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

Form 10-Q

 

 

Commission File Number 000-29472

 

AMKOR TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

 

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

 

(480) 821-5000

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes 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 April 30, 2010 was 183,731,815.

 

 

QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2010

TABLE OF CONTENTS

 

 

 

AMKOR TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

 

The accompanying notes are an integral part of these statements.

AMKOR TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)

 

 

The accompanying notes are an integral part of these statements.

AMKOR TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

 

The accompanying notes are an integral part of these statements.

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Basis of Presentation.  The Consolidated Financial Statements and related disclosures as of March 31, 2010 and for the three months ended March 31, 2010 and 2009 are unaudited, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The December 31, 2009 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, 2009 filed on Form 10-K with the SEC on February 24, 2010. The results of operations for the three months ended March 31, 2010 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 our subsidiaries.

 

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

 

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

 

 

Recently Adopted Standards

 

In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). This ASU codified consolidation guidance previously issued in June 2009 which applies to variable interest entities and affects the overall consolidation analysis under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities. This standard is effective for fiscal years beginning after November 15, 2009. Our adoption of ASU 2009-17 on January 1, 2010, did not have an impact on our financial statements.

 

In December 2009, the FASB issued ASU 2009-16, Accounting for Transfers of Financial Assets (“ASU 2009-16”). This ASU codified guidance previously issued in June 2009 which amends existing derecognition guidance, 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 standard is effective for fiscal years beginning after November 15, 2009, and applies to financial asset transfers occurring on or after the effective date. Our adoption of ASU 2009-16 on January 1, 2010, did not have an impact on our financial statements.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

All of our share-based payments to employees, including grants of employee stock options and restricted share stocks, are measured at fair value and expensed over the service period (generally the vesting period). The following table presents stock-based compensation expense attributable to stock options and restricted stock shares. There is no deferred income tax benefit in either period.

 

 

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

 

 

The following is a summary of all common stock option activity for the three months ended March 31, 2010:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The following assumptions were used in the Black-Scholes option pricing model to calculate weighted average fair values of the options granted for the three months ended March 31, 2009. There were no options granted during the three months ended March 31, 2010.

 

 

The intrinsic value of options exercised for the three months ended March 31, 2010 was $0.1 million. There were no options exercised during the three months ended March 31, 2009. For the three months ended March 31, 2010, cash received for stock option exercises was $0.4 million, while no cash was received in the three months ended March 31, 2009. There was no tax benefit realized. The related cash receipts are included in financing activities in the accompanying Condensed Consolidated Statements of Cash Flows. Total unrecognized compensation expense from stock options, including a forfeiture estimate, was approximately $4.6 million as of March 31, 2010, which is expected to be recognized over a weighted-average period of 2.2 years beginning April 1, 2010. To the extent the actual forfeiture rate is different than what we have anticipated, stock-based compensation related to these awards will be different from our expectations.

 

Restricted Stock Shares

 

In February 2010, we granted 472,000 restricted stock shares to employees under the 2007 Equity Incentive Plan. The restricted stock shares vest ratably over 4 years, with 25% of the shares at the end of the first year, and 1/48^th each month thereafter, such that 100% of the shares will become vested on the fourth anniversary of the award date. Although ownership of the restricted stock shares does not transfer to the recipients until the shares have vested, recipients have voting and nonforfeitable dividend rights on these shares from the date of grant.

 

The valuation of restricted stock shares is determined based on the fair market value of the underlying shares on the date of the grant and amortized on a straight-line basis over the 4 year vesting period. The unrecognized compensation cost of nonvested awards, including a forfeiture estimate, was $2.4 million as of March 31, 2010, which is expected to be recognized over a weighted average period of approximately 3.7 years beginning April 1, 2010. To the extent the actual forfeiture rate is different than what we have anticipated, stock-based compensation related to these awards will be different from our expectations.

 

The following table summarizes our restricted stock activity for the three months ended March 31, 2010:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

Our income tax benefit of $0.2 million for the three months ended March 31, 2010 reflects $1.1 million of expense primarily related to income taxes at certain of our foreign operations, foreign withholding taxes and minimum taxes which were offset by reductions in unrecognized tax benefits. Our income tax expense reflects income taxed in foreign jurisdictions where we benefit from tax holidays. At March 31, 2010, we had U.S. net operating loss carryforwards totaling $361.5 million, which expire at various times through 2029. Additionally, at March 31, 2010, we had $68.8 million of non-U.S. net operating loss carryforwards, which expire at various times through 2020.

