recorded a loss on extinguishment of $0.4 million for premiums paid related to the repurchase of the senior notes during the three months ended September 30, 2009, and wrote-off a proportionate amount of our deferred debt issuance costs of $0.4 million. Both charges are included in debt retirement, net in the Consolidated Statements of Operations.

 

In the three months ended September 30, 2009, we repurchased in open market transactions $25.3 million aggregate principal amount of our 7.125% senior notes due March 2011. We recorded a loss on extinguishment of $0.3 million for premiums paid and wrote-off a proportionate amount of our deferred debt issuance costs of $0.1 million in the three months ended September 30, 2009. In the nine months ended September 30, 2009, we repurchased in open market transactions $133.6 million aggregate principal amount of our 7.125% senior notes due March 2011. We recorded a gain on extinguishment of $8.6 million and wrote-off a proportionate amount of our

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

deferred debt issuance costs of $0.8 million in the nine months ended September 30, 2009. All amounts are included in debt retirement, net in the Consolidated Statements of Operations.

 

In the nine months ended September 30, 2009, we repurchased in open market transactions $69.0 million aggregate principal amount of our 2.5% convertible senior subordinated notes due May 2011. We recorded a gain on extinguishment of $9.5 million during the nine months ended September 30, 2009, which was partially offset by the write-off of a proportionate amount of our deferred debt issuance costs of $0.9 million. All amounts are included in debt retirement, net in the Consolidated Statements of Operations.

 

In April 2009, we amended our $100.0 million first lien revolving credit facility and extended its term to April 2013. The facility has a letter of credit sub-limit of $25.0 million. Interest is charged under the credit facility at a floating rate based on the base rate in effect from time to time plus the applicable margins which range from 2.0% to 2.5% for base rate revolving loans, or LIBOR plus 3.5% to 4.0% for LIBOR revolving loans. The LIBOR-based interest rate at September 30, 2009 was 3.75%. There have been no borrowings under this credit facility as of September 30, 2009. The borrowing base for the revolving credit facility is based on the amount of our eligible accounts receivable, which exceeded $100.0 million as of September 30, 2009. In connection with amending and extending our $100.0 million facility, we incurred $3.0 million of debt issuance costs in the nine months ended September 30, 2009.

 

In April 2009, we issued $250.0 million of our 6.0% Convertible Senior Subordinated Notes due April 2014 (the “2014 Notes”). The 2014 Notes are convertible at any time prior to the maturity date into our common stock at a price of $3.02 per share, subject to adjustment. The 2014 Notes are subordinated to the prior payment in full of all of our senior debt. The 2014 Notes were purchased by certain qualified institutional buyers and Mr. James J. Kim, Amkor’s Executive Chairman of the Board of Directors and largest shareholder, and an entity controlled by Mr. Kim. Mr. Kim and his affiliate purchased $150.0 million of the 2014 Notes. The net proceeds received of $244.5 million are being used to reduce debt and for general corporate purposes. In connection with the issuance of the 2014 Notes, we incurred $5.5 million of debt issuance costs in the nine months ended September 30, 2009.

 

In January 2009, Amkor Assembly & Test (Shanghai) Co, Ltd., a Chinese subsidiary, entered into a $50.0 million U.S. dollar denominated working capital facility agreement with a Chinese bank maturing in January 2011. The facility is collateralized with certain real property and buildings in China. Principal amounts borrowed must be repaid within twelve months of the drawdown date and may be prepaid at any time without penalty. All principal and interest must be repaid by January 2011. The working capital facility bears interest at LIBOR plus 1.7% which is payable in semi-annual payments. The borrowings outstanding as of September 30, 2009 were $15.0 million. At September 30, 2009, the interest rate ranged from 2.38% to 2.59% based on the dates of borrowing.

 

Interest expense related to short-term borrowings and long-term debt is presented net of interest income in the accompanying Consolidated Statements of Operations. Interest income for the three months ended September 30, 2009 and 2008 was $0.5 million and $2.0 million, respectively. Interest income for the nine months ended September 30, 2009 and 2008 was $1.5 million and $6.8 million, respectively.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

 

Our Philippine, Taiwanese and Japanese subsidiaries sponsor defined benefit 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:

 

 

During the three months ended March 31, 2009, we recognized a curtailment gain of $1.1 million related to the remeasurement of two defined benefit plans due to reductions in force programs (see Note 17). Due to the reduction in our workforce, our service cost and interest cost recognized in the three and nine months ended September 30, 2009 has decreased when compared to the three and nine months ended September 30, 2008.

