UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

 

Commission File Number 000-29472

 

AMKOR TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

 

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

 

(480) 821-5000

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o

 

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

 

(Do not check if a smaller reporting company)

 

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

 

The number of outstanding shares of the registrant’s Common Stock as of October 29, 2010 was 183,785,342.

 

 

 

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QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2010

TABLE OF CONTENTS

 

 

AMKOR TECHNOLOGY, INC.

 

 

The accompanying notes are an integral part of these statements.

 

AMKOR TECHNOLOGY, INC.

 

 

The accompanying notes are an integral part of these statements.

AMKOR TECHNOLOGY, INC.

 

 

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 September 30, 2010 and for the three and nine months ended September 30, 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 and nine months ended September 30, 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.

 

Treasury Stock.  Treasury stock is acquired by us when certain restricted share awards vest or are forfeited (see Note 3). At the vesting or retirement eligibility date, a participant has a tax liability and, pursuant to the recipient’s award agreement, we withhold restricted shares to satisfy statutory minimum tax withholding obligations. The withheld or forfeited restricted shares are accounted for as treasury stock and carried at cost.

 

 

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

 

 

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

 

 

Stock Options

 

The following is a summary of all common stock option activity for the nine months ended September 30, 2010:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

There were no options granted during the three months ended September 30, 2010 and 2009. 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, 2010 and 2009:

 

 

The intrinsic value of options exercised for the three and nine months ended September 30, 2010 was $0.1 million and $0.2 million, respectively. The intrinsic value of options exercised for the three and nine months ended September 30, 2009 was $0.1 million and $0.1 million, respectively. For the nine months ended September 30, 2010, cash received for stock option exercises was $0.9 million, while $0.3 million was received in the nine months ended September 30, 2009. No tax benefits were 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 $3.7 million as of September 30, 2010, which is expected to be recognized over a weighted-average period of 1.9 years beginning October 1, 2010. To the extent that the actual forfeiture rate is different than what we have anticipated, the share-based compensation expense related to these awards will be different from our expectations.

 

Restricted Shares

 

In February 2010, we granted 472,000 restricted shares to employees under the 2007 Equity Incentive Plan. The restricted shares vest ratably over 4 years, with 25% of the shares vesting at the end of the first year, and 1/48th each month thereafter, such that 100% of the shares will become vested on the fourth anniversary of the award date, subject to the recipient’s continued employment with us on the applicable vesting dates. In addition, provided that the restricted shares have not been forfeited earlier, the restricted shares will vest upon the recipient’s death, disability or retirement, or upon a change in control of Amkor. Although ownership of the restricted shares does not transfer to the recipients until the shares have vested, recipients have voting and dividend rights on these shares from the date of grant. The value of the restricted shares is determined based on the fair market value of the underlying shares on the date of the grant and is recognized ratably over the vesting period or to the date on which the recipient becomes retirement eligible, if shorter.

 

The Equity Incentive Plan provides that when a recipient’s age plus years of service equals or exceeds 75, the recipient will be eligible to voluntarily retire and become fully vested in their restricted shares upon retirement. Consequently, under federal tax law, when a recipient becomes retirement eligible, the employee is immediately taxable on 100% of their restricted shares whether or not the recipient actually retires. Upon the earlier of retirement eligibility or vesting of the restricted shares, the recipient has a tax liability and pursuant to the recipient’s award agreement, a portion of the restricted shares are withheld to satisfy the recipient’s statutory minimum tax withholding obligations. The shares withheld are accounted for as treasury stock at cost, which is determined by the closing stock price per share on the applicable date of vesting or retirement eligibility.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The following table summarizes our restricted share activity for the nine months ended September 30, 2010:

 

 

Awards vested include 81,000 shares for retirement eligible recipients whose restricted shares are treated for accounting and tax purposes as if vested when they meet the retirement eligible date. Of those 81,000 shares, 27,806 shares were withheld to satisfy tax withholding obligations and are treated as treasury stock, at a cost of $0.2 million. The unrecognized compensation cost, including a forfeiture estimate, was $1.7 million as of September 30, 2010, which is expected to be recognized over a weighted average period of approximately 3.1 years beginning October 1, 2010. To the extent that the actual forfeiture rate is different than what we have anticipated, the share-based compensation expense related to these awards will be different from our expectations.