 

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 decreased from $5.1 million at December 31, 2009 to $4.1 million as of March 31, 2010 primarily because of expired statutes of limitations related to the use of such benefits. All of the March 31, 2010 balance of $4.1 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 $1.8 million within the next twelve months related to our eligibility for certain tax incentives in a foreign jurisdiction. 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.

 

 

Basic earnings per share (“EPS”) is computed by dividing net income (loss) attributable to Amkor common stockholders by the weighted average number of common shares outstanding during the period. The accounting framework for calculating earnings per share includes guidance on unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents and states that they are participating securities and should be included in the computation of earnings per share pursuant to the two-class method. As discussed in Note 3, we granted shares of restricted stock which entitle recipients to have voting and nonforfeitable dividend rights from the date of grant. As a result, we have applied the two-class method to determine earnings per share.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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, unvested restricted shares and convertible debt. The basic and diluted EPS amounts are the same for the three months ended March 31, 2009, as a result of the potentially diluted securities being antidilutive due to a net loss. 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 March 31, 2010 consist of the following:

 

 

Acquired intangibles as of December 31, 2009 consist of the following:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Amortization of identifiable intangible assets for the three months ended March 31, 2010 and 2009 was $1.2 million and $2.8 million, respectively. Based on the amortizing assets recognized in our balance sheet at March 31, 2010, amortization for each of the next five years is estimated as follows:

 

 

 

Investments consist of the following:

 

 

J-Devices Corporation

 

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

 

Our investment includes our 30% equity interest and call options to acquire additional equity interest. Under the equity method of accounting, we recognize our 30% proportionate share of J-Devices’ net income or loss, which includes J-Devices’ income taxes in Japan during each accounting period. In addition, we record equity method adjustments for the amortization of a basis difference as our carrying value exceeded our equity in the net assets of J-Devices at the date of investment and other adjustments required by the equity method.

 

In conjunction with entering into the joint venture, one of our existing subsidiaries in Japan purchased assembly and test equipment from Toshiba and leased the equipment to J-Devices under an agreement which is accounted for as a direct financing lease. For the three months ended March 31, 2010, we recognized $0.3 million in interest income. Our lease receivables consist of the following:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

Accrued expenses consist of the following:

 

 

 

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

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

On May 4, 2010, we issued $345 million of our 7.375% Senior Notes due April 2018 (the “2018 Notes”). The 2018 Notes were issued at par and are senior unsecured obligations. Interest is payable semi-annually on May 1 and November 1 of each year at a rate of 7.375%, commencing on November 1, 2010. We will use the proceeds together with existing cash to redeem in full the $53.5 million outstanding principal amount of our 7.125% senior notes due 2011 and the $358.3 million principal amount of our 7.75% senior notes due 2013, and to pay related fees and expenses during the three months ended June 30, 2010.

 

In April 2010, Amkor Technology Taiwan Ltd, a Taiwanese subsidiary, entered into a 1.5 billion Taiwan dollar (approximately $47 million) term loan with a Taiwanese bank due April 2015. Principal payments are due annually in the first year and semiannually thereafter, and interest payments are due monthly. The term loan accrues interest at the 90-day commercial paper rate plus 0.835%. The interest rate at April 30, 2010 was 2.26%. The term loan is collateralized with certain land, buildings, and equipment in Taiwan. The proceeds will be used for capital expenditures and general corporate purposes.

 

In March 2010, Amkor Iwate Company, Ltd., a Japanese subsidiary (“AIC”), entered into a 2.5 billion Japanese yen (approximately $28 million) term loan with a Japanese bank due September 2012. Principal amounts borrowed are to be repaid in equal quarterly payments and may be prepaid at any time without penalty. The term loan accrues interest monthly at the Tokyo Interbank Offering Rate (“TIBOR”) plus 0.8%. The interest rate at March 31, 2010 was 1.4%. The borrowing outstanding as of March 31, 2010 was $24.6 million. The proceeds of the term loan were used to repay the revolving line of credit with the same bank.

 

Additionally, in March 2010, AIC entered into a 1.0 billion Japanese yen (approximately $11 million) term loan with another Japanese bank due October 2012. Principal amounts borrowed are to be repaid in equal monthly payments and may be prepaid at any time without penalty. The term loan accrues interest monthly at TIBOR plus 0.65%. The interest rate at March 31, 2010 was 0.84%. The borrowing outstanding was $10.5 million as of March 31, 2010. The term loan is collateralized with certain equipment located at our AIC facilities. The proceeds of the term loan were used to repay the $3.3 million of AIC’s existing revolving line of credit balance and the remaining proceeds will be used for general corporate purposes.