 

For the three and nine months ended September 30, 2009, we contributed $0.1 million and $0.3 million to the pension plans, respectively, and we expect to contribute an additional $6.8 million during 2009.

 

Our Korean subsidiary participates in an accrued severance plan that covers employees and directors with at least one year of service. Eligible employees are entitled to receive a lump-sum payment upon termination of employment, based on their length of service, seniority and average monthly wages at the time of termination. In addition and in accordance with Korean severance plan regulations, employers may pay employees earned benefits prior to terminating their employment. Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date.

 

The provision recorded for severance benefits for the three months ended September 30, 2009 and 2008 was $5.8 million and $5.7 million, respectively. The provision recorded for severance benefits for the nine months ended September 30, 2009 and 2008 was $12.6 million. The balance recorded in pension and severance obligations for accrued severance at our Korean subsidiary was $69.5 million and $99.6 million at September 30, 2009 and December 31, 2008, respectively. At September 30, 2009 and December 31, 2008, there was an additional $46.1 million and $31.6 million classified in accrued expenses, respectively. In January 2009, we paid out $31.6 million for voluntary interim benefits to approximately 750 eligible employees, and we expect to pay out $40 million in voluntary interim benefits during the three months ended December 31, 2009. The amount of the voluntary interim benefit payment in the three months ended December 31, 2009 may vary depending upon employee response. The voluntary interim benefit payments are being made to lower our long-term commitments.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

 

Other non-current liabilities consist of the following:

 

 

Customer advances relate to supply agreements with customers where we commit capacity in exchange for a customer’s prepayment of services. At September 30, 2009, $12.0 million in customer advances has been classified in current liabilities since they are expected to be paid out within the next twelve months.

 

 

In April 2009, we amended our $100.0 million first lien revolving credit facility and extended the term to April 2013. The facility has a letter of credit sub-limit of $25.0 million. As of September 30, 2009, we have $0.4 million of standby letters of credit outstanding and have an additional $24.6 million available for letters of credit. Such standby letters of credit are used in the ordinary course of our business and are collateralized by our cash balances.

 

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

 

Legal Proceedings

 

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

 

Arbitration Proceedings with Tessera, Inc.

 

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

 

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

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

December 1, 2008. The final award, plus interest, and the royalties for December 2008, were paid when due in February 2009.

 

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

 

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

 

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

 

In connection with the new arbitration proceeding, we deposited $5.1 million in an escrow account, which is classified as restricted cash in non-current assets. This amount represented our good faith estimate of the disputed amount of royalties that we expected Tessera to allege that we owe on packages assembled by us for one of our customers for the period from December 2, 2008 through June 30, 2009. We do not believe that the funds held in escrow are owed to Tessera and these funds may only be distributed upon the order of the panel in the current arbitration proceeding.

 

Securities Class Action Litigation

 

On January 23, 2006, a purported securities class action suit entitled Nathan Weiss et al. v. Amkor Technology, Inc. et al., was filed in U.S. District Court for the Eastern District of Pennsylvania against Amkor and certain of its current and former officers. Subsequently, other law firms filed two similar cases, which were consolidated with the initial complaint. The plaintiffs amended the complaint to add additional officer, director and former director defendants and alleged improprieties in certain option grants. The amended complaint further alleged that defendants improperly recorded and accounted for the options in violation of generally accepted accounting principles and made materially false and misleading statements and omissions in its disclosures in violation of the federal securities laws, during the period from July 2001 to July 2006. The amended complaint requested certification as a class action pursuant to Fed. R. Civ. Proc. 23, compensatory damages, costs and expenses, and such other further relief as the court deems just and proper. On December 28, 2006, pursuant to motion by defendants, the U.S. District Court for the Eastern District of Pennsylvania transferred this action to the U.S. District Court for the District of Arizona.

 

On September 25, 2007, the U.S. District Court for the District of Arizona dismissed this case with prejudice. On October 23, 2007, plaintiffs filed an appeal from the dismissal to the U.S. Court of Appeals for the Ninth Circuit.