 

 

Our income tax expense of $9.0 million for the nine months ended September 30, 2010 reflects $12.2 million of expense primarily related to income taxes at certain of our foreign operations, foreign withholding taxes and minimum taxes, partially offset by the release of a $3.2 million valuation allowance on net deferred tax assets of a Taiwan subsidiary. Our income tax expense reflects the benefit from tax holidays and lower income tax rates in certain foreign jurisdictions. We released the valuation allowance during the three months ended June 30, 2010 because we believe that sufficient positive evidence now exists to support the conclusion it is more likely than not that we will realize the benefits of these deferred tax assets. The positive evidence we considered was: (i) the consistent profitability of these operations over a two year period, which included the recent downturn in the semiconductor industry in late 2008 and 2009; (ii) the increase in profitability experienced in the second quarter of 2010 based on demand for the products from these operations; and (iii) our expectation that we will realize substantially all of the deferred tax assets over the next three years for these operations.

 

At September 30, 2010, we had U.S. net operating loss carryforwards totaling $384.3 million, which expire at various times through 2030. Additionally, at September 30, 2010, we had $46.2 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 increased from $5.1 million at December 31, 2009 to $5.4 million as of September 30, 2010 primarily because of $1.8 million of additions for contested deductions in a foreign jurisdiction, partially offset by reductions for expired statutes of limitations. All of the September 30, 2010 balance of $5.4 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 $3.6 million within the next twelve months related to our eligibility for certain tax incentives in a foreign jurisdiction and the expected resolution of the aforementioned contested deductions. 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 (loss) attributable to Amkor common stockholders by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding includes restricted shares held by retirement eligible recipients and a reduction for treasury stock acquired. 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 restricted shares which entitle recipients to voting and nonforfeitable dividend rights from the date of grant. As a result, we have applied the two-class method to determine earnings per share.

 

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

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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

 

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:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

Inventories consist of the following:

 

 

8.  Property, Plant and Equipment

 

Property, plant and equipment consist of the following:

 

 

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

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

Acquired intangibles as of September 30, 2010 consist of the following:

 

 

In May 2010, we executed supply and technology development agreements with a customer which require us to make approximately $9.5 million of cash payments of which $4.5 million was paid as of September 30, 2010, and the balance of $5.0 million was recorded as a liability at September 30, 2010. Approximately $8.0 million was recorded as a customer relationship intangible asset, and $1.5 million was recorded as technology rights.

 

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

 

 

Amortization of identifiable intangible assets for the three months ended September 30, 2010 and 2009 was $1.8 million and $1.3 million, respectively. Amortization of identifiable intangible assets for the nine months ended September 30, 2010 and 2009 was $4.2 million and $5.8 million, respectively. Based on the amortizing assets recognized in our balance sheet at September 30, 2010, amortization for each of the next five years is estimated as follows:

 

 

 

Investments consist of the following:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

J-Devices Corporation

 

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

 

Our investment includes our 30% equity interest and call options to acquire additional equity 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 and nine months ended September 30, 2010, we recognized $0.2 million and $0.8 million, respectively, in interest income. Our lease receivables consist of the following:

 

 

 

Accrued expenses consist of the following:

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

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

 

 

In September 2010, we amended our $100.0 million senior secured revolving credit facility and extended its term by two years to April 2015. The facility has a letter of credit sub-facility of $25.0 million. The amendment reduces the interest rate on borrowings under the facility by 100 basis points on base rate loans and 125 basis points on LIBOR rate loans. As amended, interest is charged under the facility at a floating rate based on the base rate in effect from time to time plus the applicable margins which range from 1.0% to 1.5% for base rate revolving loans, or LIBOR plus 2.25% to 2.75% for LIBOR revolving loans. The LIBOR-based interest rate at September 30, 2010 was 2.51%. In connection with amending and extending our $100.0 million facility, we capitalized $0.3 million of deferred debt issuance costs for the nine months ended September 30, 2010.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

There have been no borrowings under our senior secured credit facility as of September 30, 2010; however, we have utilized $0.5 million of the available letter of credit sub-facility 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 September 30, 2010.