 

There have been no borrowings under our senior secured credit facility as of March 31, 2010; however, we have utilized $0.5 million of the available letter of credit sub-limit of $25.0 million. The borrowing base for the revolving credit facility is based on the amount of our eligible accounts receivable, which exceeded $100.0 million as of March 31, 2010. This facility includes a number of affirmative and negative covenants, which could restrict our operations. If we were to default under the first lien revolving credit facility, we would not be permitted to draw additional amounts, and the banks could accelerate our obligation to pay all outstanding amounts.

 

Our secured bank debt agreements and the indentures governing our senior, convertible senior subordinated, and subordinated 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, 2010.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

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:

 

 

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).

 

For the three months ended March 31, 2010, we contributed $0.1 million to the pension plans, and we expect to contribute an additional $6 million during 2010.

 

Korean Severance Plan

 

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

 

The provision recorded for severance benefits for the three months ended March 31, 2010 and 2009 was $4.2 million and $2.3 million, respectively. The balance recorded in non-current pension and severance obligations for accrued severance at our Korean subsidiary was $69.3 million and $64.4 million at March 31, 2010 and December 31, 2009, respectively.

 

 

The accounting framework for determining fair value for assets and liabilities 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,

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3, defined as unobservable inputs that are not corroborated by market data.

 

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

 

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

 

 

The following table presents the financial instruments that are not recorded at fair value but which require fair value disclosure as of March 31, 2010 and December 31, 2009:

 

 

Publicly quoted trading prices are based on the prices reported on the respective balance sheet dates. Market based assumptions include current borrowing rates for similar types of borrowing arrangements adjusted for duration, optionality, and risk profile.

 

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

 

Assets and liabilities measured at fair value on a nonrecurring basis include impairment measurements when required for long-lived assets. For us, long-lived assets include property, plant and equipment, intangible assets and an equity investment. Impairment losses recognized in the three months ended March 31, 2010 and 2009 were primarily related to machinery and equipment. Machinery and equipment appraisals were obtained resulting in nonrecurring fair value measurements of $0.7 million and $0.9 million during the three months ended March 31,

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

2010 and 2009, respectively. Impairment losses on property, plant, and equipment included in cost of sales were $0.6 million and $1.0 million for the three months ended March 31, 2010 and 2009, respectively.

 

 

We have a $100.0 million first lien revolving credit facility that matures in April 2013. The facility has a letter of credit sub-limit of $25.0 million. As of March 31, 2010, we have $0.5 million of standby letters of credit outstanding and have an additional $24.5 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 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.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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 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 panel has scheduled a hearing for September 27 and 28, 2010.

 

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

 

In connection with the new arbitration proceeding, we deposited $5.1 million in an escrow account, which is classified as restricted cash in non-current assets at December 31, 2009. 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 deposited an additional $6.1 million in escrow in February 2010 covering the period from July 1 through December 31, 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.

 

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.

 

In November 2003, we also 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, and treble damages due to willful infringement plus interest, costs and attorney’s fees. This District Court action has been stayed pending resolution of the ITC case.

 

The ITC Administrative Law Judge (“ALJ”) conducted an evidentiary hearing during July and August of 2004 in Washington D.C. and 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.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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.

 

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.

 

On December 16, 2009, the Commission ordered a review of the ALJ’s Initial Determination. On February 18, 2010, the Commission reversed a finding by the ALJ on the issue of whether a certain invention constitutes prior art to Amkor’s asserted patents. The Commission remanded the investigation to the ALJ to make further findings in light of the Commission’s ruling. On March 22, 2010, the ALJ issued a Supplemental Initial Determination. Although the ALJ’s ruling did not disturb the prior finding that Carsem Dual and Quad Flat No-Lead Packages infringe some of Amkor’s patent claims relating to MicroLeadFrame technology, the ALJ found that some of Amkor’s patent claims are invalid and, as a result, the ALJ did not find a statutory violation of the Tariff Act. The ALJ’s ruling is not final and we are seeking a ruling by the Commission to modify the ALJ’s decision.

 

The target date for a final ruling by the Commission is July 20, 2010.

 

 

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

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

concerning reportable segments is shown in the following table. For 2010, the “other” column includes exit costs associated with contractual obligations for our Singapore land and building leases as well as asset impairments.

 

 

 

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.