 

On December 10, 2008, the parties entered into a memorandum of understanding to settle this case. The parties have finalized and filed formal settlement documentation with the court, under which Amkor and the other defendants will receive a full and complete release of all claims in the litigation in exchange for payment of an

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

aggregate amount of $11.3 million. The directors and officers liability insurance carrier and Amkor paid $9.0 million and $2.3 million, respectively, into a settlement fund during the three months ended September 30, 2009. The settlement is subject to review and approval by the court.

 

We do not expect the outcome in this case to have a material adverse affect on our liquidity, results of operations, financial condition or cash flows. We caution, however, that due to the inherent uncertainty of any litigation, if the court does not approve the settlement, an adverse outcome in this matter could result in material liabilities and could have a material adverse effect on our liquidity, results of operations, financial condition and cash flows.

 

Securities and Exchange Commission Investigation

 

In August 2005, the SEC issued a formal order of investigation regarding certain activities with respect to Amkor securities. The investigation related initially to transactions in our securities and was later expanded to include our historical stock option practices. While the SEC’s investigation continues and we cannot predict the outcome, we believe that the investigation is now limited to certain securities trading by a former non-executive employee. We have fully cooperated with the SEC throughout this investigation, and intend to continue to do so.

 

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

 

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

 

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

 

We filed a petition in November 2004 to have the ALJ’s ruling reviewed by the full International Trade Commission. 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. Following findings by the ALJ, on November 17, 2005, the Commission filed a second petition in the United States District Court for the District of Columbia to enforce the subpoena issued to the third party. On February 9, 2006, the ITC ordered a delay in issuance of the Final Determination pending resolution of that enforcement action. An order by the District Court enforcing the subpoena became final on January 9, 2009, and the third party has produced documents pursuant to the subpoena.

 

On January 28, 2009, the Commission extended the target date for completion of the investigation to May 1, 2009. On April 20, 2009, Carsem filed a renewed motion to extend the target date and to remand the investigation. On April 28, 2009, the Commission extended the target date to July 1, 2009 for completion of the investigation. On July 1, 2009, the Commission remanded the investigation for a second time to the ALJ to reopen the record to admit into evidence documents and related discovery obtained from the enforcement of the above-referenced third-party subpoena.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

On September 10, 2009, a two-day hearing was held by the ALJ and 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. We will now be taking steps under ITC procedures for a ruling by the Commission upholding or adopting the ALJ’s decision and issuing an exclusion order that would prohibit Carsem from importing its infringing Dual and Quad Flat No-Lead Packages into the United States. The ALJ has set February 2, 2010 as the target date for completion of the investigation.

 

In November 2003, we filed a complaint in 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, 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.

 

 

We have two reportable segments, packaging and test. Packaging and test are integral parts of 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 packaging process creates an electrical interconnect between the semiconductor chip and the system board. In packaging, fabricated semiconductor wafers are separated into individual chips. These chips are typically attached through wire bond or wafer bump technologies to a substrate or leadframe and then encased in a protective material. In the case of an advanced wafer level package, the package is assembled on the surface of a wafer. The packaged chips are then tested using sophisticated equipment to ensure that each packaged chip meets its design and performance specifications.

 

The accounting policies for segment reporting are the same as those for our Consolidated Financial Statements. We evaluate our operating segments based on gross margin and gross property, plant and equipment. We do not specifically identify and allocate total assets by operating segment. Summarized financial information concerning reportable segments is shown in the following table. The “other” column reflects other corporate adjustments to net sales and gross profit and the property, plant and equipment of our sales and corporate offices. For the three and nine months ended September 30, 2009, “other” gross profit includes exit costs associated with contractual obligations for the Singapore land and building leases as well as abandoned leasehold improvements and asset impairments (see Note 17).

 

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

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

 

 

The following table presents the financial instruments that are not recorded at fair value but which require fair value disclosure as of September 30, 2009 and December 31, 2008:

 

 

Publicly quoted trading prices are based on the prices reported on September 30, 2009 and December 31, 2008, respectively. Market based assumptions include current borrowing rates for similar types of borrowing arrangements adjusted for duration, optionality, and risk profile.