 

In May 2010, we announced a tender offer for up to $175.0 million of our outstanding 9.25% Senior Notes due June 2016 (the “2016 Notes”). We used proceeds from the lower interest rate ATK Loan (described below) to purchase $125.7 million in notes tendered. We recorded a $6.7 million loss on extinguishment related to premiums and fees paid for the tender of the 2016 Notes and a $1.6 million charge for the write-off of the associated unamortized deferred debt issuance costs. Both charges are included in debt retirement costs, net in our Consolidated Statement of Operations for the nine months ended September 30, 2010.

 

In May 2010, Amkor Technology Korea, Inc., a Korean wholly-owned subsidiary (“ATK”), entered into a $180.0 million, 3-year secured term loan with a Korean bank (the “ATK Loan”), of which $47.0 million was repaid in July 2010 upon conclusion of the tender offer described above. The ATK Loan is guaranteed on an unsecured basis by Amkor Technology, Inc. (“Amkor”) and is secured by substantially all the land, factories, and equipment located at our ATK facilities. The ATK Loan bears interest at the bank’s funding rate-linked base rate plus 1.99% (5.49% as of September 30, 2010) and amortizes in 11 equal quarterly installments of $5 million per installment, with the remaining balance of $78.0 million due in May 2013.

 

In May 2010, we issued $345.0 million of our 7.375% Senior Notes due 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. In addition, we entered into a Registration Rights Agreement with the initial purchasers of the 2018 Notes where we agreed to use our reasonable best efforts to cause to become effective a registration statement to exchange the 2018 Notes for freely tradable notes issued by us. On September 14, 2010, we filed a registration statement, which became effective on October 21, 2010, to exchange the 2018 Notes for freely tradable notes issued by us. If we are unable to effect the exchange offer within 210 days, we agreed to pay additional interest on the notes. We incurred $7.4 million of debt issuance costs associated with the 2018 Notes in the three months ended June 30, 2010. We used the net proceeds together with existing cash to redeem in full the $53.5 million outstanding principal amount of our 7.125% Senior Notes due 2011 (the “2011 Notes”) and the $358.3 million principal amount of our 7.75% Senior Notes due 2013 (the “2013 Notes”), and to pay related fees and expenses during the three months ended June 30, 2010. In connection with the prepayment of the 2011 and 2013 Notes, we recorded a loss on extinguishment of $9.5 million in June 2010, which included $7.3 million in prepayment fees and a $2.2 million write-off of the associated unamortized deferred debt issuance costs. Both charges are included in debt retirement costs, net in our Consolidated Statement of Operations for the nine months ended September 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 primarily to fund capital expenditures. The loan is guaranteed on an unsecured basis by Amkor and is collateralized with certain land, buildings, and equipment in Taiwan. 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 primary commercial paper rate plus 0.835% (2.32% as of September 30, 2010). The borrowing outstanding at September 30, 2010 was $47.7 million.

 

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% (1.4% as of September 30, 2010). The borrowing outstanding at September 30, 2010 was $21.9 million. The proceeds of the term loan were used to repay the revolving line of credit with the same bank.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Additionally, in March 2010, AIC entered into a 1.0 billion Japanese yen (approximately $11 million) term loan with another Japanese bank initially due October 2012. In May 2010, we prepaid $5.3 million of the outstanding balance, which changed the maturity date to July 2011. 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% (0.86% as of September 30, 2010). The borrowing outstanding was $3.7 million as of September 30, 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 were used for general corporate purposes.