 

Singapore Manufacturing Operations

 

In June 2009, we communicated to our employees the decision to wind-down and exit our manufacturing operations in Singapore. We expect to complete our exit plans before the end of 2010. This affects approximately 600 employees. Our exit plan includes relocating the majority of the machinery and equipment to other factories. The following table summarizes the costs of our exit activities and reduction in force initiatives associated with our Singapore manufacturing operations for the three months ended March 31, 2010. “Charges” represents the initial charge related to the exit activity. “Cash Payments” and “Non-cash Amounts” consist of the utilization of “Charges”.

 

 

The liability for one-time involuntary termination benefits for employees that will provide service beyond a minimum retention period will be recognized over the future service period. During the three months ended March 31, 2010, we recorded charges for termination benefits of $0.9 million, of which $0.6 million, and $0.3 million were recorded in cost of sales and selling, general and administrative expenses, respectively. As of March 31, 2010, we expect to incur approximately $1.8 million of additional employee separation costs during the remainder of 2010.

 

Contractual obligation costs, asset impairments and other costs are included in costs of goods sold. In January 2010, we made a final payment related to the early termination of our lease of one of our facilities that was vacated

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

and relief from our existing $1.1 million asset retirement obligation related to the leased property. Asset impairments of $0.3 million relate to non-transferable machinery and equipment.

 

All amounts accrued at March 31, 2010 are classified in current liabilities.

 

Reduction in Force

 

During the first three months of 2009, we reduced our headcount through reductions-in-force programs by 1,750 employees in certain foreign locations. We recorded a charge for one-time and contractual termination benefits of $6.3 million, net of a pension curtailment gain, of which $5.8 million and $0.5 million were charged to cost of sales and selling, general and administrative expenses, respectively. All amounts were paid prior to March 31, 2009.

 

North Carolina Manufacturing Operations

 

During 2007, we commenced a phased transition of all wafer level processing production from our wafer bumping facility in North Carolina to our facility in Taiwan. All wafer level processing production ceased at our North Carolina facility in the three months ended June 30, 2009, and the North Carolina facility is now exclusively used for research and development activities. We recorded charges for termination benefits during the three months ended March 31, 2009 of $0.6 million, of which $0.5 million and $0.1 million were recorded in cost of sales and selling, general and administrative expenses, respectively. All amounts were paid prior to December 31, 2009.

 

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 and timing of our expected capital investments and focus on customer requirements, investments in technology advancements and cost reduction programs, (2) expectations regarding labor and other manufacturing costs in support of higher customer demand, (3) our ability to fund our operating activities for the next twelve months, (4) the effect of capacity utilization rates on our gross margin, (5) the release of valuation allowances related to taxes in the future, (6) the expected use of future cash flows, if any, for the expansion of our business, capital expenditures and the repayment of debt, (7) expected workforce reductions and related severance charges in connection with our plan to exit manufacturing operations in Singapore, (8) our repurchase of outstanding debt in the future, (9) payment of dividends, (10) compliance with our covenants, (11) expected contributions to defined benefit pension plans, (12) liability for unrecognized tax benefits, (13) the effect of foreign currency exchange rate exposure on our financial results, (14) the volatility of the trading price of our common stock, 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, 2010 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.

 

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

The semiconductor industry has continued to recover from the recent cyclical downtown. Our unit demand increased nearly 1.3 billion units to 2.5 billion units during the three months ended March 31, 2010 compared to 1.2 billion units during the three months ended March 31, 2009, principally driven by the recovery of the semiconductor industry and improved consumer spending following the global economic downturn.

 

Our net sales of $645.7 million for the three months ended March 31, 2010 increased $256.9 million or 66% compared to net sales of $388.8 million for the three months ended March 31, 2009. Consumer spending beginning in the second half of 2009 and into the first quarter of 2010 resulted in increased demand for end-user products such as mobile phones, consumer electronics, computers and networking equipment, which require our semiconductor package (sometimes referred to as assembly) and test services. During the three months ended March 31, 2009, we experienced the lowest level of demand during the recent industry downturn.

 

Sales for the first quarter of 2010 were up across all product lines and end markets due to increased demand following the recovery from the recent economic and industry downturn compared to the three months ended March 31, 2009.

 

Gross margin of 21.2% for the three months ended March 31, 2010 was up from 12.4% for the three months ended March 31, 2009. Our gross margin for the three months ended March 31, 2010 benefitted from increased levels of demand and the corresponding higher level of utilization of our manufacturing assets. Gross margin in the three months ended March 31, 2010, was also impacted by the increased cost of gold used in many of our wirebond packages and the negative impact of foreign currency exchange rate movements from the three months ended March 31, 2009. Other factors affecting gross margin in the three months ended March 31, 2010, were increased labor and other manufacturing costs and the restoration of some of the compensation costs and other temporary cost reduction initiatives implemented in 2009.