 

 

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 current business needs. The following table summarizes our exit activities and reduction in force initiatives associated with these activities as of September 30,

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

2009. “Charges” represents the initial charge related to the exit activity. “Adjustments” represent revisions of estimates. “Cash Payments” and “Non-cash Amounts” consist of the utilization of “Charges”.

 

 

 

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

2008 Activities

 

During the nine months ended September 30, 2008, we completed voluntary and involuntary reduction in force programs at certain of our foreign locations. The reduction in force programs affected approximately 700 employees. We recorded a charge for special and contractual termination benefits related to these programs of $9.5 million and $11.8 million in the three and nine months ended September 30, 2008, respectively. The amounts charged to cost of sales and selling, general and administrative expenses for the three months ended September 30, 2008 were $8.1 million and $1.4 million, respectively. The amounts charged to cost of sales and selling, general and administrative expenses for the nine months ended September 30, 2008 were $10.1 million and $1.7 million, respectively. The amount recorded in accrued expenses for contractual and special termination benefits was $3.1 million as of September 30, 2008.

 

 

On October 30, 2009, Amkor and Toshiba Corporation (“Toshiba”) invested in Nakaya Microdevices Corporation (“NMD”) forming a joint venture to provide semiconductor assembly and final testing services in Japan. As a result of the transaction, NMD is now owned 60% by the existing shareholders of NMD, 30% by Amkor and 10% by Toshiba and has changed its name to J-Devices Corporation (“J-Devices”). J-Devices has also entered into a supply agreement, license agreement, support services agreements, employee secondment agreements and various other agreements with Toshiba. Amkor invested 1.5 billion JPY (approximately $17 million) for its 30% equity interest, purchased 4.0 billion JPY (approximately $45 million) of assembly and test equipment from Toshiba and leased such equipment to J-Devices. In addition, Amkor will have the right, at its discretion, to acquire a majority interest in J-Devices beginning in 2012. We expect to account for the initial investment in J-Devices using the equity method.

 

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) our plan to exit manufacturing operations in Singapore and related costs, (2) the amount of our expected capital additions and focus on customer requirements, investments in technology advancements and cost reduction programs, (3) the release of valuation allowances related to taxes in the future, (4) our ability to fund our operating activities, working capital, capital expenditures and debt service requirements for the next twelve months, (5) the expected use of cash flows, if any in the future, (6) expected workforce reductions and related severance charges, (7) our repurchase of outstanding debt in the future, (8) payment of dividends, (9) compliance with our covenants, (10) expected contributions to, and interim payouts from, defined benefit pension plans, (11) liability for unrecognized tax benefits, (12) the effect of foreign currency exchange rate exposure on our financial results, (13) improvement in the semiconductor industry, (14) the effect of capacity utilization rates on our costs and gross margin, 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 and nine months ended September 30, 2009 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 subcontractors of semiconductor packaging and test services. Packaging and test are integral steps in the process of manufacturing semiconductor devices. The manufacturing process begins with silicon wafers and involves the fabrication of electronic circuitry into complex patterns, thus creating large numbers of individual chips on the wafers. The fabricated wafers are then probe tested to ensure the individual devices meet electrical specifications. The packaging process creates an electrical interconnect between the semiconductor chip and the system board. In packaging, fabricated semiconductor wafers are separated into individual chips. These chips are typically attached through wire bond or wafer bump technologies to a substrate or leadframe and then encased in a protective material. In the case of an advanced wafer level package, the package is assembled on the surface of a wafer.

 

Our packages are designed for application specific body size and electrical connection requirements to provide optimal electrical connectivity and thermal performance. The packaged chips are then tested using sophisticated equipment to ensure that each packaged chip meets its design and performance specifications. Increasingly, packages are custom designed for specific chips and specific end-market applications. We are able to provide turnkey assembly and test solutions including semiconductor wafer bump, wafer probe, wafer backgrind, package design, assembly, test and drop shipment services.

 

The semiconductor industry is showing signs of improvement from the recent cyclical downturn. Our unit demand and utilization increased during the three months ended September 30, 2009 compared to the previous quarter, although lower than the prior year comparable period.

 

Our net sales for the three months ended September 30, 2009 and 2008 were $616.2 million and $719.7 million, respectively. In the three months ended September 30, 2009, sales decreased $103.5 million, or 14.4%, from the three months ended September 30, 2008 primarily due to the general decline in wirebond packaging services and inventory management efforts by our customers as a result of the global economic recession and weakness in consumer spending. In addition, our flip chip packaging sales decreased for the three months ended September 30,

2009 compared to the three months ended September 30, 2008 primarily due to lower unit demand for gaming systems.