 

At September 30, 2010, Mr. James J. Kim, our Executive Chairman of the Board of Directors, and certain Kim family members owned all of the $100.0 million principal amount of our 6.25% Convertible Subordinated Notes due December 2013, $150.0 million principal amount of our 6.0% Convertible Senior Subordinated Notes due April 2014, and $35.6 million principal amount of our outstanding 9.25% Senior Notes due 2016. The 2016 notes were acquired in open market purchases during 2008 and 2009.

 

Our secured bank debt agreements and the indentures governing our senior, convertible senior subordinated and subordinated notes and our senior secured credit facility contain a number of affirmative and negative covenants which could restrict our operations. We were in compliance with all of our covenants as of September 30, 2010.

 

 

Foreign Pension Plans

 

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 nine months ended September 30, 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 and nine months ended September 30, 2010, we contributed $0.1 million and $7.6 million to the pension plans, respectively, and we expect to contribute an additional $0.1 million during 2010.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Korean Severance Plan

 

Our Korean subsidiary participates in an accrued severance plan that covers employees, officers 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 September 30, 2010 and 2009 was $6.4 million and $5.8 million, respectively. The provision recorded for severance benefits for the nine months ended September 30, 2010 and 2009 was $17.0 million and $12.6 million, respectively. The balance recorded in non-current pension and severance obligations for accrued severance at our Korean subsidiary was $78.7 million and $64.4 million at September 30, 2010 and December 31, 2009, respectively.

 

For information regarding the Korean subsidiary voluntary early retirement program offered in October 2010, see Note 17 to the Consolidated Financial Statements included in this Quarterly Report.

 

 

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, 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 or Disclosed at Fair Value on a Recurring Basis

 

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

 

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The following table presents the financial instruments that are not recorded at fair value but which require fair value disclosure as of September 30, 2010 and December 31, 2009:

 

 

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

 

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

 

We measure certain assets and liabilities, including property, plant and equipment, intangible assets and an equity investment, at fair value on a nonrecurring basis. Impairment losses on property, plant, and equipment included in cost of sales were $0.1 million and $1.5 million for the three months ended September 30, 2010 and 2009, respectively. Impairment losses on property, plant, and equipment included in cost of sales were $1.4 million and $4.2 million for the nine months ended September 30, 2010 and 2009, respectively. Impairment losses included in research and development expenses were $2.6 million for the three and nine months ended September 30, 2009. There were no impairment losses included in research and development expenses in 2010.

 

 

We have a $100.0 million senior secured revolving credit facility that matures in April 2015. The facility has a letter of credit sub-facility of $25.0 million. As of September 30, 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.

AMKOR TECHNOLOGY, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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.

 

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 first hearing is expected to occur during the fourth quarter of 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 and

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$3.9 million in October 2010 covering the period from January 1, 2010 through June 30, 2010. We do not believe that the funds held in escrow are owed to Tessera and these funds may only be distributed upon the order of the panel in the current arbitration proceeding.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

AMKOR TECHNOLOGY, INC.

 

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determined that there is no violation of Section 337 of the Tariff Act and terminated the investigation. On July 27, 2010, the Commission issued a confidential Commission Opinion, a public version of which is expected in the future. We appealed the Commission’s ruling to the U.S. Court of Appeals for the Federal Circuit in September 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 concerning reportable segments is shown in the following table. 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. The following table summarizes our exit activities and reduction in force initiatives for the nine months ended September 30, 2010 and 2009.

AMKOR TECHNOLOGY, INC.

 

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“Charges” represents the initial charge related to the exit activity. “Cash Payments” consists of the utilization of “Charges”. “Adjustments” represents revisions of estimates. “Non-cash Amounts” consists of a curtailment gain, the relief of an asset retirement obligation and asset impairments.