e10vq
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Quarterly Period Ended June 30, 2011
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission File Number 000-29472
 
AMKOR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
 
         
Delaware
(State of incorporation)
      23-1722724
(I.R.S. Employer
Identification Number)
 
1900 South Price Road
Chandler, AZ 85286
(Address of principal executive offices and zip code)
 
(480) 821-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The number of outstanding shares of the registrant’s Common Stock as of July 29, 2011 was 197,920,044.
 


 

 
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2011

TABLE OF CONTENTS
             
        Page
        No.
 
PART I. Financial Information
Item 1.   Financial Statements (unaudited)     2  
    Consolidated Statements of Income — Three and Six Months Ended June 30, 2011 and 2010     2  
    Consolidated Balance Sheets — June 30, 2011 and December 31, 2010     3  
    Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2011 and 2010     4  
    Notes to Consolidated Financial Statements     5  
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     24  
Item 3.   Quantitative and Qualitative Disclosures About Market Risk     34  
Item 4.   Controls and Procedures     36  
 
PART II. Other Information
Item 1.   Legal Proceedings     36  
Item 1A.   Risk Factors     36  
Item 6.   Exhibits     50  
Signatures     52  
 EX-10.2
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


Table of Contents

 
PART I. FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
AMKOR TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
                                 
    For the Three Months Ended
    For the Six Months Ended
 
    June 30,     June 30,  
    2011     2010     2011     2010  
    (In thousands, except per share data)  
 
Net sales
  $ 687,633     $ 749,165     $ 1,352,583     $ 1,394,903  
Cost of sales
    557,816       569,966       1,096,080       1,078,748  
                                 
Gross profit
    129,817       179,199       256,503       316,155  
Operating expenses:
                               
Selling, general and administrative
    61,284       66,356       125,842       122,652  
Research and development
    12,559       12,095       24,688       23,768  
                                 
Total operating expenses
    73,843       78,451       150,530       146,420  
                                 
Operating income
    55,974       100,748       105,973       169,735  
                                 
Other (income) expense:
                               
Interest expense
    19,609       24,410       38,398       46,779  
Interest expense, related party
    2,830       3,813       5,410       7,625  
Interest income
    (553 )     (847 )     (1,140 )     (1,580 )
Foreign currency loss (gain)
    2,932       (421 )     4,663       554  
Loss on debt retirement, net
    15,531       17,807       15,531       17,807  
Equity in earnings of unconsolidated affiliate
    (2,089 )     (1,608 )     (3,607 )     (2,709 )
Other income, net
    (325 )     (149 )     (469 )     (390 )
                                 
Total other expense, net
    37,935       43,005       58,786       68,086  
                                 
Income before income taxes
    18,039       57,743       47,187       101,649  
Income tax expense (benefit)
    3,594       (1,200 )     6,976       (1,367 )
                                 
Net income
    14,445       58,943       40,211       103,016  
Net loss (income) attributable to noncontrolling interests
    43       107       (620 )     331  
                                 
Net income attributable to Amkor
  $ 14,488     $ 59,050     $ 39,591     $ 103,347  
                                 
Net income attributable to Amkor per common share:
                               
Basic
  $ 0.07     $ 0.32     $ 0.20     $ 0.56  
                                 
Diluted
  $ 0.07     $ 0.23     $ 0.17     $ 0.41  
                                 
Shares used in computing per common share amounts:
                               
Basic
    197,084       183,274       195,584       183,250  
Diluted
    280,009       282,644       278,810       282,551  
 
The accompanying notes are an integral part of these statements.


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AMKOR TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (In thousands)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 475,471     $ 404,998  
Restricted cash
    19,715       17,782  
Accounts receivable:
               
Trade, net of allowances
    348,127       392,327  
Other
    16,950       17,970  
Inventories
    217,735       191,072  
Other current assets
    32,917       37,918  
                 
Total current assets
    1,110,915       1,062,067  
                 
Property, plant and equipment, net
    1,573,478       1,537,226  
Intangibles, net
    10,957       13,524  
Investments
    32,027       28,215  
Restricted cash
    1,976       1,945  
Other assets
    88,342       93,845  
                 
Total assets
  $ 2,817,695     $ 2,736,822  
                 
 
LIABILITIES AND EQUITY
Current liabilities:
               
Short-term borrowings and current portion of long-term debt
  $ 99,275     $ 150,081  
Trade accounts payable
    420,361       443,333  
Accrued expenses
    160,662       178,794  
                 
Total current liabilities
    680,298       772,208  
                 
Long-term debt
    999,078       964,219  
Long-term debt, related party
    225,000       250,000  
Pension and severance obligations
    118,927       103,543  
Other non-current liabilities
    13,008       10,171  
                 
Total liabilities
    2,036,311       2,100,141  
                 
Commitments and contingencies (see Note 15)
               
Equity:
               
Amkor stockholders’ equity:
               
Preferred stock, $0.001 par value, 10,000 shares authorized, designated Series A, none issued
           
Common stock, $0.001 par value, 500,000 shares authorized, 197,250 and 183,467 shares issued, and 197,126 and 183,420 shares outstanding, in 2011 and 2010, respectively
    197       183  
Additional paid-in capital
    1,609,219       1,504,927  
Accumulated deficit
    (850,679 )     (890,270 )
Accumulated other comprehensive income
    16,269       15,457  
Treasury stock, at cost, 124 and 47 shares in 2011 and 2010, respectively
    (910 )     (284 )
                 
Total Amkor stockholders’ equity:
    774,096       630,013  
Noncontrolling interests in subsidiaries
    7,288       6,668  
                 
Total equity
    781,384       636,681  
                 
Total liabilities and equity
  $ 2,817,695     $ 2,736,822  
                 
 
The accompanying notes are an integral part of these statements.


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AMKOR TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
                 
    For the Six Months
 
    Ended June 30,  
    2011     2010  
    (In thousands)  
 
Cash flows from operating activities:
               
Net income
  $ 40,211     $ 103,016  
Depreciation and amortization
    166,468       154,406  
Loss on debt retirement, net
    10,557       10,562  
Other operating activities and non-cash items
    3,648       (4,697 )
Changes in assets and liabilities
    13,013       (72,779 )
                 
Net cash provided by operating activities
    233,897       190,508  
                 
Cash flows from investing activities:
               
Purchases of property, plant and equipment
    (224,629 )     (142,928 )
Proceeds from the sale of property, plant and equipment
    14,643       1,062  
Financing lease payment from unconsolidated affiliate
    5,991       7,767  
Other investing activities
    (4,014 )     (9,782 )
                 
Net cash used in investing activities
    (208,009 )     (143,881 )
                 
Cash flows from financing activities:
               
Borrowings under revolving credit facilities
          3,261  
Payments under revolving credit facilities
          (34,253 )
Proceeds from issuance of short-term working capital facility
    20,000       15,000  
Payments of short-term working capital facility
    (15,000 )     (15,000 )
Proceeds from issuance of long-term debt
    325,000       611,007  
Proceeds from issuance of long-term debt, related party
    75,000        
Payments of long-term debt, net of certain redemption premiums and discounts
    (354,693 )     (577,259 )
Payments for debt issuance costs
    (5,875 )     (7,579 )
Proceeds from the issuance of stock through share-based compensation plans
    907       587  
Payments of tax withholding for restricted shares
    (744 )      
                 
Net cash provided by (used in) financing activities
    44,595       (4,236 )
                 
Effect of exchange rate fluctuations on cash and cash equivalents
    (10 )     6  
                 
Net increase in cash and cash equivalents
    70,473       42,397  
Cash and cash equivalents, beginning of period
    404,998       395,406  
                 
Cash and cash equivalents, end of period
  $ 475,471     $ 437,803  
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 40,309     $ 52,945  
Income taxes
  $ 12,158     $ 4,118  
Non cash investing and financing activities:
               
Common stock issuance for conversion of related party 6.25% convertible subordinated notes
  $ 100,000     $  
 
The accompanying notes are an integral part of these statements.


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.   Interim Financial Statements
 
Basis of Presentation.  The Consolidated Financial Statements and related disclosures as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010, are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The December 31, 2010 Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In our opinion, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the results for the interim periods. These financial statements should be read in conjunction with the financial statements included in our Annual Report for the year ended December 31, 2010, filed on Form 10-K with the SEC on February 24, 2011. The results of operations for the three and six months ended June 30, 2011, are not necessarily indicative of the results to be expected for the full year. Unless the context otherwise requires, all references to “Amkor,” “we,” “us,” “our” or the “company” are to Amkor Technology, Inc. and our subsidiaries.
 
The U.S. dollar is our reporting currency and the functional currency for the majority of our foreign subsidiaries. For our subsidiaries and affiliate in Japan, the local currency is the functional currency.
 
Use of Estimates.  The Consolidated Financial Statements have been prepared in conformity with U.S. GAAP, using management’s best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.
 
2.   New Accounting Standards
 
Recently Adopted Standards
 
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements, which amended Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements, to require additional disclosures related to activity within Level 3 of the fair value hierarchy. These provisions of the ASU are effective for reporting periods beginning after December 15, 2010. Our adoption of these provisions on January 1, 2011, did not have an impact on our financial statements.
 
In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements, which supersedes certain guidance in ASC 605-25, Revenue Recognition — Multiple Element Arrangements. This topic requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. This ASU is effective for annual reporting periods beginning after June 15, 2010. Our adoption of ASU 2009-13 on January 1, 2011, did not have an impact on our financial statements.
 
Recently Issued Standards
 
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820). This ASU updates certain requirements for measuring fair value and disclosure regarding fair value measurement. This ASU is effective for reporting periods beginning after December 15, 2011. Early adoption is not permitted. We are currently evaluating the impact, if any, that the adoption of ASU 2011-04 will have on our financial statements.


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220). This ASU eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This ASU is effective for reporting periods beginning after December 15, 2011. Early adoption is permitted and full retrospective application is required. We are currently evaluating the impact that the adoption of ASU 2011-05 will have on our financial statements.
 
3.   Share-Based Compensation Plans
 
All of our share-based compensation to employees, including grants of employee stock options and restricted shares, are measured at fair value and expensed over the service period (generally the vesting period). The following table presents share-based compensation expense attributable to stock options and restricted shares. There is no deferred income tax benefit in either period.
 
                                 
    For the Three
    For the Six
 
    Months Ended
    Months Ended
 
    June 30,     June 30,  
    2011     2010     2011     2010  
    (In thousands)  
 
Stock options
  $ 474     $ 636     $ 1,053     $ 1,259  
Restricted shares
    523       429       1,965       734  
                                 
Total share-based compensation expense
  $ 997     $ 1,065     $ 3,018     $ 1,993  
                                 
 
The following table presents share-based compensation expense as included in the Consolidated Statements of Income:
 
                                 
    For the Three
    For the Six
 
    Months Ended
    Months Ended
 
    June 30,     June 30,  
    2011     2010     2011     2010  
    (In thousands)  
 
Cost of sales
  $ 5     $ 6     $ 6     $ 13  
Selling, general and administrative
    863       921       2,620       1,741  
Research and development
    129       138       392       239  
                                 
Share-based compensation expense
  $ 997     $ 1,065     $ 3,018     $ 1,993  
                                 


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
 
Stock Options
 
The following table summarizes our stock option activity for the six months ended June 30, 2011:
 
                                 
          Weighted
    Average
    Aggregate
 
    Number of
    Average
    Remaining
    Intrinsic
 
    Shares
    Exercise Price
    Contractual
    Value
 
    (In thousands)     Per Share     Term (Years)     (In thousands)  
 
Outstanding at December 31, 2010
    7,843     $ 10.26                  
Granted
    120       6.46                  
Exercised
    (174 )     5.22                  
Forfeited or expired
    (1,375 )     11.90                  
                                 
Outstanding at June 30, 2011
    6,414     $ 9.97       3.27     $ 1,328  
                                 
Fully vested and expected to vest at June 30, 2011
    6,368     $ 9.98       3.24     $ 1,324  
                                 
Exercisable at June 30, 2011
    5,854     $ 10.14       2.86     $ 1,272  
                                 
 
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 and six months ended June 30, 2011 and 2010.
 
                                 
    For the Three Months Ended
    For the Six Months Ended
 
    June 30     June 30  
    2011     2010     2011     2010  
 
Expected life (in years)
    6.2       6.0       6.2       6.0  
Risk-free interest rate
    2.4 %     3.0 %     2.4 %     3.0 %
Volatility
    67 %     71 %     67 %     71 %
Dividend yield
                       
Weighted average grant date fair value per option granted
  $ 4.06     $ 5.00     $ 4.06     $ 5.00  
 
The intrinsic value of options exercised for the three and six months ended June 30, 2011, was less than $0.1 million and $0.4 million, respectively. The intrinsic value of options exercised for the three and six months ended June 30, 2010, was $0.1 and $0.2 million, respectively. For the six months ended June 30, 2011 and 2010, cash received for stock option exercises was $0.9 million and $0.6 million, respectively. 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 $2.3 million as of June 30, 2011, which is expected to be recognized over a weighted-average period of 1.6 years beginning July 1, 2011. To the extent the actual forfeiture rate is different than what we have anticipated, share-based compensation related to these awards will be different from our expectations.


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
Restricted Shares
 
The following table summarizes our restricted share activity for the six months ended June 30, 2011:
 
                 
          Weighted
 
    Number of
    Average
 
    Shares
    Grant-Date
 
    (In thousands)     Fair Value  
 
Nonvested at December 31, 2010
    372     $ 5.96  
Awards granted
    809       7.70  
Awards vested
    (277 )     6.85  
Awards forfeited
    (107 )     7.18  
                 
Nonvested at June 30, 2011
    797     $ 7.26  
                 
 
Awards vested include 142,000 shares for retirement eligible recipients whose restricted shares are treated for accounting and tax purposes as if vested when they meet the retirement eligible date. The fair value of these shares upon vesting during 2011 was $1.1 million. Of those 142,000 shares, 51,000 shares were withheld to satisfy tax withholding obligations and are treated as treasury stock, at a cost of $0.4 million.
 
The valuation of restricted stock shares is determined based on the fair market value of the underlying shares on the date of grant and amortized on a straight-line basis over the four-year vesting period. The unrecognized compensation cost, including a forfeiture estimate, was $4.4 million as of June 30, 2011, which is expected to be recognized over a weighted average period of approximately 3.0 years beginning July 1, 2011. To the extent that the actual forfeiture rate is different than what we have anticipated, the share-based compensation expense related to these awards will be different from our expectations.
 
4.   Income Taxes
 
Our income tax expense of $7.0 million for the six months ended June 30, 2011, primarily reflects $4.1 million of expense related to income taxes at certain of our foreign operations, $1.0 million of foreign withholding taxes, $1.6 million of deferred taxes on undistributed earnings from our investment in J-Devices and $0.3 million of state income taxes. Our income tax expense reflects income taxed in foreign jurisdictions where we benefit from tax holidays. At June 30, 2011, we had U.S. net operating loss carryforwards totaling $395.6 million, which expire at various times through 2031. Additionally, at June 30, 2011, we had $73.2 million of non-U.S. net operating loss carryforwards, the vast majority of which will expire at various times through 2018.
 
We maintain a valuation allowance on all of our U.S. net deferred tax assets, including our net operating loss carryforwards. We also have valuation allowances on deferred tax assets in certain foreign jurisdictions. Such valuation allowances are released as the related tax benefits are realized on our tax returns or when sufficient net positive evidence exists to conclude it is more likely than not that the deferred tax assets will be realized.
 
Our gross unrecognized tax benefits decreased from $10.5 million at December 31, 2010, to $9.9 million as of June 30, 2011, primarily due to a $1.0 million settlement of an uncertain tax position offset by a $0.4 million increase in the reserve resulting from the evaluation of new information obtained during the six months ended June 30, 2011. At June 30, 2011, substantially all of our unrecognized tax benefits would reduce our effective tax rate, if recognized. We are seeking rulings from local taxing authorities to confirm the availability of unrecognized tax benefits related to revenue attribution and eligibility for certain tax incentives. The rulings are currently expected within the next twelve months, at which time our unrecognized tax benefits may be reduced by up to $8.3 million. Our unrecognized tax benefits are subject to change as examinations of tax years are completed. Tax return examinations involve uncertainties and there can be no assurances that the outcome of examinations will be favorable.


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
5.   Earnings Per Share
 
Basic earnings per share (“EPS”) is computed by dividing net income attributable to Amkor common shareholders by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding includes restricted shares held by retirement eligible recipients and excludes treasury stock. Unvested share-based compensation awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of earnings per share pursuant to the two-class method. As discussed in Note 3, we grant restricted shares which entitle recipients to voting and nonforfeitable dividend rights from the date of grant. As a result, we have applied the two-class method to determine earnings per share.
 
Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares include outstanding stock options, unvested restricted shares and convertible debt. The following table summarizes the computation of basic and diluted EPS:
 
                                 
    For the Three Months
    For the Six Months
 
    Ended June 30,     Ended June 30,  
    2011     2010     2011     2010  
    (In thousands, except per share data)  
 
Net income attributable to Amkor
  $ 14,488     $ 59,050     $ 39,591     $ 103,347  
Income allocated to participating securities
    (58 )     (123 )     (161 )     (215 )
                                 
Net income available to Amkor common stockholders
    14,430       58,927       39,430       103,132  
Adjustment for dilutive securities on net income:
                               
Net income allocated to participating securities in basic calculation
    58               161          
Interest on 2.5% convertible notes due 2011, net of tax
          329             659  
Interest on 6.25% convertible notes due 2013, net of tax
          1,592             3,185  
Interest on 6.0% convertible notes due 2014, net of tax
    4,026       4,026       8,052       8,052  
                                 
Net income attributable to Amkor — diluted
  $ 18,514     $ 64,874     $ 47,643     $ 115,028  
                                 
                                 
Weighted average shares outstanding — basic
    197,084       183,274       195,584       183,250  
Effect of dilutive securities:
                               
Stock options
    232       364       313       333  
Unvested restricted shares
    35       79       255       41  
2.5% convertible notes due 2011
          2,918             2,918  
6.25% convertible notes due 2013
          13,351             13,351  
6.0% convertible notes due 2014
    82,658       82,658       82,658       82,658  
                                 
Weighted average shares outstanding — diluted
    280,009       282,644       278,810       282,551  
                                 
Net income attributable to Amkor per common share:
                               
Basic
  $ 0.07     $ 0.32     $ 0.20     $ 0.56  
Diluted
    0.07       0.23       0.17       0.41  


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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:
 
                                 
    For the Three
    For the Six
 
    Months Ended
    Months Ended
 
    June 30,     June 30,  
    2011     2010     2011     2010  
    (In thousands, except per share data)  
 
Stock options
    5,325       6,828       5,324       6,828  
2.5% convertible notes due 2011
    1,459             2,189        
6.25% convertible notes due 2013
                1,402        
                                 
Total potentially dilutive shares
    6,784       6,828       8,915       6,828  
                                 
 
6.   Equity and Comprehensive Income
 
The following table reflects the changes in equity and comprehensive income attributable to both Amkor and the noncontrolling interests:
 
                         
          Attributable to
       
    Attributable
    Noncontrolling
       
    to Amkor     Interests     Total  
    (In thousands)  
 
Equity at December 31, 2010
  $ 630,013     $ 6,668     $ 636,681  
Comprehensive income:
                       
Net income
    39,591       620       40,211  
Other comprehensive income:
                       
Adjustments to unrealized components of defined benefit pension plan, net of tax
    266             266  
Cumulative translation adjustment
    548             548  
                         
Total other comprehensive income
    814             814  
                         
Comprehensive income
    40,405       620       41,025  
Treasury stock acquired through surrender of shares for tax withholding
    (744 )           (744 )
Issuance of stock through employee share- based compensation plans
    907             907  
Share-based compensation expense
    3,018             3,018  
Conversion of debt to common stock
    100,497             100,497  
                         
Equity at June 30, 2011
  $ 774,096     $ 7,288     $ 781,384  
                         


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
                         
          Attributable to
       
    Attributable
    Noncontrolling
       
    to Amkor     Interests     Total  
    (In thousands)  
 
Equity at December 31, 2009
  $ 383,209     $ 6,492     $ 389,701  
Comprehensive income:
                       
Net income (loss)
    103,347       (331 )     103,016  
Other comprehensive income:
                       
Adjustments to unrealized components of defined benefit pension plan, net of tax
    149             149  
Cumulative translation adjustment
    1,867             1,867  
                         
Total other comprehensive income
    2,016             2,016  
                         
Comprehensive income (loss)
    105,363       (331 )     105,032  
Treasury stock acquired through surrender of shares for tax withholding
    (234 )           (234 )
Issuance of stock through employee share-based compensation plans
    655             655  
Share-based compensation expense
    1,993             1,993  
                         
Equity at June 30, 2010
  $ 490,986     $ 6,161     $ 497,147  
                         
 
7.   Inventories
 
Inventories consist of the following:
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (In thousands)  
 
Raw materials and purchased components
  $ 165,404     $ 145,043  
Work-in-process
    52,331       46,029  
                 
Total inventories
  $ 217,735     $ 191,072  
                 

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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
8.   Property, Plant and Equipment
 
Property, plant and equipment consist of the following:
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (In thousands)  
 
Land
  $ 106,338     $ 106,338  
Land use rights
    19,945       19,945  
Buildings and improvements
    867,315       838,237  
Machinery and equipment
    2,875,193       2,749,445  
Software and computer equipment
    179,904       176,376  
Furniture, fixtures and other equipment
    20,451       20,611  
Construction in progress
    17,573       50,610  
                 
      4,086,719       3,961,562  
Less accumulated depreciation and amortization
    (2,513,241 )     (2,424,336 )
                 
Total property, plant and equipment, net
  $ 1,573,478     $ 1,537,226  
                 
 
The following table reconciles our activity related to property, plant and equipment additions as reflected on the Consolidated Balance Sheets to property, plant and equipment purchases as presented on the Condensed Consolidated Statements of Cash Flows:
 
                 
    For the Six
 
    Months Ended
 
    June 30,  
    2011     2010  
    (In thousands)  
 
Property, plant and equipment additions
    201,981     $ 230,825  
Net change in related accounts payable and deposits
    22,648       (87,897 )
                 
Purchases of property, plant and equipment
  $ 224,629     $ 142,928  
                 
 
9.   Intangible Assets
 
Acquired intangibles as of June 30, 2011, consist of the following:
 
                         
          Accumulated
       
    Gross     Amortization     Net  
    (In thousands)  
 
Patents and technology rights
  $ 52,644     $ (48,470 )   $ 4,174  
Customer relationships
    16,940       (10,157 )     6,783  
                         
Total intangibles
  $ 69,584     $ (58,627 )   $ 10,957  
                         
 
Acquired intangibles as of December 31, 2010, consist of the following:
 
                         
          Accumulated
       
    Gross     Amortization     Net  
    (In thousands)  
 
Patents and technology rights
  $ 52,587     $ (47,864 )   $ 4,723  
Customer relationships
    16,940       (8,139 )     8,801  
                         
Total intangibles
  $ 69,527     $ (56,003 )   $ 13,524  
                         


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
 
Amortization of identifiable intangible assets for the three months ended June 30, 2011 and 2010 was $1.3 million and $1.3 million, respectively. Amortization of identifiable intangible assets for the six months ended June 30, 2011 and 2010 was $2.6 million and $2.5 million, respectively. Based on the amortizing assets recognized in our balance sheet at June 30, 2011, amortization for each of the next five years is estimated as follows:
 
         
    (In thousands)  
 
2011 Remaining
  $ 2,629  
2012
    3,725  
2013
    3,356  
2014
    644  
2015
    343  
Thereafter
    260  
         
Total amortization
  $ 10,957  
         
 
10.   Investments
 
Investments consist of the following:
 
                                 
    June 30,
    December 31,
 
    2011     2010  
    Carrying
          Carrying
       
    Value
    Ownership
    Value
    Ownership
 
    (In thousands)     Percentage     (In thousands)     Percentage  
 
Investment in unconsolidated affiliate
  $ 32,027       30.0 %   $ 28,215       30.0 %
                                 
 
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 under the equity method as an unconsolidated affiliate.
 
Our investment includes our 30% equity interest and call options to acquire additional equity interests. The call options, at our discretion, permit us to subscribe to new or existing J-Devices’ shares until our maximum ownership ratio is 60%, 66% and 80% beginning in 2012, 2014 and 2015, respectively. In 2014 and beyond, Toshiba has at its discretion, a put option which allows Toshiba to sell shares to us if we have exercised any of our call options. The exercise price for all options is determined using a contractual pricing formula based primarily upon the financial position of J-Devices at the time of exercise.
 
Under the equity method of accounting, we recognize our 30% proportionate share of J-Devices’ net income or loss, which includes J-Devices’ income taxes in Japan, during each accounting period as a change in our investment in unconsolidated affiliate. For the three and six months ended June 30, 2011, our equity in earnings in J-Devices, net of J-Devices’ income taxes in Japan, was $2.1 million and $3.6 million, respectively. For the three and six months ended June 30, 2010, our equity in earnings in J-Devices, net of J-Devices’ income taxes in Japan, was $1.6 million and $2.7 million, respectively. In addition, as a change in our investment in unconsolidated affiliate, we record equity method adjustments for the amortization of a basis difference as our carrying value exceeded our equity in the net assets of J-Devices at the date of investment and other adjustments required by the equity method.


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
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 six months ended June 30, 2011, we recognized $0.2 million and $0.4 million, respectively, in interest income. For the three and six months ended June 30, 2010, we recognized $0.3 million and $0.6 million, respectively, in interest income. Our lease receivables, net consist of the following:
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (In thousands)  
 
Current (Other accounts receivable)
  $ 12,727     $ 12,327  
Non-current (Other assets)
    16,474       22,795  
                 
Total lease receivable, net
  $ 29,201     $ 35,122  
                 
 
11.   Accrued Expenses
 
Accrued expenses consist of the following:
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (In thousands)  
 
Payroll and benefits
  $ 60,856     $ 69,903  
Customer advances and deferred revenue
    36,963       34,164  
Accrued interest
    12,422       12,332  
Accrued severance plan obligations (Note 13)
    7,027       6,131  
Income taxes payable
    2,497       10,422  
Other accrued expenses
    40,897       45,842  
                 
Total accrued expenses
  $ 160,662     $ 178,794  
                 


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
12.   Debt
 
Following is a summary of short-term borrowings and long-term debt:
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (In thousands)  
 
Debt of Amkor Technology, Inc.
               
Senior secured credit facilities:
               
$100 million revolving credit facility, LIBOR plus 2.25%-2.75%, due April 2015
  $     $  
Senior notes:
               
9.25% Senior notes due June 2016
          264,283  
7.375% Senior notes due May 2018
    345,000       345,000  
6.625% Senior notes due June 2021, $75 million related party
    400,000        
Senior subordinated notes:
               
2.5% Convertible senior subordinated notes due May 2011
          42,579  
6.0% Convertible senior subordinated notes due April 2014, $150 million related party
    250,000       250,000  
Subordinated notes:
               
6.25% Convertible subordinated notes due December 2013, related party
          100,000  
Debt of subsidiaries:
               
Working capital facility, LIBOR plus 1.7%, due January 2011
          15,000  
Working capital facility, LIBOR plus 2.8%, due January 2012 and April 2012
    20,000        
Term loan, TIBOR plus 0.65%, due July 2011
    385       2,680  
Term loan, TIBOR plus 0.8%, due September 2012
    14,546       19,848  
Term loan, bank funding rate-linked base rate plus 1.99% due May 2013
    113,000       123,000  
Term loan, bank base rate plus 0.5% due April 2014
    128,568       149,996  
Term loan, 90-day primary commercial paper rate plus 0.835% due April 2015
    51,854       51,042  
KRW 50 billion revolving credit facility, CD base interest rate plus 2.20%
           
Secured equipment and property financing
          872  
                 
      1,323,353       1,364,300  
Less: Short-term borrowings and current portion of long-term debt
    (99,275 )     (150,081 )
                 
Long-term debt (including related party)
  $ 1,224,078     $ 1,214,219  
                 
 
There have been no borrowings under our senior secured revolving credit facility as of June 30, 2011; however, we have utilized $0.4 million of the available letter of credit sub-limit of $25.0 million. The borrowing base for the revolving credit facility is based on the amount of our eligible accounts receivable, which exceeded $100.0 million as of June 30, 2011. This facility includes a number of affirmative and negative covenants, which could restrict our operations. If we were to default under the first lien revolving credit facility, we would not be permitted to draw additional amounts and the banks could accelerate our obligation to pay all outstanding amounts.


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
In June 2011, we used the net proceeds from the issuance of the 6.625% Senior Notes due 2021 (the “2021 Notes”), discussed below, to fund the tender offer and call for redemption of the entire $264.3 million aggregate principal amount of our outstanding 9.25% Senior Notes due 2016 (the “2016 Notes”), to refinance the entire $42.6 million of our 2.50% Convertible Senior Subordinated Notes due May 2011, to pay related fees, expenses and accrued interest and for general corporate purposes. We purchased $156.7 million of the 2016 Notes in the tender offer and $107.6 million in the call. We recorded a $12.8 million loss on extinguishment related to the premiums and fees paid for the tender (approximately $7.8 million) and call (approximately $5.0 million) of the 2016 Notes and a $2.7 million charge for the write-off of the associated unamortized deferred debt issuance costs. Both charges are included in loss on debt retirement, net in our Consolidated Statement of Income for the three and six months ended June 30, 2011.
 
In May 2011, we issued $400.0 million of the 2021 Notes. The 2021 Notes were issued at par and are senior unsecured obligations. Interest is payable semi-annually on June 1 and December 1 of each year at a rate of 6.625%, commencing on December 1, 2011. In addition, we entered into a Registration Rights Agreement with the initial purchasers of the 2021 Notes where we agreed to use our reasonable best efforts to cause to become effective a registration statement to exchange the 2021 Notes for freely tradable notes issued by us. If we are unable to effect the exchange offer within 210 days of the issuance of the 2021 Notes, we have agreed to pay additional interest on the notes up to 0.5%. In connection with the issuance of the 2021 Notes, Mr. James J. Kim, our Executive Chairman of the Board of Directors and our largest stockholder, and 915 Investments, LP, an affiliate of Mr. James J. Kim (collectively, the “Kim Purchasers”) agreed to purchase $75.0 million aggregate principal amount of the 2021 Notes. In addition, we entered into a letter agreement with the Kim Purchasers pursuant to which we agreed to register the resale of the 2021 Notes held by the Kim Purchasers on a shelf registration statement upon request of the Kim Purchasers at any time after May 20, 2012. We incurred $5.9 million of debt issuance costs associated with the 2021 Notes in the three months ended June 30, 2011.
 
In November 2005, we issued $100.0 million of our 6.25% Convertible Subordinated Notes due December 2013 (the “December 2013 Notes”) in a private placement to Mr. James J. Kim, our Executive Chairman of the Board of Directors, and certain Kim family members. Following a call for redemption of the entire $100.0 million aggregate principal amount of the December 2013 Notes, holders of all $100.0 million of the outstanding December 2013 Notes converted their notes into an aggregate of 13,351,131 shares of our common stock in January 2011. There was no gain or loss recorded as a result of the conversion. Forfeited accrued interest of $0.9 million and unamortized deferred debt costs of $0.4 million were included in the net carrying amount of the debt recorded to our capital accounts upon conversion.
 
In January 2009, Amkor Assembly & Test (Shanghai) Co, Ltd. (“AATS”), a Chinese subsidiary, entered into a $50.0 million U.S. dollar denominated working capital facility agreement with a Chinese bank maturing in January 2011. The facility was collateralized with certain real property and buildings in China. Principal amounts borrowed were required to be repaid within twelve months of the drawdown date and could be prepaid at any time without penalty. In January 2011, the outstanding balance of $15.0 million was repaid at maturity. In January 2011, AATS entered into a new $50.0 million U.S. dollar denominated working capital facility agreement with the same Chinese bank maturing in January 2013. The new facility bears interest at LIBOR plus 2.8% (3.25% as of June 30, 2011), which is payable in semi-annual payments. All other terms and conditions are consistent with the prior facility. At June 30, 2011, $20.0 million was outstanding under the facility. The working capital facility contains certain affirmative and negative covenants, which could restrict our operations. If we were to default on our obligations under any of these facilities, we would not be permitted to draw additional amounts, and the lenders could accelerate our obligation to pay all outstanding amounts.
 
In April 2010, Amkor Technology Taiwan Ltd, a Taiwanese subsidiary, entered into a 1.5 billion Taiwan dollar (approximately $47 million at inception) term loan with a Taiwanese bank due April 2015. The term loan accrues interest at the 90-day commercial paper rate plus 0.835%. The interest rate at June 30, 2011, was 2.34%. The term


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
loan is collateralized with certain land, buildings and equipment in Taiwan. In March 2011, we amended the principal repayment schedule. As a result, semiannual principal payments of 150 million Taiwan dollars (approximately $5.2 million) will begin in April 2012 and the remaining 600 million Taiwan dollars (approximately $20.7 million) will be due on the final maturity date.
 
In June 2011, Amkor Technology Korea, Inc., a Korean subsidiary (“ATK”) entered into a KRW 50.0 billion (approximately $46 million at inception) revolving credit facility with a Korean Bank with a term of 12 months. The loan bears interest at the CD base interest rate (as quoted by Korea Financial Investment Association) plus 2.20%. Principal is payable upon maturity and interest is paid monthly. The loan is collateralized with certain land, buildings and equipment at our ATK facilities. There have been no borrowings under this revolving credit facility as of June 30, 2011.
 
In July 2011, ATK entered into a $50.0 million three-year secured term loan with a Korean bank (the “ATK Loan”) and drew $7.4 million with the remainder to be drawn throughout the three-year term. The ATK Loan bears interest at LIBOR plus 2.96% and is due in full upon maturity in 2014. The ATK Loan is secured by substantially all land, factories and equipment located at our ATK facilities. The proceeds from the term loan will be used to fund future capital expenditures.
 
Our secured bank debt agreements and the indentures governing our outstanding notes contain a number of affirmative and negative covenants which could restrict our operations. We were in compliance with all of our covenants as of June 30, 2011.
 
13.   Pension and Severance Plans
 
Foreign Pension Plans
 
Our Philippine, Taiwanese and Japanese subsidiaries sponsor defined benefit pension plans that cover substantially all of their respective employees who are not covered by statutory plans. Charges to expense are based upon actuarial analyses. The components of net periodic pension cost for these defined benefit plans are as follows:
 
                                 
    For the Three
    For the Six
 
    Months Ended
    Months Ended
 
    June 30,     June 30,  
    2011     2010     2011     2010  
    (In thousands)  
 
Components of net periodic pension cost:
                               
Service cost
  $ 1,642     $ 1,454     $ 3,270     $ 2,904  
Interest cost
    921       928       1,830       1,842  
Expected return on plan assets
    (887 )     (581 )     (1,762 )     (1,153 )
Amortization of transitional obligation
    2       3       3       6  
Amortization of prior service cost
    78       70       156       140  
Recognized actuarial loss (gain)
    23       6       45       13  
                                 
Total net periodic pension cost
  $ 1,779     $ 1,880     $ 3,542     $ 3,752  
                                 
 
For the three and six months ended June 30, 2011, we contributed $0.1 million and $0.2 to the pension plans, respectively. We expect to contribute approximately $3.3 million during the remainder of 2011.
 
For the three and six months ended June 30, 2010, we contributed $7.4 million and $7.5 million to the pension plans, respectively.


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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 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 June 30, 2011 and 2010 was $7.8 million and $6.3 million, respectively. The provision recorded for severance benefits for the six months ended June 30, 2011 and 2010 was $13.5 and $10.5 million, respectively. The balance recorded in non-current pension and severance obligations for accrued severance at our Korean subsidiary was $96.3 million and $82.5 million at June 30, 2011 and December 31, 2010, respectively. Total pension and severance obligations at June 30, 2011 and December 31, 2010, were $103.3 million and $88.6 million, respectively.
 