 

Our net income for the three months ended March 31, 2010 was $44.3 million, or $0.18 per diluted share, compared with a net loss of $22.1 million, or $0.12 per diluted share, for the three months ended March 31, 2009. The net income for the three months ended March 31, 2010 includes a net foreign currency loss of $1.0 million from the remeasurement of certain subsidiaries’ balance sheet items compared to a $12.1 million net foreign currency gain in the three months ended March 31, 2009.

 

Our capital additions totaled $72.7 million for the three months ended March 31, 2010 which were lower than expected due to extended lead times from equipment suppliers. Our capital additions totaled $24.3 million for the three months ended March 31, 2009. We expect our 2010 capital intensity to be approximately 14% of net sales. Capital additions are focused on incremental capacity for advanced packaging services including chip scale, ball grid array and bumping, specific customer requirements, technology advancements and cost reduction programs.

 

Cash provided by operating activities was $103.7 million for the three months ended March 31, 2010, as compared with cash used in operating activities of $63.2 million for the three months ended March 31, 2009. We experienced positive free cash flow of $36.6 million for the three months ended March 31, 2010, which increased $142.6 million from the prior year comparable period primarily due to approximately $103.7 million of payments made in the three months ended March 31, 2009 relating to the resolution of a patent license dispute and employee benefit and separation payments, as well as reduced business levels in 2009 as a result of the recession. We define free cash flow as net cash provided by operating activities less investing activities related to the acquisition of property, plant and equipment. Free cash flow is not defined by U.S. generally accepted accounting principles (“U.S. GAAP”) and a reconciliation of free cash flow to net cash provided by operating activities is set forth under the caption “Cash Flows” below. Please see “Liquidity and Capital Resources” and “Cash Flows” below for a further analysis of the change in our balance sheet and cash flows during the first three months of 2010.

 

We believe our financial position and liquidity are sufficient to fund our operating activities for at least the next twelve months. At March 31, 2010, our cash and cash equivalents totaled approximately $425.5 million with an aggregate of $42.8 million of debt due through the end of 2010. On May 4, 2010, we issued $345 million of our 7.375% Senior Notes due 2018. We will use the proceeds together with existing cash to redeem in full the $53.5 million outstanding principal amount of our 7.125% senior notes due 2011 and the $358.3 million principal amount of our 7.75% senior notes due 2013, and to pay related fees and expenses during the three months ended June 30, 2010.

Results of Operations

 

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

 

 

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

 

Net Sales.  Net sales increased $256.9 million, or 66.1%, to $645.7 million in the three months ended March 31, 2010 from $388.8 million in the three months ended March 31, 2009. All product lines increased for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 primarily due to the recovery of the semiconductor industry and improved consumer spending following the global economic downturn.

 

Packaging Net Sales.  Packaging net sales increased $241.7 million, or 71.3%, to $580.6 million in the three months ended March 31, 2010 from $338.9 million in the three months ended March 31, 2009 because of the broad-based product demand across our package offerings. Packaging unit volume increased in the three months ended March 31, 2010 to 2.5 billion units, compared to 1.2 billion units in the three months ended March 31, 2009 primarily due to the recovery of the semiconductor industry and improved consumer spending following the global economic downturn. The growth in net sales of chip scale packaging services with higher average sales prices per unit contributed to the overall growth in net sales from the three months ended March 31, 2009.

 

Test Net Sales.  Test net sales increased $15.2 million, or 30.5%, to $65.1 million in the three months ended March 31, 2010 from $49.9 million in the three months ended March 31, 2009 primarily due to the recovery of the semiconductor industry and improved consumer spending following the global economic downturn.

 

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

 

Material costs as a percentage of net sales increased to 41.9% for the three months ended March 31, 2010 from 39.2% in the three months ended March 31, 2009 due to change in mix to packages with higher material content as a percentage of net sales and the increased cost of gold.

 

As a percentage of net sales, labor costs decreased to 13.2% in the three months ended March 31, 2010 from 16.5% in the three months ended March 31, 2009. The decrease in labor costs as a percentage of net sales was due primarily to increased customer demand and the corresponding increase in net sales. The increase in absolute labor dollars is partially due to the restoration in 2010 of some of the compensation costs and other temporary cost reduction initiatives such as foreign subsidy programs which were implemented in 2009. In addition, labor costs in the three months ended March 31, 2010 included a charge of $0.9 million related to workforce reduction programs associated with the wind-down and exit of manufacturing operations in Singapore compared to $6.3 million in the three months ended March 31, 2009 for workforce reduction programs.