 

Gross margin for the three months ended September 30, 2009 and 2008 was 25.1% and 17.9%, respectively. Cost of sales for the three months ended September 30, 2008 included a charge of $50.0 million for royalties related to a patent license dispute. The $50.0 million charge reduced our gross margin by seven percentage points for the three months ended September 30, 2008.

 

Amkor’s net income for the three months ended September 30, 2009 was $80.9 million, or $0.31 per diluted share, compared with Amkor’s net income of $29.2 million, or $0.15 per diluted share, for the three months ended September 30, 2008. The net income for the three months ended September 30, 2009 includes an income tax benefit of $30.9 million primarily from the release of a tax valuation allowance at our subsidiary in Korea (See Note 4 “Income Taxes” to our Consolidated Financial Statements in Part I Item I of this Quarterly Report). The net income for the three months ended September 30, 2009 also includes a net foreign currency loss of $8.3 million from the remeasurement of certain subsidiaries’ balance sheet items compared to a $23.0 million net foreign currency gain in the three months ended September 30, 2008. Net income for the three months ended September 20, 2008 included a $52.4 million charge, net of tax, or $0.25 per diluted share, relating to the accrued and unpaid royalties and interest for a patent license dispute.

 

Our capital additions totaled $77.3 million in the three months ended September 30, 2009. We have increased our expected capital additions for the full year 2009 to $200 million, or approximately 9% of expected net sales for the year, in response to higher than anticipated customer demand. Capital additions are focused on specific customer requirements, technology advancements and cost reduction programs.

 

As part of our focus on generating cash flow and driving greater factory and administrative efficiencies, beginning in 2008 and continuing into 2009, we implemented cost reduction measures that include lowering executive and certain other employee compensation, reducing employee and contractor headcount, and shortening work weeks. Some costs previously reduced through cost reduction measures, such as labor and other overhead costs, have increased in the three months ended September 30, 2009 and will continue to increase in order to align with customer demand.

 

We generated $81.5 million of free cash flow in the three months ended September 30, 2009, and $44.9 million of free cash flow in the nine months ended September 30, 2009. Cash provided by operating activities was $156.8 million for the nine months ended September 30, 2009, as compared with $457.4 million for the nine months ended September 30, 2008. Free cash flow for the nine months ended September 30, 2009 decreased $95.4 million from the prior year comparable period primarily due to reduced business levels due to the recession and approximately $104.9 million of payments made relating to the resolution of a patent license dispute and employee benefit and separation payments partially offset by decreased capital additions. We define free cash flow as net cash provided by operating activities less investing activities related to the acquisition of property, plant and equipment. Free cash flow is not defined by U.S. generally accepted accounting principles (“U.S. GAAP”) and a reconciliation of free cash flow to net cash provided by operating activities is set forth under the caption “Cash Flows” below. Please see “Liquidity and Capital Resources” and “Cash Flows” below for a further analysis of the change in our balance sheet and cash flows during the first nine months of 2009.

 

We believe our financial position and liquidity are sufficient to fund our operating activities for at least the next twelve months. In April 2009, we amended our $100.0 million first lien revolving credit facility which, among other things, extended the maturity date from November 2009 to April 2013. Also, in April 2009, we issued $250.0 million of our 6.0% convertible senior subordinated notes due April 2014 (the “2014 Notes”). In the nine months ended September 30, 2009, we repurchased in open market transactions $133.6 million in aggregate principal amount of our 7.125% senior notes due March 2011, $69.0 million in aggregate principal amount of our 2.5% convertible senior subordinated notes due May 2011, and $49.2 million in aggregate principal amount of our 7.75% senior notes due May 2013 using $210.1 million of net proceeds from issuance of the 2014 Notes and $23.9 million of cash on hand. At September 30, 2009, our cash and cash equivalents totaled approximately $446.7 million with an aggregate of $86.4 million of debt due through the end of 2010. In 2011, the remaining $119.1 million aggregate principal amount of our 2.5% convertible senior subordinated notes and 7.125% senior notes mature.

Results of Operations

 

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