14.   Fair Value Measurements
 
The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows: Level 1, defined as quoted market prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3, defined as unobservable inputs that are not corroborated by market data.
 
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 as of June 30, 2011:
 
                                 
    Quoted Prices
                   
    in Active
    Significant
             
    Markets for
    Other
    Significant
       
    Identical
    Observable
    Unobservable
       
    Assets
    Inputs
    Inputs
       
    (Level 1)     (Level 2)     (Level 3)     Total  
    (In thousands)  
 
Cash equivalent money market funds
  $ 261,730     $   —     $   —     $ 261,730  
Restricted cash
    19,715                   $ 19,715  
 
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
 
We measure certain assets and liabilities, including property, plant and equipment, intangible assets and an equity investment, at fair value on a nonrecurring basis. Such measurements are generally obtained from third party


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
appraisal reports. Impairment losses on property, plant and equipment included in cost of sales for the three months ended June 30, 2011 and 2010, were $0.1 million and $0.7 million, respectively. Impairment losses on property, plant and equipment included in cost of sales for the six months ended June 30, 2011 and 2010, were $1.1 million and $1.3 million, respectively.
 
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
 
We measure the fair value of our debt on a quarterly basis for disclosure purposes. The following table presents the financial instruments that are not recorded at fair value but which require fair value disclosure as of June 30, 2011 and December 31, 2010:
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (In thousands)  
 
Carrying value of debt
  $ 1,323,353     $ 1,364,300  
                 
Fair value of debt
  $ 1,639,911     $ 1,806,231  
                 
 
The estimated fair value of the debt is based primarily on quoted market prices reported on the respective balance sheet dates for our senior and senior subordinated notes. The estimated fair value for the debt of our subsidiaries is based on market based assumptions including current borrowing rates for similar types of borrowing arrangements adjusted for duration, optionality and risk profile.
 
15.   Commitments and Contingencies
 
We have a $100.0 million senior secured revolving credit facility that matures in April 2015. The facility has a letter of credit sub-facility of $25.0 million. As of June 30, 2011, we have $0.4 million of standby letters of credit outstanding and have an additional $24.6 million available for letters of credit. Such standby letters of credit are used in the ordinary course of our business and are collateralized by our cash balances.
 
We generally warrant that our services will be performed in a professional and workmanlike manner and in compliance with our customers’ specifications. We accrue costs for known warranty issues. Historically, our warranty costs have been immaterial.
 
Legal Proceedings
 
We are involved in claims and legal proceedings and we may become involved in other legal matters arising in the ordinary course of our business. We evaluate these claims and legal matters on a case-by-case basis to make a determination as to the impact, if any, on our business, liquidity, results of operations, financial condition or cash flows. Except as indicated below, we currently believe that the ultimate outcome of these claims and proceedings, individually and in the aggregate, will not have a material adverse impact to us. Our evaluation of the potential impact of these claims and legal proceedings on our business, liquidity, results of operations, financial condition or cash flows could change in the future. Attorney fees related to legal matters are expensed as incurred. We have not recorded any accrual for contingent liabilities associated with the legal proceedings described below, except where noted otherwise, based on our belief that liabilities, while possible, are not probable. Further, except where noted otherwise, any possible range of loss cannot be reasonably estimated at this time.
 
Arbitration Proceedings with Tessera, Inc.
 
On March 2, 2006, Tessera, Inc. 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


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
matter of the arbitration was a license agreement (“License Agreement”) entered into between Tessera and our predecessor in 1996.
 
On October 27, 2008, the arbitration panel in that proceeding issued an interim order in this matter. While the panel found that most of the packages accused by Tessera were not subject to the patent royalty provisions of the License Agreement, the panel did find that past royalties were due to Tessera as damages for some infringing packages. The panel also denied Tessera’s request to terminate the License Agreement.
 
On January 9, 2009, the panel issued the final damage award in this matter awarding Tessera $60.6 million in damages for past royalties due under the License Agreement. The award was for the period March 2, 2002 through December 1, 2008. The final award, plus interest, and the royalties through December 2008 amounting to $64.7 million, was expensed in 2008 and paid when due in February 2009.
 
Following Tessera’s favorable decision in the U.S International Trade Commission in May 2009 against some of our customers, Tessera began making repeated statements to customers and others claiming that we were in breach of the royalty provisions of the License Agreement. We informed Tessera that we believed we were in full compliance with the License Agreement and of our intent to continue making the royalty payments when due in accordance with the terms of the License Agreement.
 
On August 7, 2009, we filed a request for arbitration in the ICC against Tessera, captioned Amkor Technology, Inc. v. Tessera, Inc. (the “Arbitration”). We instituted this action in order to obtain declaratory relief confirming that we are a licensee in good standing under our 1996 License Agreement with Tessera and that the License Agreement remains in effect. We 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 denied Amkor’s claims. Tessera also alleged breach of contract, seeking termination of the License Agreement and asserting that Amkor owes Tessera additional royalties under the License Agreement, including royalties for use of thirteen U.S. and six foreign patents that Tessera did not assert in the previous arbitration. Tessera has since dropped its claims on five of those patents. Tessera also alleged that Amkor tortiously interfered with Tessera’s prospective business relationships and seeks damages. On February 17, 2011, Tessera sent Amkor a notice of termination of the License Agreement.
 
We filed our response to Tessera’s answer on January 15, 2010, denying Tessera’s claims and filed a motion with the panel seeking priority consideration and phased early determination of issues from the previous arbitration decision, including the proper method for calculating royalties under the License Agreement for periods subsequent to December 1, 2008. On March 28, 2010, the panel granted our request for priority consideration and phased early determination.
 
The first hearing regarding the issues from the previous arbitration was held in December 2010 and in July 2011, the Panel issued its decision in the first phase of the Arbitration. The Panel found that we do not owe any of the approximately $18 million of additional royalties claimed by Tessera for packages assembled by us for customers who had been involved in proceedings with Tessera before the U.S. International Trade Commission. The Panel also did not grant Tessera’s request to terminate the License Agreement in the first phase of the arbitration and deferred making any determination regarding termination until the full Arbitration is completed.
 
Our request for a declaration confirming that we are in compliance with the License Agreement and that our royalty calculations from the previous arbitration were correct was denied. The Panel found that we had materially breached the License Agreement by not paying the full amount of royalties due and by failing to satisfy the audit provisions of the License Agreement. The amount of royalties claimed by Tessera that remain unpaid is approximately $700,000, and we estimate that the amount owed, after applying offsets, is approximately $125,000.


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
The hearing on Tessera’s assertion of infringement on additional patents (now ten U.S. and four foreign patents) and the payment of additional royalties under the License Agreement relating to the additional asserted patents is currently scheduled for August 2011. Tessera initially claimed that the amount in dispute in the Arbitration was approximately $100 million and is now claiming more than $400 million of royalties under the License Agreement for the additional patents. We believe this amount is speculative and strongly dispute these claims. However, the outcome of this matter is uncertain and an adverse decision could have a material adverse effect on our results of operations, cash flows and financial condition.
 
In connection with the Arbitration, we deposited $17.0 million in an escrow account, which is classified as restricted cash in current assets at June 30, 2011. This amount represented our good faith estimate of the disputed amount of royalties that we expected Tessera to allege that we owed on packages assembled by us for one of our customers involved in proceedings with Tessera before the U.S. ITC related to the patents at issue in the prior arbitration. As a result of the Panel’s decision in the first phase of the Arbitration, we expect that the funds held in escrow will be returned to us.
 
In May 2011, Tessera filed a new Request for Arbitration against Amkor seeking undisclosed damages and a declaration that the License Agreement has been terminated. Amkor disputes that Tessera has a right to terminate the License Agreement or that the License Agreement has been terminated. We believe that Tessera’s claims in this new arbitration are without merit.
 
Amkor Technology, Inc. v. Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc.
 
On November 17, 2003, we filed a complaint against Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc. (collectively “Carsem”) with the 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.


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
On July 1, 2009, the Commission remanded the investigation for a second time to the ALJ to reopen the record to admit into evidence documents and related discovery obtained from the enforcement of the above-referenced third-party subpoena.
 
Following a two-day hearing, on October 30, 2009, the ALJ issued an Initial Determination reaffirming his prior ruling that the Carsem Dual and Quad Flat No-Lead Packages infringe some of Amkor’s patent claims relating to MicroLeadFrame package technology, that all of Amkor’s asserted patent claims are valid, and that Carsem violated Section 337 of the Tariff Act.
 
On December 16, 2009, the Commission ordered a review of the ALJ’s Initial Determination. On February 18, 2010, the Commission reversed a finding by the ALJ on the issue of whether a certain invention constitutes prior art to Amkor’s asserted patents. The Commission remanded the investigation to the ALJ to make further findings in light of the Commission’s ruling. On March 22, 2010, the ALJ issued a Supplemental Initial Determination. Although the ALJ’s ruling did not disturb the prior finding that Carsem Dual and Quad Flat No-Lead Packages infringe some of Amkor’s patent claims relating to MicroLeadFrame technology, the ALJ found that some of Amkor’s patent claims are invalid and, as a result, the ALJ did not find a statutory violation of the Tariff Act. On July 20, 2010, the Commission issued a Notice of Commission Final Determination, in which the Commission determined that there is no violation of Section 337 of the Tariff Act and terminated the investigation. We have appealed the Commission’s ruling to the U.S. Court of Appeals for the Federal Circuit.
 
16.   Business Segments
 
We have two reportable segments, packaging and test. Packaging and test are integral steps in the process of manufacturing semiconductor devices, and our customers will engage with us for both packaging and test services, or just packaging or test services.
 
The accounting policies for segment reporting are the same as those for our Consolidated Financial Statements as a whole. We evaluate our operating segments based on gross profit and gross property, plant and equipment. We do not specifically identify and allocate total assets by operating segment. Summarized financial information concerning reportable segments is shown in the following table. The “other” column reflects other corporate adjustments to net sales and gross profit and the property, plant and equipment of our sales and corporate offices.
 
                                 
    Packaging   Test   Other   Total
    (In thousands)
 
Three Months Ended June 30, 2011
                               
Net sales
  $ 612,363       75,210       60     $ 687,633  
Gross profit
  $ 109,379       20,663       (225 )   $ 129,817  
Three Months Ended June 30, 2010
                               
Net sales
  $ 677,937       71,128       100     $ 749,165  
Gross profit
  $ 159,932       19,281       (14 )   $ 179,199  
Six Months Ended June 30, 2011
                               
Net sales
  $ 1,210,169       142,342       72     $ 1,352,583  
Gross profit
  $ 220,685       36,149       (331 )   $ 256,503  
Six Months Ended June 30, 2010
                               
Net sales
  $ 1,258,524       136,191       188     $ 1,394,903  
Gross profit
  $ 282,041       34,503       (389 )   $ 316,155  
Gross Property, Plant and Equipment
                               
June 30, 2011
  $ 3,122,741       816,536       147,442     $ 4,086,719  
December 31, 2010
  $ 3,018,216       800,125       143,221     $ 3,961,562  


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AMKOR TECHNOLOGY, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
 
17.   Exit Activities and Reductions in Force
 
As part of our ongoing efforts to improve our manufacturing operations and manage costs, we regularly evaluate our staffing levels and facility requirements compared to business needs. The following table summarizes our exit activities and reduction in force initiatives associated with these activities. “Charges” represents the initial charge related to the exit activity. “Cash Payments” consists of the utilization of “Charges.” “Non-cash Amounts” for the six months ended June 30, 2010, consists of asset impairments.
 
                                 
    Employee
    Contractual
    Asset
       
    Separation Costs     Obligations     Impairments     Total  
    (In thousands)  
 
Accrual at December 31, 2010
  $ 670     $     $     $ 670  
Charges
    23                   23  
Cash Payments
    (589 )                 (589 )
                                 
Accrual at June 30, 2011
  $ 104     $     $     $ 104  
                                 
 
                                 
    Employee
    Contractual
    Asset
       
    Separation Costs     Obligations     Impairments     Total  
    (In thousands)  
 
Accrual at December 31, 2009
  $ 3,938     $ 2,813     $     $ 6,751  
Charges
    2,045       41       282       2,368  
Cash Payments
    (893 )     (2,854 )           (3,747 )
Non-cash Amounts
                (282 )     (282 )
                                 
Accrual at June 30, 2010
  $ 5,090     $     $     $ 5,090  
                                 
 
In June 2009, we communicated to our employees the decision to wind-down and exit our manufacturing operations in Singapore. We completed our exit as of December 31, 2010. This wind-down affected approximately 600 employees and enabled us to improve our cost structure by consolidating factories. The majority of the machinery and equipment was relocated to and utilized in other factories. In June 2011, we sold the facility in Singapore for $13.3 million in cash, net of goods and services tax, and recorded a gain of less than $0.1 million, with no net tax effect.
 
The liability for one-time involuntary termination benefits for employees that provided service beyond a minimum retention period was recognized over the service period. During the three and six months ended June 30, 2011, charges for termination benefits were not significant. During the three months ended June 30, 2010, we recorded charges for termination benefits of $1.1 million, of which $0.8 million and $0.3 million were recorded in cost of sales and selling, general and administrative expenses, respectively. During the six months ended June 30, 2010, we recorded charges for termination benefits of $2.0 million, of which $1.4 million and $0.6 million were recorded in cost of sales and selling, general and administrative expenses, respectively.
 
Contractual obligation costs, asset impairments and other costs are included in costs of goods sold. In January 2010, we made a final payment related to the early termination of our lease of one of our facilities that was vacated and relief from our existing $1.1 million asset retirement obligation related to the leased property. Asset impairments of $0.3 million during the six months ended June 30, 2010, relate to non-transferable machinery and equipment.
 
All amounts accrued at June 30, 2011, are classified in current liabilities.


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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This report contains forward-looking statements within the meaning of the federal securities laws, including but not limited to statements regarding: (1) the amount, timing and focus of our expected capital investments, (2) our ability to fund our operating activities for the next twelve months, (3) the effect of capacity utilization rates on our gross margin, (4) the expiration of tax holidays in jurisdictions in which we operate and expectations regarding our effective tax rate, (5) the release of valuation allowances related to taxes in the future, (6) the expected use of future cash flows, if any, for the expansion of our business, capital expenditures and the repayment of debt, (7) our repurchase or repayment of outstanding debt or the conversion of debt in the future, (8) payment of dividends, (9) compliance with our covenants, (10) expected contributions to defined benefit pension plans, (11) liability for unrecognized tax benefits, (12) the effect of foreign currency exchange rate exposure on our financial results, (13) the volatility of the trading price of our common stock, (14) changes to our internal controls related to implementation of a new enterprise resource planning (“ERP”) system and (15) other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intend” or the negative of these terms or other comparable terminology. Because such statements include risks and uncertainties, actual results may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the following discussion as well as in Part II, Item 1A “Risk Factors” of this Quarterly Report. The following discussion provides information and analysis of our results of operations for the three and six months ended June 30, 2011 and our liquidity and capital resources. You should read the following discussion in conjunction with Item 1, “Financial Statements” in this Quarterly Report as well as other reports we file with the Securities and Exchange Commission (“SEC”).
 
Overview
 
Amkor is one of the world’s leading providers of outsourced semiconductor packaging and test services. Packaging and test are integral steps in the process of manufacturing semiconductor devices. The semiconductor manufacturing process begins with the fabrication of tiny transistor elements into complex patterns of electronic circuitry on silicon wafers, thereby creating large numbers of individual semiconductor devices or integrated circuits on each wafer (generally referred to as “chips” or “die”). Each device on the wafer is tested and the wafer is cut into pieces called chips. The chips are attached through wire bonding to a substrate or leadframe, or to a substrate in the case of flip chip interconnect, and then encased in a protective material. For a wafer-level package, the electrical interconnections are created directly on the surface of the wafer without a substrate or leadframe. The packages are then tested using sophisticated equipment to ensure that each packaged chip meets its design and performance specifications.
 
Our packages are designed based on application and chip specific requirements including the type of interconnection technology employed, size, thickness and electrical, mechanical and thermal performance. We are able to provide turnkey packaging and test solutions including semiconductor wafer bump, wafer probe, wafer backgrind, package design, assembly, test and drop shipment services.
 
Our customers include, among others: Altera Corporation; Broadcom Corporation; Infineon Technologies, AG; International Business Machines Corporation (“IBM”); LSI Corporation; Qualcomm Incorporated; Sony Corporation; ST Microelectronics, Pte.; Texas Instruments, Inc. and Toshiba Corporation. The outsourced semiconductor packaging and test market is very competitive. We also compete with the internal semiconductor packaging and test capabilities of many of our customers.
 
On March 11, 2011, operations at our facility in Kitakami, Japan, were interrupted by the Tohoku earthquake near Sendai and the aftershocks that followed. Although the facility suffered some minor damage to buildings and equipment, as well as a complete shutdown of power and utilities, the facility recovered quickly and was substantially operational for the three months ended June 30, 2011.


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Japan is a major supplier of semiconductors, silicon wafers, specialty chemicals, substrates, equipment and other supplies to the electronics industry. We have been able to partially mitigate the impact of the earthquake by working closely with our customers and suppliers to understand the situation, identify the potential exposure and mitigate the risk, where possible. We believe our results for the three months ended June 30, 2011, were impacted to some extent by substrate and semiconductor wafer shortages.
 
Our net sales for the three months ended June 30, 2011, were $687.6 million compared to $749.2 million for the three months ended June 30, 2010. The decrease was driven primarily by weakness in demand for our ball grid array packaging solutions, primarily in consumer electronics and networking, as well as the supply chain situation in Japan.
 
Gross margin of 18.9% for the three months ended June 30, 2011, was down from 23.9% for the three months ended June 30, 2010. Gross margin in the three months ended June 30, 2011, decreased from the prior year period due to lower utilization of our packaging assets and the negative impact of foreign currency exchange rate movements. Also affecting gross margin in the three months ended June 30, 2011, were higher other manufacturing costs and the increased cost of gold used in many of our wirebond packages.
 