 

As a percentage of net sales, other manufacturing costs decreased to 23.7% in the three months ended March 31, 2010 from 31.9% in the three months ended March 31, 2009 due to increased customer demand and the corresponding increase in net sales. The increase in absolute labor dollars is partially due to the reinstatement of annual bonus programs in 2010 as well as an increase in repairs and maintenance costs primarily due to higher levels of production in our factories.

Gross Profit.  Gross profit increased $89.0 million to $137.0 million, or 21.2% of net sales, in the three months ended March 31, 2010 from $48.0 million, or 12.4% of net sales, in the three months ended March 31, 2009 due primarily to the increased customer demand and the corresponding higher level of utilization of our manufacturing assets during the quarter. Gross margin in the three months ended March 31, 2010, was also impacted by the increased cost of gold used in many of our wirebond packages and the negative impact of foreign currency exchange rate movements from the three months ended March 31, 2009. Other factors affecting gross margin in the three months ended March 31, 2010, were increased labor and other manufacturing costs, and the restoration of some of the compensation costs and other temporary cost reduction initiatives implemented in 2009.

 

Packaging Gross Profit.  Gross profit for packaging increased $78.2 million to $122.1 million, or 21.0% of packaging net sales, in the three months ended March 31, 2010 from $43.9 million, or 13.0% of packaging net sales, in the three months ended March 31, 2009. The increase in gross margin is primarily attributable to increased customer demand.

 

Test Gross Profit.  Gross profit for test increased $10.8 million to $15.2 million, or 23.3% of test net sales, in the three months ended March 31, 2010 from $4.4 million, or 8.8% of test net sales, in the three months ended March 31, 2009 due to increased customer demand.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased $6.2 million, or 12.4%, to $56.3 million in the three months ended March 31, 2010, from $50.1 million in the three months ended March 31, 2009. The increase is primarily driven by the reinstatement of employee compensation and benefit costs that had been reduced in 2009 as part of our cost reduction initiatives through the global economic downturn.

 

Research and Development.  Research and development activities are currently focused on developing new package solutions, test services and improving the efficiency and capabilities of our existing production processes. Our key areas for research and development are advanced flip chip packaging, 3D packaging, copper pillar bumping, laminate and leadframe packaging, Through Mold Via and Through Silicon Via technology, wafer level packaging services and other manufacturing cost reduction initiatives. Research and development expenses increased $1.6 million to $11.7 million, or 1.8% of net sales in the three months ended March 31, 2010 from $10.1 million, or 2.6% of net sales in the three months ended March 31, 2009. Increased research and development expenses are due to increased expenditures and reinstatement of employee compensation and benefit costs.

 

Other (Income) Expense, Net.  Other expense, net increased $18.4 million to $25.1 million, or 3.9% of net sales, in the three months ended March 31, 2010 from $6.7 million, or 1.7% of net sales in the three months ended March 31, 2009. This increase was driven by a $1.0 million foreign currency loss in the three months ended March 31, 2010 compared to a $12.1 million foreign currency gain in the three months ended March 31, 2009. In addition, during the three months ended March 31, 2009 we repurchased an aggregate $33.1 million principal amount of our 7.125% senior notes and 2.5% convertible senior subordinated notes due in 2011, resulting in a net gain of $9.0 million. There were no debt repurchases during the three months ended March 31, 2010.

 

Income Tax Benefit (Expense).  In the three months ended March 31, 2010, we recorded an income tax benefit of $0.2 million compared to an income tax expense of $3.1 million in the three months ended March 31, 2009. The decrease in income tax expense is primarily attributable to a decline in profits in certain taxable foreign jurisdictions. Our income tax benefit for the three months ended March 31, 2010 is attributable to $1.1 million of expense in certain foreign jurisdictions, foreign withholding taxes, and minimum taxes which was offset by reductions in unrecognized tax benefits.

 

At March 31, 2010, we had U.S. net operating loss carryforwards totaling $361.5 million, which expire at various times through 2029. Additionally, at March 31, 2010, we had $68.8 million of non-U.S. net operating loss carryforwards, which expire at various times through 2020. 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. We release such valuation allowances as the related tax benefits are realized on our tax returns or when sufficient positive evidence exists to conclude that it is more likely than not that the deferred tax assets will be realized.

Liquidity and Capital Resources

 

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

 

Our primary source of cash and the source of funds for our operations are cash flows from our operations, current cash and cash equivalents, borrowings under available debt facilities, or proceeds from any additional debt or equity financings. As of March 31, 2010, we had cash and cash equivalents of $425.5 million and availability of $99.5 million under our $100.0 million first lien senior secured revolving credit facility. We expect cash flows to be used in the operation and expansion of our business, making capital expenditures, paying principal and interest on our debt and for other corporate purposes.

 

During the three months ended March 31, 2009 we implemented cost reduction measures including lowering executive and other employee compensation, reducing employee and contractor headcount, and shortening work weeks. As capacity utilization increased during the second half of 2009 and into the first quarter of 2010, we have experienced increased labor and other overhead costs. During 2010, executive and other employee compensation has largely been restored to previous levels and we have reversed other temporary cost reduction initiatives.

 

From time to time, we evaluate our staffing levels compared to business needs and changes in demand in order to manage costs and improve performance. We expect to reduce our workforce by an additional 400 employees during the remainder of 2010 in connection with the wind-down and exit of our manufacturing operations in Singapore, which will require approximately $1.8 million in termination benefit payouts during the remainder of 2010. In connection with the wind-down our Singapore manufacturing operations, we refunded approximately $12.1 million of customer advances using cash on hand during the three months ended March 31, 2010.

 

We have a significant level of debt, with $1,428.0 million outstanding at March 31, 2010, of which $125.6 million is current. At March 31, 2010, we have an aggregate of $42.8 million of debt coming due through the end of 2010, and $168.2 million of debt due in 2011, which includes the remaining $42.6 million aggregate principal amount of our 2.5% convertible senior subordinated notes and $53.5 million aggregate principal amount of our 7.125% senior notes. In April 2010, Amkor Technology Taiwan Ltd, a Taiwanese subsidiary, entered into a 1.5 billion Taiwan dollar (approximately $47 million) term loan due April 2015. On May 4, 2010, we issued $345 million of our 7.375% Senior Notes due 2018. We will use the proceeds together with existing cash to redeem in full the $53.5 million outstanding principal amount of our 7.125% senior notes due 2011 and the $358.3 million principal amount of our 7.75% senior notes due 2013, and to pay related fees and expenses during the three months ended June 30, 2010. The refinancing of our debt due in 2011 and 2013 extends our maturities and reduces our interest cost.

 

The interest payments required on our debt are substantial. For example, we paid $116.2 million of interest in 2009. We refer you to “Contractual Obligations” below for a summary of principal and interest payments.

 

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 transactions may be made in the open market or through privately negotiated transactions and are subject to the terms of our indentures and other debt agreements, market conditions and other factors.

 

Many of our debt agreements have restrictions on dividend payments and the repurchase of stock and subordinated securities, including our convertible notes. These restrictions are determined by defined calculations which include net income. The $671.1 million write-off of our goodwill at December 31, 2008 impacted these restrictions, which has reduced our ability to pay dividends and repurchase stock and subordinated securities,

including our convertible notes. We have never paid a dividend to our stockholders, and we do not have any current plans to do so.

 

We were in compliance with all debt covenants at March 31, 2010 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, 2010 were $72.7 million. We expect that our full year 2010 capital additions will be approximately 14% of net sales. Ultimately, the amount of our 2010 capital additions will depend on several factors including, among others, the performance of our business, the need for additional capacity to service customer demand and the availability of suitable cash flow from operations or financing. 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:

 

 

Cash Flows

 

Cash provided by operating activities was $103.7 million for the three months ended March 31, 2010 compared to cash used in operating activities of $63.2 million for the three months ended March 31, 2009. We experienced positive free cash flow of $36.6 million for the three months ended March 31, 2010, which increased $142.6 million from the prior year comparable period. The increase is primarily due to approximately $103.7 million of payments made in the three months ended March 31, 2009 relating to the resolution of a patent license dispute and employee benefit and separation payments, as well as reduced business levels in 2009 as a result of the recession, partially offset by reduced capital additions.

 

Net cash provided by (used in) operating, investing and financing activities for the three months ended March 31, 2010 and 2009 were as follows:

 

 

Operating activities:  Our cash flow from operating activities for the three months ended March 31, 2010 increased by $166.9 million compared to the prior year comparable period. Operating income for the three months ended March 31, 2010 adjusted for depreciation and amortization, other operating activities and non-cash items increased $72.7 million which is largely attributable to increased net sales and the related increase in net income.

 

Changes in assets and liabilities decreased operating cash flow for the three months ended March 31, 2010 principally due to increases in inventories and accounts receivable because of increased business volumes. The $115.1 million decrease from changes in assets and liabilities in the three months ended March 31, 2009 was principally due to the $64.7 million payment made in connection with the resolution of a patent license dispute and $39.0 million in other employee benefit and separation payments.