Our net income for the three months ended June 30, 2011, was $14.5 million, or $0.07 per diluted share, compared to net income of $59.1 million, or $0.23 per diluted share, for the three months ended June 30, 2010. The decrease is primarily attributable to the decrease in gross profit, an increase in income tax expense and unfavorable foreign currency exchange rate movements during the three months ended June 30, 2011. Partially offsetting these increased expenses was a decline in interest expense and selling, general and administrative costs. Net income for the three months ended June 30, 2011, includes a $15.5 million loss on the extinguishment of debt, or $0.05 per diluted share. Net income for the three months ended June 30, 2010, includes a $17.8 million loss on the refinancing of debt, or $0.06 per diluted share.
 
Our capital additions totaled $97.0 million for the three months ended June 30, 2011, compared to $158.1 million for the three months ended June 30, 2010. Our spending was focused primarily on new capacity for flip chip assembly and test services in support of communications and improvements to our manufacturing facilities. We expect our capital additions for the full year 2011 will be approximately $425 million.
 
Cash provided by operating activities was $233.9 million for the six months ended June 30, 2011, as compared to cash provided by operating activities of $190.5 million for the six months ended June 30, 2010. We experienced positive free cash flow of $9.3 million for the six months ended June 30, 2011, which decreased $38.3 million from the prior year comparable period. The decrease in free cash flow was primarily due to increased purchases of property, plant and equipment which were partially offset by increased collections on accounts receivable. We define free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. Free cash flow is not defined by U.S. generally accepted accounting principles (“U.S. GAAP”) and a reconciliation of free cash flow to net cash provided by operating activities is set forth under the caption “Cash Flows” below. 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 six months of 2011.
 
We believe our financial position and liquidity are sufficient to fund our operating activities for at least the next twelve months. At June 30, 2011, our cash and cash equivalents totaled approximately $475.5 million with an aggregate of $37.2 million of debt due through the end of 2011. In May 2011, we issued $400.0 million of our 6.625% Senior Notes due 2021. We used the majority of the proceeds of that note issuance to refinance the $42.6 million principal balance outstanding of our 2.5% convertible senior subordinated notes due May 2011 and redeem in full the $264.3 million outstanding principal amount of our 9.25% Senior Notes due 2016.


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Results of Operations
 
The following table sets forth certain operating data as a percentage of net sales for the periods indicated:
 
                                 
    For the Three Months Ended
  For the Six Months Ended
    June 30,   June 30,
    2011   2010   2011   2010
 
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Gross profit
    18.9 %     23.9 %     19.0 %     22.7 %
Depreciation and amortization
    12.1 %     10.5 %     12.3 %     11.1 %
Operating income
    8.1 %     13.4 %     7.8 %     12.2 %
Income before income taxes
    2.6 %     7.7 %     3.5 %     7.3 %
Net income attributable to Amkor
    2.1 %     7.9 %     2.9 %     7.4 %
 
Three and Six Months Ended June 30, 2011 Compared to Three and Six Months Ended June 30, 2010
 
Net Sales
 
                                                                 
    For the Three Months Ended June 30,   For the Six Months Ended June 30,
    2011   2010   Change   2011   2010   Change
    (In thousands, except percentages)
 
Net sales
  $ 687,633     $ 749,165     $ (61,532 )     (8.2 )%   $ 1,352,583     $ 1,394,903     $ (42,320 )     (3.0 )%
Packaging net sales
    612,363       677,937       (65,574 )     (9.7 )%     1,210,169       1,258,524       (48,355 )     (3.8 )%
Test net sales
    75,210       71,128       4,082       5.7 %     142,342       136,191       6,151       4.5 %
 
Net Sales.  Net sales in the three and six months ended June 30, 2011, decreased compared to the three and six months ended June 30, 2010. Ball grid array packaging solutions decreased as demand for consumer electronics and networking applications decreased. Leadframe packaging solutions decreased primarily due to weakness in demand and inventory adjustments for consumer applications. Chip scale packaging (“CSP”) solutions decreased in the three months ended June 30, 2011, compared to the three months ended June 30, 2010, due to weakness in demand for our packaging solutions supporting memory products. The decrease was partially offset by growth in flip chip CSP, flip chip stacked CSP and fine pitch copper pillar flip chip packaging solutions supporting wireless products, such as smart phones. Chip scale packaging increased in the six months ended June 30, 2011, compared to the six months ended June 30, 2010, primarily due to growth in the chip scale packaging solutions noted above. The growth is primarily the result of strength in demand experienced in the three months ended March 31, 2011. Net sales were also negatively impacted by the supply chain situation in Japan in both the three and six months ended June 30, 2011.
 
Packaging Net Sales.  Packaging net sales in the three months ended June 30, 2011, decreased compared to the three months ended June 30, 2010. The decrease in the three months ended June 30, 2011, is primarily due to weakness in demand for our ball grid array and chip scale packaging solutions and the supply chain situation in Japan. Packaging unit volume decreased 0.5 billion units to 2.2 billion units during the three months ended June 30, 2011, compared to 2.7 billion units during the three months ended June 30, 2010, primarily due to a decrease in unit demand for our leadframe packaging solutions, as well as inventory adjustments for consumer applications.
 
Packaging net sales in the six months ended June 30, 2011, decreased compared to the six months ended June 30, 2010. The decrease in the six months ended June 30, 2011, is primarily due to a decrease in demand for our ball grid array, leadframe packaging solutions and the supply chain situation in Japan, partially offset by growth in our chip scale packaging solutions. Packaging unit volume decreased 0.9 billion units to 4.3 billion units for the six months ended June 30, 2011, compared to 5.2 billion units in the six months ended June 30, 2010, primarily due to a decrease in unit demand for our leadframe packaging solutions, as well as inventory adjustments for consumer applications.


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Test Net Sales.  Test net sales in the three and six months ended June 30, 2011, increased compared to the three and six months ended June 30, 2010. The increase is primarily attributable to increased demand for smart phones.
 
Cost of Sales
 
                                                                 
    For the Three Months Ended June 30,   For the Six Months Ended June 30,
    2011   2010   Change   2011   2010   Change
    (In thousands, except percentages)
 
Cost of sales
  $ 557,816     $ 569,966     $ (12,150 )     (2.1 )%   $ 1,096,080     $ 1,078,748     $ 17,332       1.6 %
 
Our cost of sales consists principally of materials, labor, depreciation and manufacturing overhead. Since a substantial portion of the costs at our factories is fixed, relatively modest increases or decreases in capacity utilization rates can have a significant effect on our gross margin.
 
Material costs as a percentage of net sales increased to 42.8% for the three and six months ended June 30, 2011 from 42.4% and 42.2% for the three and six months ended June 30, 2010, respectively. The increase as a percentage of sales is primarily due to the increased cost of gold used in many of our wirebond packages. Material costs in absolute dollars decreased in the three and six months ended June 30, 2011, primarily due to weakness in some of our packaging solutions as discussed above.
 
Labor costs as a percentage of net sales increased to 14.9% and 14.5% for the three and six months ended June 30, 2011, respectively, from 12.7% and 12.9% for the three and six months ended June 30, 2010, respectively. Labor costs as a percentage of sales were negatively impacted by lower utilization of our manufacturing assets and foreign currency exchange rate movements in the three and six months ended June 30, 2011, compared to the three and six months ended June 30, 2010, as substantially all of our manufacturing operations’ workforce is paid in local currencies. Additionally, labor costs in absolute dollars increased due to unfavorable foreign currency exchange rate movements and salary increases, partially offset by cost savings from the closure of our Singapore manufacturing operations.
 
Other manufacturing costs as a percentage of net sales increased to 23.4% and 23.7% for the three and six months ended June 30, 2011, respectively, from 21.0% and 22.2% for the three and six months ended June 30, 2010, respectively. Other manufacturing costs as a percentage of sales were negatively impacted by foreign currency exchange rate movements, lower utilization of our manufacturing assets and increased depreciation as a result of our continued investments in property, plant and equipment. Other manufacturing costs in absolute dollars also increased in the three and six months ended June 30, 2011, due to increased depreciation as a result of our continued investments in property, plant and equipment.
 
Gross Profit
 
                                                 
    For the Three Months Ended June 30,   For the Six Months Ended June 30,
    2011   2010   Change   2011   2010   Change
    (In thousands, except percentages)
 
Gross profit
  $ 129,817     $ 179,199     $ (49,382 )   $ 256,503     $ 316,155     $ (59,652 )
Gross margin
    18.9 %     23.9 %     (5.0 ) %     19.0 %     22.7 %     (3.7 ) %
 
Gross profit and gross margin for the three and six months ended June 30, 2011, decreased compared to the three and six months ended June 30, 2010. The decline in gross profit was primarily due to weakness in demand for some of our packaging solutions and the corresponding lower level of utilization of our manufacturing assets, including assets supporting our ball grid array and chip scale packaging solutions for the three months ended June 30, 2011 and assets supporting our ball grid array and leadframe packaging solutions for the six months ended June 30, 2011. Gross margin was also negatively impacted by unfavorable foreign currency exchange rate movements, increased depreciation expense as a result of our continued investment in property, plant and equipment and the increased cost of gold used in many of our wirebond packages.
 


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    For the Three Months Ended June 30,   For the Six Months Ended June 30,
    2011   2010   Change   2011   2010   Change
    (In thousands, except percentages)
 
Packaging gross profit
  $ 109,379     $ 159,932     $ (50,553 )   $ 220,685     $ 282,041     $ (61,356 )
Packaging gross margin
    17.9 %     23.6 %     (5.7 )%     18.2 %     22.4 %     (4.2 )%
 
Packaging Gross Profit.  Gross profit and gross margin for packaging sales for the three and six months ended June 30, 2011, decreased compared to the three and six months ended June 30, 2010. The decrease in gross profit and margin was primarily attributable to weakness in demand for some of our packaging solutions and the corresponding lower level of utilization of our manufacturing assets, negative foreign currency exchange rate movements, increased depreciation expense resulting from our continued investment in property, plant and equipment and the increased cost of gold used in many of our wirebond packages.
 
                                                 
    For the Three Months Ended June 30,   For the Six Months Ended June 30,
    2011   2010   Change   2011   2010   Change
    (In thousands, except percentages)
 
Test gross profit
  $ 20,663     $ 19,281     $ 1,382     $ 36,149     $ 34,503     $ 1,646  
Test gross margin
    27.5 %     27.1 %     0.4 %     25.4 %     25.3 %     0.1 %
 
Test Gross Profit.  Gross profit and gross margin for test sales for the three and six months ended June 30, 2011, remained consistent with the three and six months ended June 30, 2010.
 
Selling, General and Administrative Expenses
 
                                                                 
    For the Three Months Ended June 30,   For the Six Months Ended June 30,
    2011   2010   Change   2011   2010   Change
    (In thousands, except percentages)
 
Selling, general and administrative
  $ 61,284     $ 66,356     $ (5,072 )     (7.6 )%   $ 125,842     $ 122,652     $ 3,190       2.6 %
 
Selling, general and administrative expenses for the three months ended June 30, 2011, decreased compared to the three months ended June 30, 2010. The decrease was primarily driven by reduced contracted services, primarily associated with the implementation of our global ERP information system in the three months ended June 30, 2010 and reduced employee compensation and benefit costs as a result of decreased bonus attainment levels. The decrease was partially offset by increased professional fees.
 
Selling, general and administrative expenses for the six months ended June 30, 2011, increased compared to the six months ended June 30, 2010. The increase was primarily driven by increased employee compensation and benefit costs and professional fees. The increase was partially offset by reduced contracted services primarily associated with the implementation of our global ERP information system in the six months ended June 30, 2010 and reduced employee compensation and benefit costs as a result of decreased bonus attainment levels.
 
Research and Development
 
                                                                 
    For the Three Months Ended June 30,   For the Six Months Ended June 30,
    2011   2010   Change   2011   2010   Change
    (In thousands, except percentages)
 
Research and development
  $ 12,559     $ 12,095     $ 464       3.8 %   $ 24,688     $ 23,768     $ 920       3.9 %
 
Research and development activities are currently focused on developing new package interconnect solutions and test services. In addition, research and development is focused on improving the efficiency and capabilities of our existing production processes. Our key areas for research and development initiatives include 3D packaging, advanced flip chip packaging, advanced micro-electromechanical system packaging and testing, fine pitch copper pillar bumping and packaging, laminate and leadframe packaging, Through Mold Via and Through Silicon Via technologies, wafer level processing and wafer level fan out technology and manufacturing cost reduction initiatives. Research and development expenses for the three and six months ended June 30, 2011, remained consistent with the three and six months ended June 30, 2010, both in dollars and as a percentage of net sales.

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Other Expense, Net
 
                                                                 
    For the Three Months Ended     For the Six Months Ended  
    2011     2010     Change     2011     2010     Change  
    (In thousands, except percentages)  
 
Interest expense, net
  $ 21,886     $ 27,376     $ (5,490 )     (20.1 )%   $ 42,668     $ 52,824     $ (10,156 )     (19.2 )%
Loss on debt retirement, net
    15,531       17,807       (2,276 )     (12.8 )%     15,531       17,807       (2,276 )     (12.8 )%
Foreign currency loss (gain)
    2,932       (421 )     3,353       796.4 %     4,663       554       4,109       741.7 %
Other income, net
    (2,414 )     (1,757 )     (657 )     37.4 %     (4,076 )     (3,099 )     (977 )     31.5 %
                                                                 
Other expense, net
  $ 37,935     $ 43,005     $ (5,070 )     (11.8 )%   $ 58,786     $ 68,086     $ (9,300 )     (13.7 )%
                                                                 
 
Other expense, net for the three and six months ended June 30, 2011, decreased compared to the three and six months ended June 30, 2010. This decrease was driven primarily by a reduction in interest expense and debt retirement costs, partially offset by an increase in foreign currency loss. The reduction in interest expense, of $5.5 million and $10.2 million during the three and six months ended June 30, 2011, respectively, was primarily due to debt refinanced with lower interest rate instruments during the three months ended June 30, 2010 and the conversion in January 2011 of our 6.25% Convertible Notes due 2013. We recorded $15.5 million of debt retirement costs related to the debt transactions described above during the three and six months ended June 30, 2011. We recorded $17.8 million of debt retirement costs related to the redemption of the full $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 during the three and six months ended June 30, 2010. Partially offsetting the decrease is a $3.4 million and $4.1 million increase in foreign currency loss in the three and six months ended June 30, 2011, respectively, from the remeasurement of certain subsidiaries’ balance sheet items.
 
Income Tax Expense (Benefit)
 
                                                                 
    For the Three Months Ended
  For the Six Months Ended
    June 30,   June 30,
    2011   2010   Change   2011   2010   Change
    (In thousands, except percentages)
 
Income tax expense (benefit)
  $ 3,594     $ (1,200 )   $ 4,794       399.5 %   $ 6,976     $ (1,367 )   $ 8,343       610.3 %
 
Generally, our effective tax rate is substantially below the U.S. federal tax rate of 35% because we have experienced taxable losses in the U.S. and our income is taxed in foreign jurisdictions where we benefit from tax holidays or tax rates lower than the U.S. statutory rate. Income tax expense for the three and six months ended June 30, 2011, is attributable to income tax on profits earned in certain foreign jurisdictions, foreign withholding taxes, deferred taxes on undistributed earnings from our investment in J-Devices and state income taxes. The tax benefit for the three and six months ended June 30, 2010, is attributable to tax expense in certain foreign jurisdictions, foreign withholding taxes, and minimum taxes offset by the release of a valuation allowance of $5.3 million on the net deferred tax assets of a Taiwanese subsidiary.
 
During 2011, our subsidiaries in China, Korea, the Philippines and Taiwan operated under tax holidays which will expire in whole or in part at various dates through 2015. We expect our effective tax rate to increase as the tax holidays expire so that the income earned in these jurisdictions will be subject to higher statutory income tax rates.
 
At June 30, 2011, we had U.S. net operating loss carryforwards totaling $395.6 million which expire at various times through 2031. Additionally, at June 30, 2011, we had $73.2 million of non-U.S. net operating loss carryforwards, the vast majority of which will expire at various times through 2018. We maintain a valuation allowance on all of our U.S. net deferred tax assets, including our net operating loss carryforwards, and on deferred tax assets in certain foreign jurisdictions. We will release such valuation allowances as the related tax benefits are realized on our tax returns or when sufficient positive evidence exists to conclude that it is more likely than not that the deferred tax assets will be realized.


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Liquidity and Capital Resources
 
We assess our liquidity based on our current expectations regarding sales, operating expenses, capital spending and debt service requirements. Based on this assessment, we believe that our cash flow from operating activities, together with existing cash and cash equivalents and availability under our revolving credit facility, will be sufficient to fund our working capital, capital expenditure and debt service requirements for at least the next twelve months. Thereafter, our liquidity will continue to be affected by, among other things, volatility in the global economy and credit markets, the performance of our business, our capital expenditure levels and our ability to either repay debt out of operating cash flow or refinance debt at or prior to maturity with the proceeds of debt or equity offerings. There is no assurance that we will generate the necessary net income or operating cash flows to meet the funding needs of our business beyond the next twelve months due to a variety of factors, including the cyclical nature of the semiconductor industry and the other factors discussed in Part II, Item 1A “Risk Factors” of this Quarterly Report.
 
Our primary source of cash and the source of funds for our operations are cash flows from our operations, current cash and cash equivalents, borrowings under available debt facilities and proceeds from any additional debt or equity financings. As of June 30, 2011, we had cash and cash equivalents of $475.5 million and availability of $99.6 million under our $100.0 million first lien senior secured revolving credit facility. We expect cash flows to be used in the operation and expansion of our business, making capital expenditures, paying principal and interest on our debt and for other corporate purposes.
 
We sponsor an accrued severance plan for our Korean subsidiary, which under existing tax laws in Korea, limits our ability to currently deduct related severance expenses accrued under that plan. The purpose of these limitations is to encourage companies to migrate to a defined contribution or defined benefit plan; however, if we retain our existing severance plan, we will be required to pay increased taxes. If we decide to adopt a new plan, we would be required to significantly fund the existing liability. Our Korean severance liability was $103.3 million as of June 30, 2011.
 
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. Our investment includes our 30% equity interest and call options to acquire additional equity interests. The call options, at our discretion, permit us to subscribe to new or existing J-Devices’ shares until our maximum ownership ratio is 60%, 66% and 80% beginning in 2012, 2014 and 2015, respectively. In 2014 and beyond, Toshiba has at its discretion, a put option which allows Toshiba to sell shares to us if we have exercised any of our call options. The exercise price for all options is determined using a contractual pricing formula based primarily upon the financial position of J-Devices at the time of exercise and would require funding if we exercised our option.
 
We operate in a capital intensive industry. Servicing our current and future customers may require that we incur significant operating expenses and make significant capital expenditures, which are generally made in advance of the related revenues and without any firm customer commitments.
 
We have debt of $1,323.4 million outstanding at June 30, 2011, of which $99.3 million is current. This includes $250.0 million of our 6.0% Convertible Notes due 2014, which we expect will be converted into equity rather than being paid at maturity. At June 30, 2011, we have an aggregate of $37.2 million of debt coming due through the end of 2011, and $102.3 million of debt due in 2012.
 
In January 2011, all $100.0 million of our 6.25% Convertible Notes due 2013 were converted into an aggregate of 13,351,131 shares of our common stock.
 
In March 2011, we amended the principal repayment schedule of our term loan in Taiwan. As a result, semiannual principal payments of 150 million Taiwan dollars (approximately $5.2 million) will begin in April 2012 and the remaining 600 million Taiwan dollars (approximately $20.7 million) will be due on the final maturity date.
 
In May 2011, we issued $400.0 million of 6.625% Senior Notes due 2021 (the “2021 Notes). We used the net proceeds from the issuance of the 2021 Notes to fund the tender offer and call for redemption of the entire


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$264.3 million aggregate principal amount of our outstanding 9.25% Senior Notes due 2016, to refinance our 2.50% Convertible Senior Subordinated Notes due May 2011, to pay related fees, expenses and accrued interest and for general corporate purposes.
 
In June 2011, Amkor Technology Korea, Inc., a Korean subsidiary (“ATK”) entered into a KRW 50.0 billion (approximately $46 million at inception) revolving credit facility with a Korean Bank with a term of 12 months. There have been no borrowings under this revolving credit facility as of June 30, 2011.
 
In July 2011, ATK entered into a $50.0 million three-year secured term loan with a Korean bank and drew $7.4 million, with the remainder to be drawn throughout the three-year term. The proceeds from the term loan will be used to fund future capital expenditures.
 
The interest payments required on our debt are substantial. For example, we paid $96.6 million of interest in 2010. 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 transaction 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.
 
Certain debt agreements have restrictions on dividend payments and the repurchase of stock and subordinated securities, including our convertible notes. These restrictions are determined by defined calculations which include net income. 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 June 30, 2011 and expect to remain in compliance with these covenants for at least the next twelve months.
 
Capital Additions
 
Our capital additions for the six months ended June 30, 2011, were $202.0 million. Our spending was focused primarily on new capacity for flip chip assembly and test services in support of communications and improvements to our manufacturing facilities. We expect that our capital additions for the full year 2011 will be approximately $425 million. This includes approximately $25 million for research and development initiatives including next generation interconnect technologies such as wafer-level fan out and Through Silicon Via. Ultimately, the amount of our 2011 capital additions will depend on several factors including, among others, the performance of our business, the need for additional capacity to service anticipated customer demand and the availability of cash flow from operations or financing. The following table reconciles our activity related to property, plant and equipment additions as presented on the Consolidated Balance Sheets to property, plant and equipment purchases reflected on the Condensed Consolidated Statements of Cash Flows:
 
                 
    For the Six
 
    Months Ended
 
    June 30,  
    2011     2010  
    (In thousands)  
 
Property, plant and equipment additions
  $ 201,981     $ 230,825  
Net change in related accounts payable and deposits
    22,648       (87,897 )
                 
Purchases of property, plant and equipment
  $ 224,629     $ 142,928  
                 


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Cash Flows
 
Cash provided by operating activities was $233.9 million for the six months ended June 30, 2011, compared to cash provided by operating activities of $190.5 million for the six months ended June 30, 2010. We experienced positive free cash flow of $9.3 million for the six months ended June 30, 2011, which decreased $38.3 million from the prior year comparable period primarily due to increased purchases of property, plant and equipment which were partially offset by increased collections on accounts receivable.
 
Net cash provided by (used in) operating, investing and financing activities for the six months ended June 30, 2011 and 2010, were as follows:
 
                 
    For the Six
 
    Months Ended
 
    June 30,  
    2011     2010  
    (In thousands)  
 
Operating activities
  $ 233,897     $ 190,508  
Investing activities
    (208,009 )     (143,881 )
Financing activities
    44,595       (4,236 )
 
Operating activities:  Our cash flow from operating activities for the six months ended June 30, 2011, increased by $43.4 million compared to the six months ended June 30, 2010. Operating income for the six months ended June 30, 2011, adjusted for depreciation and amortization, other operating activities and non-cash items, decreased $43.4 million. The decrease is primarily attributable to decreased gross profit. This decrease was partially offset by net interest expense savings of $10.2 million in the six months ended June 30, 2011, as a result of debt refinanced with lower interest rate instruments during the three months ended June 30, 2010 and 2011 and the conversion of the December 2013 Notes in January 2011.
 
Changes in assets and liabilities increased operating cash flow for the six months ended June 30, 2011, compared to a decrease in the six months ended June 30, 2010. Accounts receivable has decreased in the six months ended June 30, 2011, compared to an increase in the comparable period in 2010, reflecting improved collection of receivables. The increase in operating cash flow for the six months ended June 30, 2011, was partially offset by decreases in accounts payable and accrued expenses.
 
Investing activities:  Our cash flows used in investing activities for the six months ended June 30, 2011, increased by $64.1 million. This increase was primarily due to an $81.7 million increase in purchases of property, plant and equipment. Our capital additions were focused primarily on new capacity for flip chip assembly and test services in support of communications and improvements to our manufacturing facilities.
 
Financing activities:  Our cash flows provided by financing activities for the six months ended June 30, 2011, increased by $48.8 million. The net cash provided by financing activities for the six months ended June 30, 2011, was primarily driven by the issuance of our $400.0 million of 6.625% Senior Notes due 2021 offset by $354.7 million of repayments, made up of $264.3 million of principal, and $7.8 million in tender premiums, on the 9.25% Senior Notes due 2016, $42.6 million for our 2.50% Convertible Senior Subordinated Notes due May 2011, $31.4 million on our Korean term loans and $7.7 million of other foreign amortizing debt. We also incurred $5.9 million in debt issuance costs associated with the issuance of the 2021 Notes.
 
Our net cash used in financing activities for the six months ended June 30, 2010, was $4.2 million which was primarily driven by the refinancing of existing debt with new debt, including term loans at our Japanese, Korean and Taiwanese subsidiaries and the issuance of our 7.375% Senior Notes due 2018 (the “2018 Notes”). We also incurred $7.6 million in debt issuance costs in the six months ended June 30, 2010, primarily associated with the issuance of the 2018 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


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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.
 
                 
    For the Six
 
    Months Ended
 
    June 30,  
    2011     2010  
    (In thousands)  
 
Net cash provided by operating activities
  $ 233,897     $ 190,508  
Purchases of property, plant and equipment
    (224,629 )     (142,928 )
                 
Free cash flow
  $ 9,268     $ 47,580  
                 
 
Contractual Obligations
 
The following table summarizes our contractual obligations at June 30, 2011, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
 
                                                         
          Payments Due for Year Ending December 31,  
          2011 -
                               
    Total     Remaining     2012     2013     2014     2015     Thereafter  
    (In thousands)  
 
Total debt(1)
  $ 1,323,353     $ 37,237     $ 102,349     $ 136,227     $ 281,799     $ 20,741     $ 745,000  
Scheduled interest payment obligations(2)
    498,210       39,156       75,761       71,059       57,254       52,070       202,910  
Purchase obligations(3)
    103,330       103,330                                
Operating lease obligations
    32,727       4,420       6,708       6,460       6,359       5,016       3,764  
Severance obligations(4)
    103,326       3,579       6,895       6,433       5,987       5,575       74,857  
                                                         
Total contractual obligations
  $ 2,060,946     $ 187,722     $ 191,713     $ 220,179     $ 351,399     $ 83,402     $ 1,026,531  
                                                         
 
 
(1) Total debt decreased less than $0.1 million from December 31, 2010. In January 2011, the entire $100.0 million aggregate principal amount of the December 2013 Notes was converted into our common stock. In May 2011, we issued $400 million of our 6.625% Senior Notes due 2021 and refinanced the $42.6 million principal balance outstanding of our 2.5% convertible senior subordinated notes due May 2011. In June 2011, we repaid $264.3 million principal amount of our 9.25% Senior Notes due 2016. Also in June 2011, we repaid $39.0 million of annual amortizing debt.
 
(2) Scheduled interest payment obligations were calculated using stated coupon rates for fixed rate debt and interest rates applicable at June 30, 2011, for variable rate debt.
 
(3) Represents capital-related purchase obligations outstanding at June 30, 2011, for capital additions.
 
(4) Represents estimated benefit payments for our Korean subsidiary severance plan.
 
In addition to the obligations identified in the table above, other non-current liabilities recorded in our Consolidated Balance Sheet at June 30, 2011, include:
 
  •  $22.6 million of foreign pension plan obligations for which the timing and actual amount of funding required is uncertain. We expect to contribute approximately $3.3 million to the defined benefit pension plans during the remainder of 2011.
 
  •  $6.3 million net liability associated with unrecognized tax benefits. Due to the uncertainty regarding the amount and the timing of any future cash outflows associated with our unrecognized tax benefits, we are unable to reasonably estimate the amount and period of ultimate settlement, if any, with the various taxing authorities.


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Off-Balance Sheet Arrangements
 
As of June 30, 2011, we had no off-balance sheet guarantees or other off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, other than our operating lease obligations described above in “Contractual Obligations.”
 
Contingencies, Indemnifications and Guarantees
 
We refer you to Note 15 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, 2010. During the three months ended June 30, 2011, there have been no significant changes in our critical accounting policies as reported in our 2010 Annual Report on Form 10-K.
 
New Accounting Pronouncements
 
For information regarding recent accounting pronouncements, see Note 2 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.
 
Item 3.   Quantitative and Qualitative Disclosures about Market Risk
 
Market Risk Sensitivity
 
We are exposed to market risks, primarily related to foreign currency and interest rate fluctuations. In the normal course of business, we employ established policies and procedures to manage the exposure to fluctuations in foreign currency values and changes in interest rates. Our use of derivative instruments, including forward exchange contracts, has been historically insignificant; however, we continue to evaluate the use of hedge instruments to manage currency and other risk. We did not enter into any derivative transactions in the six months ended June 30, 2011, and have no outstanding contracts as of June 30, 2011.
 
Foreign Currency Risks
 
We currently do not have forward contracts or other instruments to reduce our exposure to foreign currency gains and losses, although we do use natural hedging techniques to reduce foreign currency rate risk.
 
The U.S. dollar is our reporting currency and the functional currency for the majority of our foreign subsidiaries including our largest subsidiaries in Korea and the Philippines and also our subsidiaries in Taiwan, China and Singapore. For our subsidiaries and affiliate in Japan, the local currency is the functional currency.
 
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 June 30, 2011, 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 June 30, 2011, our income before income taxes would have been approximately $20 million lower. The most significant foreign denominated monetary asset or liability is our Korean severance obligation which represents approximately 57% of the net monetary exposure.
 
In addition, we have foreign currency exchange rate exposure on our results of operations. For the six months ended June 30, 2011, approximately 90% of our net sales were denominated in U.S. dollars. Our remaining net sales were principally denominated in Japanese yen and Korean won for local country sales. For the six months ended June 30, 2011, approximately 60% of our cost of sales and operating expenses were denominated in U.S. dollars and


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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 June 30, 2011, to assess the potential impact of fluctuations in exchange rates for all foreign denominated sales and expenses. Assuming a 10% adverse movement from the six months ended June 30, 2011, exchange rates of the U.S. dollar compared to all of these Asian-based currencies as of June 30, 2011, our operating income would have been approximately $36.6 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 six months ended June 30, 2011 and 2010, was a net foreign translation gain of $0.5 million and $1.9 million, respectively, and was recognized as an adjustment to equity through other comprehensive loss.
 
Interest Rate Risks
 
We have interest rate risk with respect to our long-term debt. As of June 30, 2011, we had a total of $1,323.4 million of debt of which 75.2% was fixed rate debt and 24.8% was variable rate debt. The fixed rate debt consists of senior notes and senior subordinated notes. Our variable rate debt principally relates to our foreign borrowings and revolving lines of credit and any amounts outstanding under our $100.0 million senior secured revolving credit facility, of which no amounts were drawn as of June 30, 2011. As of December 31, 2010, we had a total of $1,364.3 million of debt of which 73.4% was fixed rate debt and 26.6% was variable rate debt. Changes in interest rates have different impacts on the fixed and variable rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the fair value of the debt instrument but has no impact on interest expense or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows but does not generally impact the fair value of the instrument. The fair value of the convertible notes is also impacted by changes in the market price of our common stock.
 
The table below presents the interest rates, maturities and fair value of our fixed and variable rate debt as of June 30, 2011:
 
                                                                 
    2011 -
                           
    Remaining   2012   2013   2014   2015   Thereafter   Total   Fair Value
 
Long term debt:
                                                               
Fixed rate debt (In thousands)
  $     $     $     $ 250,000     $     $ 745,000     $ 995,000     $ 1,300,950  
Average interest rate
                      6.0 %           7.0 %     6.7 %        
Variable rate debt (In thousands)
  $ 37,237     $ 102,349     $ 136,227     $ 31,799     $ 20,741     $     $ 328,353     $ 338,961  
Average interest rate
    3.4 %     3.3 %     4.0 %     3.1 %     2.3 %           3.6 %        
 
For information regarding the fair value of our long-term debt, see Note 14 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.
 
Equity Price Risks
 
We have convertible notes that are convertible into our common stock. If investors were to decide to convert their notes to common stock, our future earnings would benefit from a reduction in interest expense and our


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common stock outstanding would be increased. If we paid a premium to induce such conversion, our earnings could include an additional charge.
 
Further, the trading price of our common stock has been and is likely to continue to be highly volatile and could be subject to wide fluctuations. Such fluctuations could impact our decision or ability to utilize the equity markets as a potential source of our funding needs in the future.
 
Item 4.   Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended. In designing and evaluating the disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply their judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
 
We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2011 and concluded those disclosure controls and procedures were effective as of that date.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
As previously reported, we are implementing a new enterprise resource planning (“ERP”) system in a multi-year program on a world-wide basis. On July 1, 2011, we implemented several significant ERP modules at a subsidiary, including modules associated with financial reporting, inventory costing and invoicing. We believe the ERP modules implemented have maintained or enhanced our internal control over financial reporting. We have taken steps to implement appropriate internal control over financial reporting during this period of change and will continue to evaluate the design and operating effectiveness of our internal controls during subsequent periods. We will complete our evaluation and testing of the internal control changes as of December 31, 2011.
 
PART II. OTHER INFORMATION
 
Item 1.   Legal Proceedings
 
Information about legal proceedings is set forth in Note 15 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.
 
Item 1A.   Risk Factors
 
The factors discussed below are cautionary statements that identify important factors and risks that could cause actual results to differ materially from those anticipated by the forward-looking statements contained in this report. For more information regarding the forward-looking statements contained in this report, see the introductory paragraph to Part I, Item 2 of this Quarterly Report. You should carefully consider the risks and uncertainties described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing Amkor. Additional risks and


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uncertainties not presently known to us also may impair our business operations. The occurrence of any of the following risks could affect our business, liquidity, results of operations, financial condition or cash flows.
 
Dependence on the Highly Cyclical Semiconductor and Electronic Products Industries — We Operate in Volatile Industries and Industry Downturns and Declines in Global Economic and Financial Conditions Could Harm Our Performance.
 
Our business is impacted by market conditions in the semiconductor industry, which is cyclical by nature and impacted by broad economic factors, such as world-wide gross domestic product and consumer spending. The semiconductor industry has experienced significant and sometimes prolonged downturns in the past. For example, the recent financial crisis and global recession resulted in a downturn in the semiconductor industry that adversely affected our business and results of operations in late 2008 and in 2009.
 
Since our business is, and will continue to be, dependent on the requirements of semiconductor companies for subcontracted packaging and test services, any downturn in the semiconductor industry or any other industry that uses a significant number of semiconductor devices, such as consumer electronic products, telecommunication devices or computing devices, could have a material adverse effect on our business and operating results. It is difficult to predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, which, in turn, makes it more challenging for us to forecast our operating results, make business decisions and identify risks that may affect our business, sources and uses of cash, financial condition and results of operations. Additionally, if industry conditions deteriorate, we could suffer significant losses, as we have in the past, which could materially impact our business, liquidity, results of operations, financial condition and cash flows.
 
Fluctuations in Operating Results and Cash Flows — Our Operating Results and Cash Flows Have Varied and May Vary Significantly as a Result of Factors That We Cannot Control.
 
Many factors, including the impact of adverse economic conditions, could have a material adverse effect on our net sales, gross profit, operating results and cash flows, or lead to significant variability of quarterly or annual operating results. Our profitability and ability to generate cash from operations is principally dependent upon demand for semiconductors, the utilization of our capacity, semiconductor package mix, the average selling price of our services, our ability to manage our capital expenditures in response to market conditions and our ability to control our costs including labor, material, overhead and financing costs. The recent downturn in demand for semiconductors in late 2008 and in 2009 resulted in significant declines in our operating results and cash flows as capacity utilization declined.
 
Our net sales, gross profit, operating income and cash flows have historically fluctuated significantly from period to period as a result of many of the following factors, over which we have little or no control and which we expect to continue to impact our business:
 
  •  fluctuation in demand for semiconductors and conditions in the semiconductor industry;
 
  •  changes in our capacity utilization rates;
 
  •  changes in average selling prices;
 
  •  changes in the mix of semiconductor packages;
 
  •  evolving package and test technology;
 
  •  absence of backlog and the short-term nature of our customers’ commitments and the impact of these factors on the timing and volume of orders relative to our production capacity;
 
  •  changes in costs, availability and delivery times of raw materials and components;
 
  •  changes in labor costs to perform our services;
 
  •  wage and commodity price inflation, including precious metals;
 
  •  the timing of expenditures in anticipation of future orders;


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  •  changes in effective tax rates;
 
  •  the availability and cost of financing;
 
  •  intellectual property transactions and disputes;
 
  •  high leverage and restrictive covenants;
 
  •  warranty and product liability claims and the impact of quality excursions and customer disputes and returns;
 
  •  costs associated with litigation judgments, indemnification claims and settlements;
 
  •  international events, political instability, civil disturbances or environmental or natural events, such as earthquakes, that impact our operations;
 
  •  pandemic illnesses that may impact our labor force and our ability to travel;
 
  •  difficulties integrating acquisitions and the failure of our joint ventures to operate in accordance with business plans;
 
  •  our ability to attract and retain qualified employees to support our global operations;
 
  •  loss of key personnel or the shortage of available skilled workers;
 
  •  fluctuations in foreign exchange rates;
 
  •  delay, rescheduling and cancellation of large orders; and
 
  •  fluctuations in our manufacturing yields.
 
It is often difficult to predict the impact of these factors upon our results for a particular period. The downturn in the global economy and the semiconductor industry increased the risks associated with the foregoing factors as customer forecasts became more volatile, and there was less visibility regarding future demand and significantly increased uncertainty regarding the economy, credit markets and consumer demand. These factors may have a material and adverse effect on our business, liquidity, results of operations, financial condition and cash flows or lead to significant variability of quarterly or annual operating results. In addition, these factors may adversely affect our credit ratings which could make it more difficult and expensive for us to raise capital and could adversely affect the price of our securities.
 
High Fixed Costs — Due to Our High Percentage of Fixed Costs, We Will Be Unable to Maintain Our Gross Margin at Past Levels if We Are Unable to Achieve Relatively High Capacity Utilization Rates.
 
Our operations are characterized by relatively high fixed costs. Our profitability depends in part not only on pricing levels for our packaging and test services, but also on the utilization of our human resources and packaging and test equipment. In particular, increases or decreases in our capacity utilization can significantly affect gross margins since the unit cost of packaging and test services generally decreases as fixed costs are allocated over a larger number of units. In periods of low demand, we experience relatively low capacity utilization in our operations, which leads to reduced margins during that period. For example, we experienced lower than optimum utilization in the three months ended December 31, 2008, and the first half of 2009 due to a decline in world-wide demand for our packaging and test services which impacted our gross margin. Although our capacity utilization at times has been strong, we cannot assure you that we will be able to achieve consistently high capacity utilization, and if we fail to do so, our gross margins may decrease. If our gross margins decrease, our business, liquidity, results of operations, financial condition and cash flows could be materially and adversely affected.
 
In addition, our fixed operating costs have increased in recent years in part as a result of our efforts to expand our capacity through significant capital additions. Forecasted customer demand for which we have made capital investments may not materialize, especially if industry conditions deteriorate. As a result, our sales may not adequately cover our substantial fixed costs resulting in reduced profit levels or causing significant losses, both of which may adversely impact our liquidity, results of operations, financial condition and cash flows.


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Guidance — Our Failure to Meet Our Guidance or Analyst Projections Could Adversely Impact the Trading Prices of Our Securities.
 
We periodically provide guidance to investors with respect to certain financial information for future periods. Securities analysts also periodically publish their own projections with respect to our future operating results. As discussed above under “Fluctuations in Operating Results and Cash Flows — Our Operating Results and Cash Flows Have Varied and May Vary Significantly as a Result of Factors That We Cannot Control,” our operating results and cash flows vary significantly and are difficult to accurately predict. Volatility in customer forecasts and reduced visibility caused by economic uncertainty and fluctuations in global consumer demand make it particularly difficult to predict future results. To the extent we fail to meet or exceed our own guidance or the analyst projections for any reason, the trading prices of our securities may be adversely impacted. Moreover, even if we do meet or exceed that guidance or those projections, the analysts and investors may not react favorably, and the trading prices of our securities may be adversely impacted.
 
Declining Average Selling Prices — The Semiconductor Industry Places Downward Pressure on the Prices of Our Packaging and Test Services.
 
Prices for packaging and test services have generally declined over time. Historically, we have been able to partially offset the effect of price declines by successfully developing and marketing new packages with higher prices, such as advanced leadframe and laminate packages, by negotiating lower prices with our material vendors, recovering material cost increases from our customers and by driving engineering and technological changes in our packaging and test processes which resulted in reduced manufacturing costs. We expect general downward pressure on average selling prices for our packaging and test services in the future. If we are unable to offset a decline in average selling prices, by developing and marketing new packages with higher prices, reducing our purchasing costs, recovering more of our material cost increases from our customers and reducing our manufacturing costs, our business, liquidity, results of operations, financial condition and cash flows could be materially adversely affected.
 
Decisions by Our Integrated Device Manufacturer Customers to Curtail Outsourcing May Adversely Affect Our Business.
 
Historically, we have been dependent on the trend in outsourcing of packaging and test services by integrated device manufacturers, or IDMs. Our IDM customers continually evaluate the outsourced services against their own in-house packaging and test services. As a result, at any time and for a variety of reasons, IDMs may decide to shift some or all of their outsourced packaging and test services to internally sourced capacity.
 
The reasons IDMs may shift their internal capacity include:
 
  •  their desire to realize higher utilization of their existing test and packaging capacity, especially during downturns in the semiconductor industry;
 
  •  their unwillingness to disclose proprietary technology;
 
  •  their possession of more advanced packaging and test technologies; and
 
  •  the guaranteed availability of their own packaging and test capacity.
 
Furthermore, to the extent we limit capacity commitments for certain customers, these customers may begin to increase their level of in-house packaging and test capabilities, which could adversely impact our sales and profitability and make it more difficult for us to regain their business when we have available capacity. Any shift or a slowdown in this trend of outsourcing packaging and test services is likely to adversely affect our business, liquidity, results of operations, financial condition and cash flows.
 
In a downturn in the semiconductor industry, IDMs could respond by shifting some outsourced packaging and test services to internally serviced capacity on a short term basis. If we experience a significant loss of IDM business, it could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows especially during a prolonged industry downturn.


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Our Substantial Indebtedness Could Adversely Affect Our Financial Condition and Prevent Us from Fulfilling Our Obligations.
 
We have a significant amount of indebtedness. As of June 30, 2011, our total debt balance was $1,323.4 million, of which $99.3 million was classified as a current liability. In addition, despite current debt levels, the terms of the indentures governing our indebtedness allow us or our subsidiaries to incur more debt, subject to certain limitations. If new debt is added to our consolidated debt level, the related risks that we now face could intensify.
 
Our substantial indebtedness could:
 
  •  make it more difficult for us to satisfy our obligations with respect to our indebtedness, including our obligations under our indentures to purchase notes tendered as a result of a change in control of Amkor;
 
  •  increase our vulnerability to general adverse economic and industry conditions;
 
  •  limit our ability to fund future working capital, capital expenditures, research and development and other general corporate requirements;
 
  •  require us to dedicate a substantial portion of our cash flow from operations to service payments on our debt;
 
  •  increase the volatility of the price of our common stock;
 
  •  limit our flexibility to react to changes in our business and the industry in which we operate;
 
  •  place us at a competitive disadvantage to any of our competitors that have less debt; and
 
  •  limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds.
 
We May Have Difficulty Funding Liquidity Needs
 
We operate in a capital intensive industry. Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures, which are generally made in advance of the related revenues and without any firm customer commitments. During the six months ended June 30, 2011, we had capital additions of $202.0 million and for the full year 2011, we currently expect to make capital additions of approximately $425 million.
 
In addition, we have a significant level of debt, with $1,323.4 million outstanding at June 30, 2011, $99.3 million of which is current. The terms of such debt require significant scheduled principal payments in the coming years, including $37.2 million due in 2011, $102.3 million due in 2012, $136.2 million due in 2013, $281.8 million due in 2014, $20.7 million due in 2015 and $745.0 million due thereafter. The interest payments required on our debt are also substantial. For example, in 2010, we paid $96.6 million of interest. The sources funding our operations, including making capital expenditures and servicing principal and interest obligations with respect to our debt, are cash flows from our operations, current cash and cash equivalents, borrowings under available debt facilities or proceeds from any additional debt or equity financing. As of June 30, 2011, we had cash and cash equivalents of $475.5 million and availability of $99.6 million under our $100.0 million senior secured revolving credit facility which matures in April 2015.
 
We assess our liquidity based on our current expectations regarding sales, operating expenses, capital spending and debt service requirements. Based on this assessment, we believe that our cash flow from operating activities together with existing cash and cash equivalents will be sufficient to fund our working capital, capital expenditure and debt service requirements for at least the next twelve months. Thereafter, our liquidity will continue to be affected by, among other things, the performance of our business, our capital expenditure levels and our ability to repay debt out of our operating cash flow or refinance the debt with the proceeds of debt or equity offerings at or prior to maturity. Moreover, the health of the worldwide banking system and financial markets affects the liquidity in the global economic environment. Volatility in fixed income, credit and equity markets could make it difficult for us to maintain our existing credit facilities or refinance our debt. If our performance or access to the capital markets differs materially from our expectations, our liquidity may be adversely impacted.


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In addition, if we fail to generate the necessary net income or operating cash flows to meet the funding needs of our business beyond the next twelve months due to a variety of factors, including the cyclical nature of the semiconductor industry and the other factors discussed in this “Risk Factors” section, our liquidity would be adversely affected.
 
Our Ability To Draw On Our Current Loan Facilities May Be Adversely Affected by Conditions in the U.S. and International Capital Markets.
 
If financial institutions that have extended credit commitments to us are adversely affected by the conditions of the U.S. and international capital and credit markets, they may be unable to fund borrowings under their credit commitments to us. For example, we currently have a $100.0 million senior secured revolving credit facility with three banks in the U.S. If any of these banks are adversely affected by capital and credit market conditions and are unable to make loans to us when requested, there could be a corresponding adverse impact on our financial condition and our ability to borrow additional funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other corporate purposes.
 
Restrictive Covenants in the Indentures and Agreements Governing Our Current and Future Indebtedness Could Restrict Our Operating Flexibility.
 
The indentures and agreements governing our existing debt, and debt we may incur in the future, contain, or may contain, affirmative and negative covenants that materially limit our ability to take certain actions, including our ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and consolidations, engage in sale leaseback transactions and encumber and dispose of assets. In addition, our future debt agreements may contain financial covenants and ratios.
 
The breach of any of these covenants by us or the failure by us to meet any of these financial ratios or conditions could result in a default under any or all of such indebtedness. If a default occurs under any such indebtedness, all of the outstanding obligations thereunder could become immediately due and payable, which could result in a default under our other outstanding debt and could lead to an acceleration of obligations related to other outstanding debt. The existence of such a default or event of default could also preclude us from borrowing funds under our revolving credit facilities. Our ability to comply with the provisions of the indentures, credit facilities and other agreements governing our outstanding debt and indebtedness we may incur in the future can be affected by events beyond our control and a default under any debt instrument, if not cured or waived, could have a material adverse effect on us.
 
We Have Significant Severance Plan Obligations Associated With Our Manufacturing Operations in Korea Which Could Reduce Our Cash Flow and Negatively Impact Our Financial Condition.
 
We sponsor an accrued severance plan for our Korean subsidiary, under which we have an accrued liability of $103.3 million as of June 30, 2011. Under the Korean plan, eligible employees are entitled to receive a lump sum payment upon termination of their service based on their length of service, seniority and rate of pay at the time of termination. Since our severance plan obligation is significant, in the event of a significant layoff or other reduction in our labor force in Korea, payments under the plan could have a material adverse effect on our liquidity, financial condition and cash flows. In addition, existing tax laws in Korea limit our ability to currently deduct severance expenses associated with the current plan. These limitations are designed to encourage companies to migrate to a defined contribution or defined benefit plan. If we adopt a new plan retrospectively, we would be required to significantly fund the existing liability, which could have a material adverse effect on our liquidity, financial condition and cash flows. If we do not adopt a new plan, we will have to pay higher taxes which could adversely affect our liquidity, financial condition and cash flows. See Note 13 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.


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If We Fail to Maintain an Effective System of Internal Controls, We May Not be Able to Accurately Report Financial Results or Prevent Fraud.
 
Effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. Any inability to provide reliable financial reports or prevent fraud could harm our business. We must annually evaluate our internal procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires management and our independent registered public accounting firm to assess the effectiveness of internal control over financial reporting.
 
As previously reported, we are implementing a new enterprise resource planning (“ERP”) system in a multi-year program on a world-wide basis. We have recently implemented several significant ERP modules and expect to implement additional ERP modules in the future. The implementation of the ERP system represents a change in our internal control over financial reporting. Although we continue to monitor and assess our internal controls in the new ERP system environment as changes are made and new modules are implemented, and have taken additional steps to modify and enhance the design and effectiveness of our internal control over financial reporting, there is a risk that deficiencies may occur that could constitute significant deficiencies or in the aggregate a material weakness.
 
If we fail to remedy any deficiencies or maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties or shareholder litigation. In addition, failure to maintain adequate internal controls could result in financial statements that do not accurately reflect our operating results or financial condition.
 
We Face Product Return and Liability Risks, the Risk of Economic Damage Claims and the Risk of Negative Publicity if Our Packages Fail.
 
Our packages are incorporated into a number of end products, and our business is exposed to product return and liability risks, the risk of economic damage claims and the risk of negative publicity if our packages fail.
 
In addition, we are exposed to the product and economic liability risks and the risk of negative publicity affecting our customers. Our sales may decline if any of our customers are sued on a product liability claim. We also may suffer a decline in sales from the negative publicity associated with such a lawsuit or with adverse public perceptions in general regarding our customers’ products. Further, if our packages are delivered with impurities or defects, we could incur additional development, repair or replacement costs, suffer other economic losses and our credibility and the market’s acceptance of our packages could be harmed.
 
Absence of Backlog — The Lack of Contractually Committed Customer Demand May Adversely Affect Our Sales.
 
Our packaging and test business does not typically operate with any material backlog. Our quarterly net sales from packaging and test services are substantially dependent upon our customers’ demand in that quarter. None of our customers have committed to purchase any significant amount of packaging or test services or to provide us with binding forecasts of demand for packaging and test services for any future period, in any material amount. In addition, our customers often reduce, cancel or delay their purchases of packaging and test services for a variety of reasons including industry-wide, customer-specific and Amkor-related reasons. Since a large portion of our costs is fixed and our expense levels are based in part on our expectations of future revenues, we may not be able to adjust costs in a timely manner to compensate for any sales shortfall. If we are unable to do so, it would adversely affect our margins, operating results, financial condition and cash flows.
 
Risks Associated With International Operations — We Depend on Our Factories and Operations in China, Japan, Korea, the Philippines and Taiwan. Many of Our Customers’ and Vendors’ Operations Are Also Located Outside of the U.S.
 
We provide packaging and test services through our factories and other operations located in China, Japan, Korea, the Philippines and Taiwan. Substantially all of our property, plant and equipment is located outside of the


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United States. Moreover, many of our customers’ and vendors’ operations are located outside the U.S. The following are some of the risks we face in doing business internationally:
 
  •  changes in consumer demand resulting from deteriorating conditions in local economies;
 
  •  regulatory limitations imposed by foreign governments, including limitations or taxes imposed on the payment of dividends and other payments by non-U.S. subsidiaries;
 
  •  fluctuations in currency exchange rates;
 
  •  political, military, civil unrest and terrorist risks, particularly an increase in tensions between South Korea and North Korea;
 
  •  disruptions or delays in shipments caused by customs brokers or government agencies;
 
  •  changes in regulatory requirements, tariffs, customs, duties and other restrictive trade barriers or policies;
 
  •  difficulties in staffing, retention and employee turnover and managing foreign operations, including foreign labor disruptions; and
 
  •  potentially adverse tax consequences resulting from changes in tax laws in the foreign jurisdictions in which we operate.
 
Changes in the U.S. Tax Law Regarding Earnings Of Our Subsidiaries Located Outside the U.S. Could Materially Affect Our Future Results.
 
There have been proposals to change U.S. tax laws that would significantly impact how U.S. corporations are taxed on foreign earnings. We earn a substantial portion of our income in foreign countries. Although we cannot predict whether or in what form this proposed legislation will pass, if enacted it could have a material adverse impact on our liquidity, results of operations, financial condition and cash flows.
 
Our Management Information Systems May Prove Inadequate — We Face Risks in Connection With Our Current Project to Install a New Enterprise Resource Planning System For Our Business.
 
We depend on our management information systems for many aspects of our business. Some of our key software has been developed by our own programmers, and this software may not be easily integrated with other software and systems. We are making a significant investment to implement a new ERP system to replace many of our existing systems. We face risks in connection with our current project to install a new ERP for our business. These risks include:
 
  •  we may face delays in the design and implementation of the system;
 
  •  the cost of the system may exceed our plans and expectations; and
 
  •  disruptions resulting from the implementation of the system may impact our ability to process transactions and delay shipments to customers, impact our results of operations or financial condition or harm our control environment.
 
Our business could be materially and adversely affected if our management information systems are disrupted or if we are unable to improve, upgrade, integrate or expand upon our systems, particularly in light of our intention to continue to implement a new ERP system over a multi-year program on a company-wide basis.
 
We Face Risks Trying to Attract and Retain Qualified Employees to Support Our Operations.
 
Our success depends to a significant extent upon the continued service of our key senior management and technical personnel, any of whom may be difficult to replace. Competition for qualified employees is intense, and our business could be adversely affected by the loss of the services of any of our existing key personnel, including senior management, as a result of competition or for any other reason. We evaluate our management team and engage in long-term succession planning in order to ensure orderly replacement of key personnel. We do not have employment agreements with our key employees, including senior management or other contracts that would


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prevent our key employees from working for our competitors in the event they cease working for us. We cannot assure you that we will be successful in our efforts to retain key employees or in hiring and properly training sufficient numbers of qualified personnel and in effectively managing our growth. Our inability to attract, retain, motivate and train qualified new personnel could have a material adverse effect on our business.
 
Difficulties Consolidating and Evolving Our Operational Capabilities — We Face Challenges as We Integrate Diverse Operations.
 
We have experienced, and expect to continue to experience, change in the scope and complexity of our operations primarily through facility consolidations, strategic acquisitions, joint ventures and other partnering arrangements and may continue to engage in such transactions in the future. For example, each business we have acquired had, at the time of acquisition, multiple systems for managing its own production, sales, inventory and other operations. Migrating these businesses to our systems typically is a slow, expensive process requiring us to divert significant amounts of resources from multiple aspects of our operations. These changes have strained our managerial, financial, plant operations and other resources. Future consolidations and expansions may result in inefficiencies as we integrate operations and manage geographically diverse operations.
 
Dependence on Materials and Equipment Suppliers — Our Business May Suffer If the Cost, Quality or Supply of Materials or Equipment Changes Adversely.
 
We obtain from various vendors the materials and equipment required for the packaging and test services performed by our factories. We source most of our materials, including critical materials such as leadframes, laminate substrates and gold wire, from a limited group of suppliers. Furthermore, we purchase the majority of our materials on a purchase order basis. From time to time, we enter into supply agreements, generally up to one year in duration, to guarantee supply to meet projected demand. Our business may be harmed if we cannot obtain materials and other supplies from our vendors in a timely manner, in sufficient quantities, in acceptable quality or at competitive prices.
 
We purchase new packaging and test equipment to maintain and expand our operations. From time to time, increased demand for new equipment may cause lead times to extend beyond those normally required by equipment vendors. For example, in the past, increased demand for equipment caused some equipment suppliers to only partially satisfy our equipment orders in the normal time frame or to increase prices during market upturns for the semiconductor industry. The unavailability of equipment or failures to deliver equipment could delay or impair our ability to meet customer orders. If we are unable to meet customer orders, we could lose potential and existing customers. Generally, we do not enter into binding, long-term equipment purchase agreements and we acquire our equipment on a purchase order basis, which exposes us to substantial risks. For example, changes in foreign currency exchange rates could result in increased prices for equipment purchased by us, which could have a material adverse effect on our results of operations.
 
We are a large buyer of gold and other commodity materials including substrates and copper. The prices of gold and other commodities used in our business fluctuate. Historically, we have been able to partially offset the effect of commodity price increases through price adjustments to some customers and changes in our product designs, such as shorter, thinner, gold wire and migration to copper wire. However, we typically do not have long-term contracts that permit us to impose price adjustments, and market conditions may limit our ability to do so. Significant price increases may adversely impact our gross margin in future quarters to the extent we are unable to pass along past or future commodity price increases to our customers.
 
Loss of Customers — The Loss of Certain Customers May Have a Significant Adverse Effect on Our Operations and Financial Results.
 
The loss of a large customer or disruption of our strategic partnerships or other commercial arrangements may result in a decline in our sales and profitability. Although we have approximately 225 customers, we have derived and expect to continue to derive a large portion of our revenues from a small group of customers during any particular period due in part to the concentration of market share in the semiconductor industry. Our ten largest customers together accounted for approximately 59.2%, 54.2% and 53.4% of our net sales in the six months ended


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June 30, 2011, and the years ended December 31, 2010 and 2009, respectively. Two customers each accounted for greater than 10% of our sales during the six months ended June 30, 2011. No customer accounted for greater than 10% of our sales during the year ended December 31, 2010. A single customer accounted for more than 10% of our sales during the year ended December 31, 2009.
 
The demand for our services from each customer is directly dependent upon that customer’s level of business activity, which could vary significantly from year to year. The loss of a large customer may adversely affect our sales and profitability. Our key customers typically operate in the cyclical semiconductor business and, in the past, order levels have varied significantly from period to period based on a number of factors. Our business is likely to remain subject to this variability in order levels, and we cannot assure you that these key customers or any other customers will continue to place orders with us in the future at the same levels as in past periods.
 
The loss of one or more of our significant customers, or reduced orders by any one of them and our inability to replace these customers or make up for such orders could reduce our profitability. For example, our facility in Iwate, Japan, is primarily dedicated to a single customer, Toshiba Corporation. We have also invested in an unconsolidated affiliate, J-Devices Corporation, for which Toshiba is the primary customer. If we were to lose Toshiba as a customer or if it were to materially reduce its business with us, it could be difficult for us to find one or more new customers to utilize the capacity, which could have a material adverse effect on our operations and financial results. In addition, we have a long term supply agreement that expires in December 2013 with International Business Machines, or IBM. If we were to lose IBM as a customer, this could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows.
 
Capital Additions — We Make Substantial Capital Additions To Support the Demand Of Our Customers, Which May Adversely Affect Our Business If the Demand Of Our Customers Does Not Develop As We Expect or Is Adversely Affected.
 
We make significant capital additions in order to service the demand of our customers. The amount of capital additions depends on several factors, including the performance of our business, our assessment of future industry and customer demand, our capacity utilization levels and availability, our liquidity position and the availability of financing. Our ongoing capital addition requirements may strain our cash and short-term asset balances, and, in periods when we are expanding our capital base, we expect that depreciation expense and factory operating expenses associated with our capital additions to increase production capacity will put downward pressure on our gross margin, at least over the near term.
 
Furthermore, if we cannot generate or raise additional funds to pay for capital additions, particularly in some of the advanced packaging and bumping areas, as well as research and development activities, our growth prospects and future profitability may be adversely affected. Our ability to obtain external financing in the future is subject to a variety of uncertainties, including:
 
  •  our future financial condition, results of operations and cash flows;
 
  •  general market conditions for financing activities by semiconductor companies;
 
  •  volatility in fixed income, credit and equity markets; and
 
  •  economic, political and other global conditions.
 
The lead time needed to order, install and put into service various capital additions is often significant, and, as a result, we often need to commit to capital additions in advance of our receipt of firm orders or advance deposits based on our view of anticipated future demand with only very limited visibility. Although we seek to limit our exposure in this regard, in the past we have from time to time expended significant capital for additions for which the anticipated demand did not materialize for a variety of reasons, many of which were outside of our control. To the extent this occurs in the future, our business, liquidity, results of operations, financial condition and cash flows could be materially and adversely affected.
 
In addition, during periods where customer demand exceeds our capacity, customers may transfer some or all of their business to other suppliers who are able to support their needs. To the extent this occurs, our business, liquidity, results of operations, financial condition and cash flows could be materially and adversely affected.


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Impairment Charges — Any Impairment Charges Required Under U.S. GAAP May Have a Material Adverse Effect on Our Net Income.
 
Under U.S. GAAP, we review our long-lived assets including property, plant and equipment, intellectual property and other intangibles for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors we consider include significant under-performance relative to expected historical or projected future operating results, significant negative industry or economic trends and our market capitalization relative to net book value. We may be required in the future to record a significant charge to earnings in our financial statements during the period in which any impairment of our long-lived assets is determined. Such charges have had and could have a significant adverse impact on our results of operations and our operating flexibility under our debt covenants.
 
Litigation Incident to Our Business Could Adversely Affect Us.
 
We have been a party to various legal proceedings, including those described in Note 15 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report, and may be a party to litigation in the future. If an unfavorable ruling or outcome were to occur in this or future litigation, there could be a material adverse impact on our business, liquidity, results of operations, financial condition, cash flows and the trading price of our securities.
 
We Could Suffer Adverse Tax and Other Financial Consequences if Taxing Authorities Do Not Agree with Our Interpretation of Applicable Tax Laws.
 
Our corporate structure and operations are based, in part, on interpretations of various tax laws, including withholding tax, compliance with tax holiday requirements, application of changes in tax law to our operations and other relevant laws of applicable taxing jurisdictions. From time to time, the taxing authorities of the relevant jurisdictions may conduct examinations of our income tax returns and other regulatory filings. We cannot assure you that the taxing authorities will agree with our interpretations. To the extent they do not agree, we may seek to enter into settlements with the taxing authorities which require significant payments or otherwise adversely affect our results of operations or financial condition. We may also appeal the taxing authorities’ determinations to the appropriate governmental authorities, but we cannot be sure we will prevail. If we do not prevail, we may have to make significant payments or otherwise record charges (or reduce tax assets) that adversely affect our results of operations, financial condition and cash flows.
 
Intellectual Property — Our Business Will Suffer if We Are Not Able to Develop New Proprietary Technology, Protect Our Proprietary Technology and Operate Without Infringing the Proprietary Rights of Others.
 
The complexity and breadth of semiconductor packaging and test services are rapidly increasing. As a result, we expect that we will need to develop, acquire and implement new manufacturing processes and package design technologies and tools in order to respond to competitive industry conditions and customer requirements. Technological advances also typically lead to rapid and significant price erosion and may make our existing packages less competitive or our existing inventories obsolete. If we cannot achieve advances in package design or obtain access to advanced package designs developed by others, our business could suffer.
 
The need to develop and maintain advanced packaging capabilities and equipment could require significant research and development and capital expenditures and acquisitions in future years. In addition, converting to new package designs or process methodologies could result in delays in producing new package types, which could adversely affect our ability to meet customer orders and adversely impact our business.
 
We maintain an active program to protect and derive value from our investment in technology and the associated intellectual property rights. Intellectual property rights that apply to our various packages and services include patents, copyrights, trade secrets and trademarks. We have filed for and have obtained a number of patents in the U.S. and abroad, the duration of which varies depending on the jurisdiction in which the patent was filed. While our patents are an important element of our intellectual property strategy, as a whole, we are not materially dependent on any one patent or any one technology. The process of seeking patent protection takes a long time and is expensive. There can be no assurance that patents will issue from pending or future applications or that, if patents


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are issued, the rights granted under the patents will provide us with meaningful protection or any commercial advantage. Any patents we do obtain may be challenged, invalidated or circumvented and may not provide meaningful protection or other commercial advantage to us.
 
Some of our technologies are not covered by any patent or patent application. The confidentiality agreements on which we rely to protect these technologies may be breached and may not be adequate to protect our proprietary technologies. There can be no assurance that other countries in which we market our services will protect our intellectual property rights to the same extent as the U.S.
 
Our competitors may develop, patent or gain access to know-how and technology similar to our own. In addition, many of our patents are subject to cross licenses, several of which are with our competitors.
 
The semiconductor industry is characterized by frequent claims regarding patent and other intellectual property rights. If any third party makes an enforceable infringement claim against us or our customers, we could be required to:
 
  •  discontinue the use of certain processes;
 
  •  cease to provide the services at issue;
 
  •  pay substantial damages;
 
  •  develop non-infringing technologies; or
 
  •  acquire licenses to the technology we had allegedly infringed.
 
We may need to enforce our patents or other intellectual property rights, including our rights under patent and intellectual property licenses with third parties, or defend ourselves against claimed infringement of the rights of others through litigation, which could result in substantial cost and diversion of our resources. Furthermore, if we fail to obtain necessary licenses, our business could suffer. We have been involved in legal proceedings involving the acquisition and license of intellectual property rights, the enforcement of our existing intellectual property rights or the enforcement of the intellectual property rights of others, including the arbitration proceeding filed against Tessera, Inc. and complaint filed and ongoing proceeding against Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc., or collectively “Carsem”, both of which are described in more detail in Note 15 to the Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report. Unfavorable outcomes in any litigation matters involving intellectual property could result in significant liabilities and could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows. The potential impact from the legal proceedings referred to in this Quarterly Report on our results of operations, financial condition and cash flows could change in the future.
 
Packaging and Test — Packaging and Test Processes Are Complex and Our Production Yields and Customer Relationships May Suffer from Defects in the Services We Provide.
 
Semiconductor packaging and test services are complex processes that require significant technological and process expertise. The packaging process is complex and involves a number of precise steps. Defective packages primarily result from:
 
  •  contaminants in the manufacturing environment;
 
  •  human error;
 
  •  equipment malfunction;
 
  •  changing processes to address environmental requirements;
 
  •  defective raw materials; or
 
  •  defective plating services.


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Testing is also complex and involves sophisticated equipment and software. Similar to most software programs, these software programs are complex and may contain programming errors or “bugs.” The testing equipment is also subject to malfunction. In addition, the testing process is subject to operator error.
 
These and other factors have, from time to time, contributed to lower production yields. They may also do so in the future, particularly as we adjust our capacity or change our processing steps. In addition, we must continue to expand our offering of packages to be competitive. Our production yields on new packages typically are significantly lower than our production yields on our more established packages.
 
Our failure to maintain high standards or acceptable production yields, if significant and prolonged, could result in loss of customers, increased costs of production, delays, substantial amounts of returned goods and claims by customers relating thereto. Any of these problems could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows.
 
In addition, in line with industry practice, new customers usually require us to pass a lengthy and rigorous qualification process that may take several months. If we fail to qualify packages with potential customers or customers, our business, results of operations, financial condition and cash flows could be adversely affected.
 
Competition — We Compete Against Established Competitors in the Packaging and Test Business as Well as Internal Customer Capabilities.
 
The subcontracted semiconductor packaging and test market is very competitive. We face substantial competition from established packaging and test service providers primarily located in Asia, including companies with significant processing capacity, financial resources, research and development operations, marketing and other capabilities. These companies also have established relationships with many large semiconductor companies that are our current or potential customers. We also face competition from the internal capabilities and capacity of many of our current and potential IDM customers. In addition, we may in the future have to compete with companies (including semiconductor foundries) that may enter the market or offer new or emerging technologies that compete with our packages and services.
 
We cannot assure you that we will be able to compete successfully in the future against our existing or potential competitors or that our customers will not rely on internal sources for packaging and test services, or that our business, liquidity, results of operations, financial condition and cash flows will not be adversely affected by such increased competition.
 
Environmental Regulations — Future Environmental Regulations Could Place Additional Burdens on Our Manufacturing Operations.
 
The semiconductor packaging process uses chemicals, materials and gases and generates byproducts that are subject to extensive governmental regulations. For example, at our foreign facilities we produce liquid waste when semiconductor wafers are diced into chips with the aid of diamond saws, then cooled with running water. In addition, semiconductor packages have historically utilized metallic alloys containing lead (Pb) within the interconnect terminals typically referred to as leads, pins or balls. Federal, state and local laws and regulations in the U.S., as well as environmental laws and regulations in foreign jurisdictions, impose various controls on the storage, handling, discharge and disposal of chemicals used in our production processes and on the factories we occupy and are increasingly imposing restrictions on the materials contained in semiconductor products. We may become liable under environmental laws for the cost of cleanup of any disposal or release of hazardous materials arising out of our former or current operations, or otherwise as a result of the existence of hazardous materials on our properties. In such an event, we could be held liable for damages, including fines, penalties and the cost of investigations and remedial actions, and could also be subject to revocation of permits negatively affecting our operations.
 
Public attention has focused on the environmental impact of semiconductor operations and the risk to neighbors of chemical releases from such operations and to the materials contained in semiconductor products. For example, the European Union’s Restriction of Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive imposes strict restrictions on the use of lead and other hazardous substances in electrical and


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electronic equipment. In response to this directive, and similar laws and developing legislation in countries like China, Japan and Korea, we have implemented changes in a number of our manufacturing processes in an effort to achieve compliance across all of our package types. Complying with existing and possible future environmental laws and regulations, including laws and regulations relating to climate change, may impose upon us the need for additional capital equipment or other process requirements, restrict our ability to expand our operations, disrupt our operations, increase costs, subject us to liability or cause us to curtail our operations.
 
Our Business and Financial Condition Could be Adversely Affected by Natural Disasters, Including the Recent Earthquake and Tsunami in Japan.
 
We have significant packaging and test and other operations in locations which are subject to natural disasters such as earthquakes, tsunamis, typhoons, floods and other severe weather and geological events that could disrupt our operations. In addition, our suppliers and customers also have significant operations in such locations. A natural disaster that results in a prolonged disruption to our operations, or the operations of our customers or suppliers, could have a material adverse effect on our business, financial condition and results of operations. For example, on March 11, 2011, the northeast coast of Japan experienced a severe earthquake followed by a tsunami, with continuing aftershocks. These geological events have caused significant damage in the region, including severe damage to nuclear power plants, and have impacted Japan’s power and other infrastructure as well as its economy. Japan is a major supplier of semiconductors, silicon wafers, specialty chemicals, substrates, equipment and other supplies to the electronics industry, and the earthquake could have an impact on the overall supply chain for electronics. A number of our suppliers and customers are also located in Japan. Some of these suppliers and customers have been impacted by the events in Japan and continue to be affected by unreliable power, shipping constraints and issues with their respective suppliers. Additionally, many of our customers in Japan and in other parts of the world may be unable to obtain adequate supplies of components as a result of the events in Japan, which could reduce the demand for our packaging and test services. As a result, our business, financial condition and results of operations could be adversely affected by the events in Japan or future natural disasters of a similar nature.
 
Fire, Flood or Other Calamity — With Our Operations Conducted in a Limited Number of Facilities, a Fire, Flood or Other Calamity at one of Our Facilities Could Adversely Affect Us.
 
We conduct our packaging and test operations at a limited number of facilities. Significant damage or other impediments to any of these facilities, whether as a result of fire, flood, weather, the outbreak of infectious diseases (such as SARs or flu), civil strife, industrial strikes, breakdowns of equipment, difficulties or delays in obtaining materials and equipment, natural disasters, terrorist incidents, industrial accidents or other causes could temporarily disrupt or even shut down our operations, which would have a material adverse effect on our business, financial condition and results of operations. In the event of such a disruption or shutdown, we may be unable to reallocate production to other facilities in a timely or cost-effective manner (if at all) and may not have sufficient capacity to service customer demands in our other facilities. For example, our operations in Asia are vulnerable to regional typhoons that can bring with them destructive winds and torrential rains, which could in turn cause plant closures and transportation interruptions. In addition, some of the processes that we utilize in our operations place us at risk of fire and other damage. For example, highly flammable gases are used in the preparation of wafers holding semiconductor devices for flip chip packaging. While we maintain insurance policies for various types of property, casualty and other risks, we do not carry insurance for all the above referred risks and with regard to the insurance we do maintain, we cannot assure you that it would be sufficient to cover all of our potential losses.
 
Continued Control By Existing Stockholders — Mr. James J. Kim and Members of His Family Can Substantially Control The Outcome of All Matters Requiring Stockholder Approval.
 
As of June 30, 2011, Mr. James J. Kim, our Executive Chairman of the Board of Directors, members of Mr. Kim’s immediate family and affiliates owned approximately 87,899,000 shares, or approximately 44%, of our outstanding common stock. Approximately 13,351,000 of these shares (the “2013 Convert Shares”) were acquired upon the conversion in January 2011 of all $100.0 million of our 6.25% Convertible Subordinated Notes due 2013. The Kim family also has options to acquire approximately 923,000 shares and owns $150.0 million of our 6.0% Convertible Senior Subordinated Notes due 2014 (the “2014 Notes”) that are convertible into approximately


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49,595,000 shares of common stock (the “2014 Convert Shares”) at a conversion price of approximately $3.02 per share. If the options are exercised and the 2014 Notes are converted, the Kim family would own an aggregate of approximately 138,417,000 shares, or approximately 56%, of our outstanding common stock.
 
The 2013 Convert Shares and the 2014 Convert Shares are each subject to separate voting agreements that require the Kim family to vote these respective shares in a “neutral manner” on all matters submitted to Amkor stockholders for a vote, so that such 2013 Convert Shares and 2014 Convert Shares are voted in the same proportion as all of the other outstanding securities (excluding the other shares owned by the Kim family) that are actually voted on a proposal submitted to Amkor’s stockholders for approval. The Kim family is not required to vote in a “neutral manner” any 2013 Convert Shares or 2014 Convert Shares that, when aggregated with all other voting shares held by the Kim family, represent 41.6% or less of the total then-outstanding voting shares of Amkor common stock. The voting agreement for the 2013 Convert Shares terminates upon the earliest of (i) December 1, 2013, (ii) at such time as no principal amount of the 2013 Notes or any 2013 Convert Shares remain outstanding, (iii) a change of control transaction (as defined in the voting agreement) or (iv) the mutual agreement of the Kim family and Amkor. The voting agreement for the 2014 Convert Shares terminates upon the earliest of (i) such time as no principal amount of the 2014 Notes remains outstanding and the Kim family no longer beneficially own any of the 2014 Convert Shares, (ii) consummation of a change of control (as defined in the voting agreement) or (iii) the mutual agreement of the Kim family and Amkor.
 
Subject to the requirements imposed by the voting agreements that the Kim family vote in a neutral manner any shares issued upon conversion of their convertible notes, Mr. James J. Kim and his family and affiliates, acting together, have the ability to effectively determine matters (other than interested party transactions) submitted for approval by our stockholders by voting their shares, including the election of all of the members of our Board of Directors. There is also the potential, through the election of members of our Board of Directors, that Mr. Kim’s family could substantially influence matters decided upon by the Board of Directors. This concentration of ownership may also have the effect of impeding a merger, consolidation, takeover or other business consolidation involving us, or discouraging a potential acquirer from making a tender offer for our shares, and could also negatively affect our stock’s market price or decrease any premium over market price that an acquirer might otherwise pay.
 
Item 6.   Exhibits
 
The exhibits required by Item 601 of Regulation S-K which are filed with this report are set forth in the Exhibit Index.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
AMKOR TECHNOLOGY, INC.
 
  By: 
/s/  Joanne Solomon
Joanne Solomon
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer, Chief
Accounting Officer and Duly
Authorized Officer)
 
 
Date: August 4, 2011


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EXHIBIT INDEX
 
         
Exhibit
   
Number   Description of Exhibit
 
  4 .1   Indenture, dated May 20, 2011, by and between Amkor Technology, Inc. and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on May 20, 2011).
  4 .2   Form of Note for Amkor Technology, Inc.’s 6.625% Senior Notes due 2021 (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed on May 20, 2011).
  4 .3   Registration Rights Agreement, dated May 20, 2011, by and among Amkor Technology, Inc. and Deutsche Bank Securities Inc. and Citigroup Global Markets Inc. (incorporated herein by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed on May 20, 2011).
  10 .1   Letter Agreement, dated May 17, 2011, between Amkor Technology, Inc., James J. Kim and 915 Investments, LP. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on May 20, 2011).
  10 .2   Severance Agreement and Release, dated May 23, 2011, by and between James Fusaro and Amkor Technology, Inc.
  31 .1   Certification of Kenneth T. Joyce, President and Chief Executive Officer of Amkor Technology, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31 .2   Certification of Joanne Solomon, Executive Vice President and Chief Financial Officer of Amkor Technology, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32     Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  101 .INS*   XBRL Instance Document
  101 .SCH*   XBRL Taxonomy Extension Schema Document
  101 .CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
  101 .LAB*   XBRL Taxonomy Extension Label Linkbase Document
  101 .PRE*   XBRL Taxonomy Extension Presentation Linkbase Document
  101 .DEF*   XBRL Taxonomy Extension Definition Linkbase Document
 
 
This information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.


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exv10w2
Exhibit 10.2
SEVERANCE AGREEMENT AND RELEASE
     This Severance Agreement and Release (“Agreement”) is made by and between James Fusaro (“Executive”) and Amkor Technology, Inc., a Delaware Corporation (“Company”), (jointly referred to as the “Parties”).
RECITALS
     WHEREAS, Executive was employed by the Company;
     WHEREAS, the Executive’s employment by the Company terminated on May 12, 2011 (the “Termination Date”);
     WHEREAS, the Executive and the Company desire to settle fully and finally all matters between them to date, including, but in no way limited to, any issues that might arise out of the Executive’s employment with or his separation from the Company;
     NOW THEREFORE, in consideration of the promises made herein, the Parties hereby agree as follows:
COVENANTS
1. Separation. The Executive ceased to be Company’s Executive Vice President, Product Management, Assembly & Test Business Unit on the Termination Date, and ceased all other positions of any kind with the Company and its subsidiaries and affiliates.
2. Consideration. The Company agrees to pay Executive a lump sum of $520,000.00, less applicable tax withholdings. This payment will be made to Executive no later than the first pay period subsequent to the expiration of the seven (7) day revocation period described in Section 7 (c) hereof.
3. Stock. As of the Termination Date, Executive has 150,250 vested and outstanding stock options (“Options”). Options must be exercised within a specified period of time following the Termination Date, as set forth in the closing statement in Exhibit A hereto. Options not exercised by the specified date are forfeit. In addition, as of the Termination Date, Employee has 6,250 vested shares from his restricted stock award under Employee’s Restricted Stock Award (“RSA”), granted on February 3, 2010 and February 14, 2011 (“RSA”). The balance of the shared granted under the RSA shall not vest and are forfeited.
4. Benefits. Executive’s health insurance benefits will cease on May 31, 2011, subject to Executive’s right to continue his health insurance under COBRA. Company will pay for twelve (12) months of health insurance under COBRA on Executive’s behalf. Executive’s participation in all other benefits and incidents of employment (including, but not limited to, the accrual of vacation and paid time off) ceased on the Termination Date.
5. Payment of Salary. Executive acknowledges and represents that Executive has been paid all salary, wages, accrued vacation, paid time off in the amount of $66,500.00, bonuses,

 


 

commissions, and any and all other benefits and compensation due to Executive from Company and any of its affiliates.
6. Release of Claims. Executive agrees that the foregoing consideration represents settlement in full of all outstanding obligations owed to Executive by the Company and its current and former: officers, directors, employees, agents, investors, attorneys, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations and assigns (the “Releasees”). Executive, on his own behalf, and on behalf of his respective heirs, family members, executors, agents, and assigns, hereby fully and forever releases the Company and the other Releasees from, and agrees not to sue concerning, any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that Executive may possess arising from any omissions, acts or facts that have occurred up until and including the Effective Date of this Agreement including, without limitation:
          (a) any and all claims relating to or arising from Executive’s employment with the Company, or the termination of that employment;
          (b) any and all claims under the law of any jurisdiction, including, but not limited to, wrongful discharge of employment; constructive discharge from employment; termination in violation of public policy; discrimination; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied; promissory estoppel; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; and conversion;
          (c) any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964; the Civil Rights Act of 1991; the Age Discrimination in Employment Act of 1967; the Fair Labor Standards Act; the Employee Retirement Income Security Act of 1974; the Worker Adjustment and Retraining Notification Act; the Sarbanes-Oxley Act of 2002; the Family and Medical Leave Act, as amended; the Arizona Civil Rights Act, as amended; the Arizona Employment Protection Act, as amended, or any claim for workers’ compensation;
          (d) any and all claims for violation of the federal, or any state, constitution;
          (e) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination;
          (f) any claim for any loss, cost, damage, or expense arising out of any dispute over the non-withholding or other tax treatment of any of the proceeds received by Executive as a result of this Agreement; and
          (g) any and all claims for attorneys’ fees and costs.
     The Company and Executive agree that the release set forth in this section shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred under this Agreement.

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7. Acknowledgement of Waiver of Claims Under ADEA. Executive acknowledges that he/she is waiving and releasing any rights he/she may have under the Age Discrimination in Employment Act of 1967 (“ADEA”) and that this waiver and release is knowing and voluntary. Executive and the Company agree that this waiver and release does not apply to any rights or claims that may arise under ADEA after the Effective Date of this Agreement. Executive acknowledges that the consideration given for this waiver and release Agreement is in addition to anything of value to which Executive was already entitled. Executive further acknowledges that he/she has been advised by this writing that:
(a) Executive should consult with an attorney prior to executing this Agreement;
(b) Executive has up to twenty-one (21) days within which to consider this Agreement;
(c) Executive has seven (7) days following his execution of this Agreement to revoke this Agreement;
(d) this Agreement shall not be effective until the revocation period has expired; and,
(e) nothing in this Agreement prevents or precludes Executive from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties or costs for doing so, unless specifically authorized by federal law.
8. Confidential Information. Executive recognizes that due to his service, Executive has had access to non-public proprietary information, confidential information and trade secrets. Consequently, at all times after the Termination Date Executive will not, without the prior express written consent of the Company, use for himself or for others or directly or indirectly divulge, disclose or make available or accessible any Confidential Information (as defined below) to any person, firm, partnership, corporation, trust or any other entity or third party (other than when required to do so by a lawful order of a court of competent jurisdiction, any governmental authority or agency, or any recognized subpoena power). For purposes of this Agreement, “Confidential Information” shall mean all information respecting the business and activities of the Company or any of its affiliates, including, without limitation, the clients, customers, suppliers, employees, consultants, computer or other files, projects, products, computer disks or other media, computer hardware or computer software programs, marketing plans, financial information, methodologies, know-how, processes, practices, approaches, projections, forecasts, formats, systems, data gathering methods and/or strategies of the Company or any of its affiliates. Notwithstanding the immediately preceding sentence, Confidential Information shall not include any information that is, or becomes, generally available to the public (unless such availability occurs as a result of the Executive’s breach of any portion of this Section 8). Executive will use particular care to ensure that such Confidential Information does not become known to those who are engaged in activities competitive with those of the Company or any of its affiliates. In addition, Executive represents, warrants and agrees that he is in compliance with the Company’s Code of Business Conduct.

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9. [INTENTIONALLY LEFT BLANK]
10. Assistance. The Executive agrees to personally provide reasonable assistance and cooperation to the Company in activities related to the prosecution or defense of any pending or future lawsuits or claims involving the Company. The Company will reimburse Executive for any reasonable out of pocket costs and reasonable travel expenses, including but not limited to hotel, airfare and meals, incurred in connection with providing such assistance.
11. No Cooperation. Except as otherwise prohibited by law, Executive agrees that he will not knowingly counsel or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any third party against any of the Releasees, unless under a subpoena or other court order to do so. Executive agrees both to immediately notify the Company upon receipt of any such subpoena or court order, and to furnish, within three (3) business days of its receipt, a copy of such subpoena or court order to the Company. If approached by anyone for counsel or assistance in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints against any of the Releasees, Executive shall state no more than that he cannot provide counsel or assistance.
12. Non-Solicitation. During the period from the Termination Date through and including May 12, 2012, Executive shall not, without the express prior written consent of Company, which may be given or withheld by Company in its sole discretion, directly or indirectly, for himself or on behalf of or in conjunction with any other person, company, partnership, corporation, business, group, or other entity, solicit or encourage any employee or consultant of Company to leave the employment of or cease to perform services for Company.
13. Non-Disparagement. Executive agrees that he will not make any disparaging remarks, comments or statements to the press, the employees of the Company or its affiliates or to the Releasees, or to any individual or entity with whom they have dealings, which are reasonably likely to (a) damage materially the reputation of the Company or any Releasee or (b) interfere materially with the contracts or business relationships of the Company.
14. Costs. The Parties shall each bear their own costs, attorneys’ fees and other fees incurred in connection with the preparation of this Agreement.
15. Arbitration; Injunctive Relief. The Parties agree that any and all disputes arising out of, or relating to, the terms of this Agreement, their interpretation, and any of the matters herein released, shall be subject to binding arbitration in Maricopa County before the American Arbitration Association under its National Rules for the Resolution of Employment Disputes. The Parties agree that the prevailing party in any arbitration shall be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award. The Parties agree that the prevailing party in any arbitration shall be awarded its reasonable attorneys’ fees and costs. The Parties hereby agree to waive their right to have any dispute between them resolved in a court of law by a judge or jury. This section will not prevent either party from seeking injunctive relief (or any other provisional remedy) from any court having jurisdiction over the Parties and the subject matter of their dispute relating to Executive’s obligations under this Agreement and the agreements incorporated herein by reference. Executive acknowledges that a breach by Executive of the obligations set forth in Sections 6, 7, 8, 11, 12 and 13 above will result in irreparable harm and that such breach will be deemed “material”, entitling the Company

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to money damages and other appropriate relief including an injunction to prevent any further breach of this Agreement.
16. No Admission of Liability. The Parties understand and acknowledge that this Agreement constitutes a compromise and settlement of disputed claims. No action taken by the Parties, previously or in connection with this Agreement, shall be construed to be: (a) an admission of the truth or falsity of any claims made, or (b) an admission by either party of any fault or liability whatsoever to the other party or to any third party.
17. Representations. Each party represents that it has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement.
18. Severability. If any term or provision of this Agreement, or the application thereof to any person or circumstances, will to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is invalid or unenforceable, will not be affected thereby, and each term and provision of this Agreement will be valid and enforceable to the fullest extent permitted by law.
19. Entire Agreement. This Agreement, the Indemnification Agreement, the Confidentiality and Intellectual Property Obligations Agreement and Memorandum of Agreement (in each case, by and between Company and Executive and any and all Stock Agreements (Option Agreements, RSA) represent the entire agreement and understanding between the Company and Executive concerning the subject matter of this Agreement and Executive’s relationship with the Company and its affiliates, and supersede and replace any and all prior agreements and understandings between the Parties concerning the subject matter of this Agreement and Executive’s relationship with the Company, Parent and their affiliates.
20. No Oral Modification. Any modification or amendment of this Agreement, or additional obligation assumed by either party in connection with this Agreement, shall be effective only if placed in writing and signed by both Parties or their respective authorized representatives.
21. Governing Law. This Agreement shall be governed by the laws of the State of Arizona, without regard for choice of law provisions.
22. Effective Date. This Agreement is effective on after it has been signed by both parties and after eight (8) days have passed following the date Executive signed the Agreement, provided he has not revoked it pursuant to Section 7(c) of the Agreement (the “Effective Date”).
23. Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned.
26. Voluntary Execution of Agreement. This Agreement is executed voluntarily and with the full intent of releasing all claims, and without any duress or undue influence by any of the Parties. The Parties acknowledge that they:
(a) have read this Agreement;

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(b) have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel;
(c) understand the terms and consequences of this Agreement and of the releases it contains; and
(d) are fully aware of the legal and binding effect of this Agreement.
     IN WITNESS WHEREOF, the Parties have executed this Agreement on the dates set forth below.
             
 
      Amkor Technology, Inc.    
 
           
Dated: 5/23/2011
  By   /s/ Brenda Perry    
 
     
 
Brenda Perry
   
 
      Senior Director, Human Resources    
 
           
Dated: 5/23/2011
      /s/ James Fusaro    
 
     
 
James Fusaro, an individual
   

6

exv31w1
Exhibit 31.1
SECTION 302 CERTIFICATION
I, Kenneth T. Joyce, certify that:
     1. I have reviewed this Quarterly Report on Form 10-Q of Amkor Technology, Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
         
     
  /s/ Kenneth T. Joyce    
  Kenneth T. Joyce   
  President and Chief Executive Officer   
 
August 4, 2011

 

exv31w2
Exhibit 31.2
SECTION 302 CERTIFICATION
I, Joanne Solomon, certify that:
     1. I have reviewed this Quarterly Report on Form 10-Q of Amkor Technology, Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
     a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
         
     
  /s/ Joanne Solomon    
  Joanne Solomon   
  Executive Vice President and
Chief Financial Officer 
 
 
August 4, 2011

 

exv32
Exhibit 32
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the Quarterly Report of Amkor Technology, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kenneth T. Joyce, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
  /s/ Kenneth T. Joyce    
  Kenneth T. Joyce   
  President and Chief Executive Officer   
 
August 4, 2011
     In connection with the Quarterly Report of Amkor Technology, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joanne Solomon, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
  /s/ Joanne Solomon    
  Joanne Solomon   
  Executive Vice President and
Chief Financial Officer 
 
 
August 4, 2011