Investing activities:  Our cash flows used in investing activities for the three months ended March 31, 2010 increased by $21.7 million. This increase was primarily due to increased levels of capital additions in 2010 and the $24.3 million increase in payments for property, plant and equipment. Our capital additions in the three months ended March 31, 2010 were focused on incremental capacity for advanced packaging services including chip scale, ball grid array and bumping, specific customer requirements and other technology advancements.

 

Financing activities:  Our net cash used in financing activities for the three months ended March 31, 2010 was $5.6 million, compared with net cash used of $22.3 million for the three months ended March 31, 2009. The net cash used in financing activities for the three months ended March 31, 2010 was primarily driven by the $10.7 million repayment on our term loan at our Korean subsidiary. Partially offsetting this repayment was the $34.3 million repayment of two existing revolving lines of credit at one of our Japanese subsidiaries using the proceeds from two new term loans at that subsidiary totaling 3.5 billion Japanese yen (approximately $38.8 million). During the three months ended March 31, 2009, we used $23.9 million in cash on hand to repurchase an aggregate $33.1 million principal amount of our 7.125% senior notes and 2.5% convertible senior subordinated notes due 2011. In the three months ended March 31, 2009, we also incurred $2.6 million in debt issuance costs related to the April 2009 issuance of our 6.0% convertible senior subordinated notes.

 

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 investing activities related to the acquisition of property, plant and equipment. Free cash flow is not defined by U.S. GAAP and our definition of free cash flow may not be comparable to similar companies and should not be considered a substitute for cash flow measures in accordance with U.S. GAAP. We believe free cash flow provides our investors and analysts useful information to analyze our liquidity and capital resources.

 

 

Contractual Obligations

 

The following table summarizes our contractual obligations at March 31, 2010, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

 

 

 

 

 

In addition to the obligations identified in the table above, other non-current liabilities recorded in our Consolidated Balance Sheet at March 31, 2010 include:

 

 

Off-Balance Sheet Arrangements

 

As of March 31, 2010, 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 leases.

 

Contingencies, Indemnifications and Guarantees

 

We refer you to Note 15 “Commitments and Contingencies” 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, 2009. During the three months ended March 31, 2010, there have been no significant changes in our critical accounting policies as reported in our 2009 Annual Report on Form 10-K.

 

New Accounting Pronouncements

 

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

 

 

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 hedge instruments to manage currency and other risk. We have not entered into any derivative transactions in the three months ended March 31, 2010 and have no outstanding contracts as of March 31, 2010.

Foreign Currency Risks

 

We currently do not have forward contracts or other instruments to reduce our exposure to foreign currency gains and losses. To the extent possible, we have managed our foreign currency exposures by using natural hedging techniques to minimize the 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.

 

We have foreign currency exchange rate risk associated with the remeasurement of monetary assets and monetary liabilities on our Consolidated Balance Sheet that are denominated in currencies other than the functional currency. We performed a sensitivity analysis of our foreign currency exposure as of March 31, 2010, 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, 2010, our income before income taxes would have been approximately $13.6 million lower. The most significant foreign denominated monetary asset or liability is our Korean severance obligation which represents approximately 61% of the net monetary exposure.

 

In addition, we have foreign currency exchange rate exposure on our results of operations. For the three months ended March 31, 2010, approximately 91% 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, 2010, approximately 47% of our cost of sales and operating expenses were denominated in U.S. dollars and were largely for 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 was largely for 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 increased 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, 2010 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, 2010 exchange rates of the U.S. dollar compared to all of these Asian-based currencies as of March 31, 2010, our operating income would have been approximately $19.5 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 Sheet for the three months ended March 31, 2010 and 2009 was a net foreign translation loss of $0.7 million and a loss of $7.2 million, respectively, and was recognized as an adjustment to equity through other comprehensive (loss) income.

 

Interest Rate Risks

 

We have interest rate risk with respect to our long-term debt. As of March 31, 2010, we had a total of $1,428.0 million of debt of which 83.6% was fixed rate debt and 16.4% was variable rate debt. Our variable rate debt principally relates to our foreign borrowings and any amounts outstanding under our $100.0 million revolving line of credit, of which no amounts were drawn as of March 31, 2010. The fixed rate debt consists of senior notes, senior subordinated notes and subordinated notes. As of December 31, 2009, we had a total of $1,434.2 million of debt of which 83.3% was fixed rate debt and 16.7% was variable rate debt.

The table below presents the interest rates and maturities of our fixed and variable rate debt as of March 31, 2010: