AMKR 9.30.13 10Q


 

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 September 30, 2013
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 o
Accelerated filer þ
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 October 25, 2013 was 217,841,787.
 




QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2013

TABLE OF CONTENTS


 
 
Page
 
 
 
 
 
 


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 in 2013 including expenditures related to our new factory and research and development facility in Korea, (2) our ability to fund our operating activities for the next twelve months, (3) the effect of net sales or capacity utilization on our gross profit and gross margin, (4) the focus of our research and development activities, (5) the expiration of tax holidays in jurisdictions in which we operate and expectations regarding our effective tax rate, (6) the release of valuation allowances related to taxes in the future, (7) our repurchase or repayment of outstanding debt or the conversion of debt in the future, (8) payment of dividends, (9) compliance with our covenants, (10) expected contributions to foreign pension plans, (11) liability for unrecognized tax benefits, (12) the effect of foreign currency exchange rate exposure on our financial results, (13) the volatility of the trading price of our common stock, (14) changes to our internal controls related to integration of acquired operations and implementation of our enterprise resource planning (“ERP”) system and other systems, (15) our estimates regarding the possible amount of, and funding for, any payments due in conjunction with our litigation with Tessera, (16) the anticipated schedule for construction of our new factory and research and development facility in Korea, (17) our expected increase in ownership of J-Devices and consolidation of J-Devices' results into our consolidated financial statements and (18) 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 of this Quarterly Report. You should read the following discussion in conjunction with Item 1 in this Quarterly Report as well as other reports we file with the Securities and Exchange Commission.



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Table of Contents

PART I. FINANCIAL INFORMATION


Item 1.        Financial Statements

AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per share data)
Net sales
$
767,987

 
$
695,353

 
$
2,201,575

 
$
2,036,890

Cost of sales
626,979

 
578,566

 
1,807,235

 
1,725,802

Gross profit
141,008

 
116,787

 
394,340

 
311,088

Operating expenses:
 
 
 
 
 

 
 

Selling, general and administrative
64,347

 
49,297

 
189,524

 
160,041

Research and development
18,647

 
13,472

 
47,261

 
40,764

Total operating expenses
82,994

 
62,769

 
236,785

 
200,805

Operating income
58,014

 
54,018

 
157,555

 
110,283

Other expense (income):
 
 
 
 
 

 
 

Interest expense
26,104

 
19,689

 
71,921

 
60,727

Interest expense, related party
1,243

 
3,493

 
7,927

 
10,477

Interest income
(1,605
)
 
(772
)
 
(3,108
)
 
(2,489
)
Foreign currency (gain) loss, net
(2,716
)
 
2,394

 
(1,841
)
 
4,461

Loss on debt retirement, net

 

 
11,619

 

Equity in earnings of unconsolidated affiliate
(3,179
)
 
(2,541
)
 
(4,679
)
 
(5,421
)
Other income, net
(7
)
 
(359
)
 
(344
)
 
(1,511
)
Total other expense, net
19,840

 
21,904

 
81,495

 
66,244

Income before income taxes
38,174

 
32,114

 
76,060

 
44,039

Income tax expense
12,170

 
9,538

 
5,961

 
9,009

Net income
26,004

 
22,576

 
70,099

 
35,030

Net income attributable to noncontrolling interests
(655
)
 
(259
)
 
(1,641
)
 
(358
)
Net income attributable to Amkor
$
25,349

 
$
22,317

 
$
68,458

 
$
34,672

Net income attributable to Amkor per common share:
 
 
 
 
 

 
 

Basic
$
0.12

 
$
0.14

 
$
0.38

 
$
0.21

Diluted
$
0.11

 
$
0.11

 
$
0.33

 
$
0.19

Shares used in computing per common share amounts:
 
 
 
 
 

 
 
Basic
216,499

 
154,365

 
176,839

 
162,699

Diluted
235,143

 
237,060

 
235,119

 
245,431


The accompanying notes are an integral part of these statements.


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


 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Net income
$
26,004

 
$
22,576

 
$
70,099

 
$
35,030

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Adjustments to unrealized components of defined benefit pension plans, net of tax of ($182), ($15), ($135) and ($58)
4,194

 
219

 
4,411

 
1,602

Cumulative translation adjustment, net of tax of $0, ($413), ($1,087) and ($84)
(1,661
)
 
1,214

 
(8,812
)
 
104

Total other comprehensive income (loss)
2,533

 
1,433

 
(4,401
)
 
1,706

Comprehensive income
28,537

 
24,009

 
65,698

 
36,736

Comprehensive income attributable to noncontrolling interests
(655
)
 
(259
)
 
(1,641
)
 
(358
)
Comprehensive income attributable to Amkor
$
27,882

 
$
23,750

 
$
64,057

 
$
36,378


The accompanying notes are an integral part of these statements.


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AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)


 
September 30,
2013
 
December 31,
2012
 
(In thousands, except per share data)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
591,310

 
$
413,048

Restricted cash
2,681

 
2,680

Accounts receivable:
 
 
 

Trade, net of allowances
429,788

 
389,699

Other
4,210

 
13,098

Inventories
222,663

 
227,439

Other current assets
38,131

 
45,444

Total current assets
1,288,783

 
1,091,408

Property, plant and equipment, net
1,947,448

 
1,819,969

Intangibles, net
4,058

 
4,766

Investments
105,097

 
38,690

Restricted cash
2,264

 
2,308

Other assets
129,268

 
68,074

Total assets
$
3,476,918

 
$
3,025,215

LIABILITIES AND EQUITY
Current liabilities:
 

 
 

Short-term borrowings and current portion of long-term debt
$
56,350

 
$

Trade accounts payable
432,490

 
439,663

Accrued expenses
290,843

 
212,964

Total current liabilities
779,683

 
652,627

Long-term debt
1,519,527

 
1,320,000

Long-term debt, related party
75,000

 
225,000

Pension and severance obligations
160,550

 
139,379

Other non-current liabilities
12,801

 
21,415

Total liabilities
2,547,561

 
2,358,421

Commitments and contingencies (Note 17)


 


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, 261,877 and 197,709 shares issued, and 216,513 and 152,397 shares outstanding, in 2013 and 2012, respectively
262

 
198

Additional paid-in capital
1,811,178

 
1,614,143

Accumulated deficit
(688,186
)
 
(756,644
)
Accumulated other comprehensive income
6,840

 
11,241

Treasury stock, at cost, 45,364 and 45,312 shares in 2013 and 2012, respectively
(211,217
)
 
(210,983
)
Total Amkor stockholders’ equity
918,877

 
657,955

Noncontrolling interests in subsidiaries
10,480

 
8,839

Total equity
929,357

 
666,794

Total liabilities and equity
$
3,476,918

 
$
3,025,215

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 Nine Months Ended
September 30,
 
2013
 
2012
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
70,099

 
$
35,030

Depreciation and amortization
302,007

 
272,891

Loss on debt retirement, net
11,619

 

Other operating activities and non-cash items
(12,728
)
 
(724
)
Changes in assets and liabilities
4,248

 
(22,761
)
Net cash provided by operating activities
375,245

 
284,436

Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(402,004
)
 
(380,344
)
Acquisition of business, net of cash acquired
(41,865
)
 

Proceeds from the sale of property, plant and equipment
26,505

 
3,759

Payments from unconsolidated affiliate
8,843

 
13,684

Investment in unconsolidated affiliate
(67,372
)
 

Other investing activities
(1,015
)
 
1,451

Net cash used in investing activities
(476,908
)
 
(361,450
)
Cash flows from financing activities:
 

 
 

Borrowings under revolving credit facilities
5,000

 

Payments under revolving credit facilities
(5,000
)
 

Borrowings under short-term debt

 
30,000

Payments of short-term debt

 
(40,000
)
Proceeds from issuance of long-term debt
293,000

 
562,528

Payments of long-term debt, net

 
(272,976
)
Payments for debt issuance costs
(3,216
)
 
(6,007
)
Payments for the retirement of debt
(11,619
)
 

Payments for repurchase of common stock

 
(80,946
)
Proceeds from the issuance of stock through share-based compensation plans

 
181

Payments of tax withholding for restricted shares
(234
)
 
(546
)
Net cash provided by financing activities
277,931

 
192,234

Effect of exchange rate fluctuations on cash and cash equivalents
1,994

 
(766
)
Net increase in cash and cash equivalents
178,262

 
114,454

Cash and cash equivalents, beginning of period
413,048

 
434,631

Cash and cash equivalents, end of period
$
591,310

 
$
549,085

Non cash investing and financing activities:
 

 
 

Common stock issuance for exchange of 6.0% convertible senior subordinated notes due April 2014, $150 million related party
$
193,650

 
$


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 September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012, are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The December 31, 2012, 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, 2012, filed on Form 10-K with the SEC on March 8, 2013. The results of operations for the three and nine months ended September 30, 2013, 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.

On July 31, 2013, we completed the purchase of Toshiba Electronics Malaysia Sdn. Bhd. The financial results of the entity have been included in our Consolidated Financial Statements from the date of acquisition (Note 3).

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 February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Topic 220). ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income ("AOCI") by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. This ASU is effective for reporting periods beginning after December 15, 2012. ASU 2013-02 was adopted on January 1, 2013 and did not have a significant impact on our financial statements.

Recently Issued Standards

In March 2013, the FASB issued ASU 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (Topic 405). ASU 2013-04 provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in ASU 2013-04 also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. This ASU is effective for reporting periods beginning after December 15, 2013. ASU 2013-04 is not expected to have a significant effect on our financial statements.


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


In March 2013, the FASB issued ASU 2013-05, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (Topic 830). ASU 2013-05 provides guidance to resolve the diversity in practice regarding the release into net income of the cumulative translation adjustment when a company sells or ceases to hold a controlling interest in a subsidiary or group of assets within a foreign entity. This ASU is effective for reporting periods beginning after December 15, 2013. ASU 2013-05 may affect our financial statements to the extent we sell or cease to hold a controlling interest in subsidiaries or groups of assets within a foreign entity.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740). ASU 2013-11 requires that unrecognized tax benefits be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective for reporting periods beginning after December 15, 2013. ASU 2013-11 is not expected to have a significant impact on our financial statement presentation.

3.    Business Acquisitions

On July 31, 2013, we completed the purchase of 100% of the shares of Toshiba Electronics Malaysia Sdn. Bhd., Toshiba’s power discrete semiconductor packaging and test operation in Malaysia, and subsequently changed the name of the entity to Amkor Technology Malaysia Sdn. Bhd. The total price for the shares was $61.9 million, based on the estimated net asset value at closing. The price for the shares is subject to adjustment to the extent the actual net asset value at closing was more or less than the estimate. We paid $42.4 million in cash at closing and are obligated to pay the remaining $19.5 million by March 31, 2014. We were also granted a non-exclusive, royalty bearing license by Toshiba to certain intellectual property rights for providing packaging and test services for power discrete and certain other semiconductor products. The license has a royalty cap of ¥1.5 billion (approximately $15 million). Under the purchase method of accounting, we allocated the purchase price to the assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. We did not record any goodwill as a result of the acquisition.

4.    Share-Based Compensation Plans

The following table presents share-based compensation expense attributable to stock options and restricted shares.
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Stock options
$
243

 
$
251

 
$
498

 
$
908

Restricted shares
640

 
360

 
1,567

 
1,140

Total share-based compensation expense
$
883

 
$
611

 
$
2,065

 
$
2,048


The following table presents share-based compensation expense as included in the Consolidated Statements of Income:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Selling, general and administrative
$
769

 
$
532

 
1,800

 
1,783

Research and development
114

 
79

 
265

 
265

Total share-based compensation expense
$
883

 
$
611

 
$
2,065

 
$
2,048


There is no corresponding deferred income tax benefit for stock options or restricted shares.


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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 nine months ended September 30, 2013:
 
Number of
Shares
(In thousands)
 
Weighted Average
Exercise Price
Per Share
 
Weighted Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at December 31, 2012
4,893

 
$
9.52

 
 
 
 

Granted
2,045

 
4.37

 
 
 
 

Exercised

 

 
 
 
 

Forfeited or expired
(1,973
)
 
11.73

 
 
 
 

Outstanding at September 30, 2013
4,965

 
$
6.51

 
5.85
 
$
69

Fully vested at September 30, 2013 and expected to vest thereafter
4,922

 
$
6.53

 
5.82
 
$
69

Exercisable at September 30, 2013
2,820

 
$
8.12

 
2.91
 
$
52


The following assumptions were used to calculate weighted average fair values of the options granted in the three and nine months ended September 30, 2013 and 2012:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Expected life (in years)
6.1

 
6.0

 
6.2

 
6.0

Risk-free interest rate
2.2
%
 
1.0
%
 
1.7
%
 
1.0
%
Volatility
60
%
 
65
%
 
60
%
 
65
%
Dividend yield

 

 

 

Weighted average grant date fair value per option granted
$
2.44

 
$
2.68

 
$
2.48

 
$
2.68

 
The intrinsic value of options exercised for the three and nine months ended September 30, 2012, was less than $0.1 million and $0.1 million, respectively. For the nine months ended September 30, 2012, cash received under all share-based payment arrangements was $0.2 million. 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, net of a forfeiture estimate, was approximately $4.9 million as of September 30, 2013, which is expected to be recognized over a weighted-average period of 3.6 years beginning October 1, 2013. To the extent the actual forfeiture rate is different than what we have anticipated, share-based compensation expense related to these options 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 nine months ended September 30, 2013:
 
Number of
Shares
(In thousands)
 
Weighted
Average
Grant-Date
Fair Value
(Per share)
Nonvested at December 31, 2012
816

 
$
5.61

Awards granted
750

 
4.50

Awards vested
(141
)
 
7.13

Awards forfeited
(95
)
 
4.80

Nonvested at September 30, 2013
1,330

 
$
4.88


The fair value of shares vested during the nine months ended September 30, 2013, was $0.6 million.

Unrecognized compensation cost, net of a forfeiture estimate, was $5.0 million as of September 30, 2013, which is expected to be recognized over a weighted average period of approximately 3.1 years beginning October 1, 2013. 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.

5.    Income Taxes

Our income tax expense of $12.2 million for the three months ended September 30, 2013, primarily reflects $6.6 million of expense related to income taxes at certain of our foreign operations and foreign withholding taxes, $2.8 million of expense for the revaluation of certain deferred taxes resulting from the approval of a tax incentive in Korea and a $2.8 million addition to our unrecognized tax benefits related to the characterization of a deduction in a foreign jurisdiction. Our income tax expense also reflects income taxed in foreign jurisdictions where we benefit from tax holidays.

Our income tax expense of $6.0 million for the nine months ended September 30, 2013, primarily reflects $16.2 million of expense related to income taxes at certain of our foreign operations and foreign withholding taxes, $2.8 million of expense for the revaluation of certain deferred taxes resulting from the approval of a tax incentive in Korea and a $2.8 million addition to our unrecognized tax benefits related to the characterization of a deduction in a foreign jurisdiction. These income tax expense items were partially offset by a $9.2 million benefit for the reversal of a deferred tax liability associated with the undistributed earnings from our investment in J-Devices Corporation (“J-Devices”) and by a $6.6 million release of a valuation allowance on deferred tax assets at one of our foreign jurisdictions.

At September 30, 2013, we had U.S. net operating loss carryforwards totaling $341.3 million, which expire at various times through 2033. Additionally, at September 30, 2013, we had $40.2 million of non-U.S. net operating loss carryforwards, which expire at various times through 2019.

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 or when sufficient net positive evidence exists to conclude that it is more likely than not that the deferred tax assets will be realized.

Our gross unrecognized tax benefits increased from $8.2 million at December 31, 2012, to $11.9 million as of September 30, 2013, primarily because of a $1.6 million addition related to the application of a law change in a foreign jurisdiction, a $2.8 million addition related to the characterization of a deduction in a foreign jurisdiction and a $0.8 million addition related to revenue attribution in a foreign jurisdiction. The additions were partially offset by $1.5 million of net reductions related to the settlement of contested prior year deductions in a foreign jurisdiction. At September 30, 2013, all of our unrecognized tax benefits would reduce our effective tax rate, if recognized. Our unrecognized tax benefits are subject to change as


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


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.

6.    Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income attributable to Amkor common shareholders by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding includes restricted shares held by retirement eligible recipients and is reduced for treasury stock. Unvested share-based compensation awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of EPS pursuant to the two-class method. We grant restricted shares which entitle recipients to voting and nonforfeitable dividend rights from the date of grant. As a result, we have applied the two-class method to determine EPS.

Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares include outstanding stock options, unvested restricted shares and convertible debt. The following table summarizes the computation of basic and diluted EPS:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands, except per share data)
Net income attributable to Amkor
$
25,349

 
$
22,317

 
$
68,458

 
$
34,672

Income allocated to participating securities
(155
)
 
(55
)
 
(511
)
 
(81
)
Net income available to Amkor common stockholders
25,194

 
22,262

 
67,947

 
34,591

Adjustment for dilutive securities on net income:
 

 
 

 
 

 
 

Net income reallocated to participating securities
7

 
55

 
78

 
81

Interest on 6.0% convertible notes due 2014, net of tax
907

 
4,026

 
8,533

 
12,077

Net income attributable to Amkor — diluted
$
26,108

 
$
26,343

 
$
76,558

 
$
46,749

 
 
 
 
 
 
 
 
Weighted average shares outstanding — basic
216,499

 
154,365

 
176,839

 
162,699

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options and restricted share awards
12

 
37

 
13

 
74

6.0% convertible notes due 2014
18,632

 
82,658

 
58,267

 
82,658

Weighted average shares outstanding — diluted
235,143

 
237,060

 
235,119

 
245,431

Net income attributable to Amkor per common share:
 

 
 

 
 

 
 

Basic
$
0.12

 
$
0.14

 
$
0.38

 
$
0.21

Diluted
0.11

 
0.11

 
0.33

 
0.19


The following table summarizes the potential shares of common stock that were excluded from diluted EPS, because the effect of including these potential shares was antidilutive:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Stock options and restricted share awards
4,951

 
4,856

 
5,152

 
4,597




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


7.    Equity and Accumulated Other Comprehensive Income

The following table reflects the changes in equity attributable to both Amkor and the noncontrolling interests:
 
Attributable
to Amkor
 
Attributable to
Noncontrolling
Interests
 
Total
 
(In thousands)
Equity at December 31, 2012
$
657,955

 
$
8,839

 
$
666,794

Net income
68,458

 
1,641

 
70,099

Other comprehensive loss
(4,401
)
 

 
(4,401
)
Treasury stock acquired through surrender of shares for tax withholding
(234
)
 

 
(234
)
Share-based compensation expense
2,065

 

 
2,065

Exchange of debt for common stock
195,034

 

 
195,034

Equity at September 30, 2013
$
918,877

 
$
10,480

 
$
929,357

 
Attributable
to Amkor
 
Attributable to
Noncontrolling
Interests
 
Total
 
(In thousands)
Equity at December 31, 2011
$
693,266

 
$
7,955

 
$
701,221

Net income
34,672

 
358

 
35,030

Other comprehensive income
1,706

 

 
1,706

Issuance of stock through employee share-based compensation plans
181

 

 
181

Treasury stock acquired through surrender of shares for tax withholding
(546
)
 

 
(546
)
Share-based compensation expense
2,048

 

 
2,048

Repurchase of common stock
(79,814
)
 

 
(79,814
)
Equity at September 30, 2012
$
651,513

 
$
8,313

 
$
659,826


The following table reflects the changes in accumulated other comprehensive income, net of tax:
 
Defined Benefit Pension
 
Foreign Currency
 
Total
 
(In thousands)
Accumulated other comprehensive (loss) income at December 31, 2012
$
(5,373
)
 
$
16,614

 
$
11,241

Other comprehensive income (loss) before reclassifications
4,120

 
(8,812
)
 
(4,692
)
Amounts reclassified from accumulated other comprehensive (loss) income
291

 

 
291

Other comprehensive income (loss)
4,411

 
(8,812
)
 
(4,401
)
Accumulated other comprehensive (loss) income at September 30, 2013
$
(962
)
 
$
7,802

 
$
6,840



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


 
Defined Benefit Pension
 
Foreign Currency
 
Total
 
(In thousands)
Accumulated other comprehensive (loss) income at December 31, 2011
$
(10,510
)
 
$
21,359

 
$
10,849

Other comprehensive income before reclassifications
1,294

 
104

 
1,398

Amounts reclassified from accumulated other comprehensive (loss) income
308

 

 
308

Other comprehensive income
1,602

 
104

 
1,706

Accumulated other comprehensive (loss) income at September 30, 2012
$
(8,908
)
 
$
21,463

 
$
12,555


Amounts reclassified out of accumulated other comprehensive income are included as a component of net periodic pension cost (Note 14).

8.    Inventories

Inventories consist of the following:
 
September 30, 2013
 
December 31, 2012
 
(In thousands)
Raw materials and purchased components
$
162,545

 
$
166,691

Work-in-process
60,118

 
60,748

Total inventories
$
222,663

 
$
227,439


9.    Property, Plant and Equipment

Property, plant and equipment consist of the following:
 
September 30, 2013
 
December 31, 2012
 
(In thousands)
Land
$
103,992

 
$
106,338

Land use rights
26,845

 
19,945

Buildings and improvements
897,495

 
904,919

Machinery and equipment
3,590,226

 
3,332,855

Software and computer equipment
194,535

 
191,132

Furniture, fixtures and other equipment
17,459

 
19,194

Construction in progress
34,901

 
24,670

 
4,865,453

 
4,599,053

Less accumulated depreciation and amortization
(2,918,005
)
 
(2,779,084
)
Total property, plant and equipment, net
$
1,947,448

 
$
1,819,969


In January 2013, we sold office space and land located in Chandler, Arizona for $22.8 million, net of selling costs of $1.2 million.



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


The following table presents depreciation expense as included in the Consolidated Statements of Income:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Cost of sales
$
97,648

 
$
85,172

 
$
277,621

 
$
247,160

Selling, general and administrative
3,672

 
4,670

 
11,667

 
15,066

Research and development
3,914

 
2,889

 
10,023

 
7,666

Total depreciation expense
$
105,234

 
$
92,731

 
$
299,311

 
$
269,892


The following table reconciles our activity related to property, plant and equipment additions as presented on the Consolidated Balance Sheets to purchases of property, plant and equipment as presented on the Condensed Consolidated Statements of Cash Flows:
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
(In thousands)
Property, plant and equipment additions
$
380,179

 
$
446,767

Net change in related accounts payable and deposits
21,825

 
(66,423
)
Purchases of property, plant and equipment
$
402,004

 
$
380,344


In February 2013, we entered into an agreement for the purchase of land for a factory and research and development center in Korea. The agreement to purchase the land for the facility is subject to our compliance with various construction, investment, hiring, regulatory and other requirements. We made a non-refundable deposit of ₩10.9 billion ($10 million) at signing, a deposit of ₩43.4 billion ($39 million) in the three months ended September 30, 2013 and have one remaining payment of ₩54.2 billion (approximately $51 million) due during the three months ending December 31, 2013. As of September 30, 2013, the deposits are recorded in other assets on our Consolidated Balance Sheets.

10.    Intangible Assets

Intangibles as of September 30, 2013, consist of the following:
 
Gross
 
Accumulated
Amortization
 
Net
 
(In thousands)
Patents and technology rights
$
22,361

 
$
(18,861
)
 
$
3,500

Customer relationships
8,000

 
(7,442
)
 
558

Total intangibles
$
30,361

 
$
(26,303
)
 
$
4,058


Intangibles as of December 31, 2012, consist of the following:
 
Gross
 
Accumulated
Amortization
 
Net
 
(In thousands)
Patents and technology rights
$
22,169

 
$
(19,636
)
 
$
2,533

Customer relationships
8,000

 
(5,767
)
 
2,233

Total intangibles
$
30,169

 
$
(25,403
)
 
$
4,766




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


Amortization of identifiable intangible assets for the three and nine months ended September 30, 2013, was $1.0 million and $2.7 million, respectively. Amortization of identifiable intangible assets for the three and nine months ended September 30, 2012, was $1.0 million and $3.0 million, respectively. Based on the amortizing assets recognized in our balance sheet at September 30, 2013, amortization for each of the next five years is estimated as follows:
 
Amortization
 
(In thousands)
2013 remaining
$
928

2014
1,022

2015
731

2016
513

2017
477

Thereafter
387

Total amortization
$
4,058


11.    Investments

Investments consist of the following:
 
September 30,
2013
 
December 31,
2012
 
Carrying
Value
(In thousands)
 
Ownership
Percentage
 
Carrying
Value
(In thousands)
 
Ownership
Percentage
Investment in unconsolidated affiliate
$
105,097

 
60.0
%
 
$
38,690

 
30.0
%

J-Devices Corporation

In October 2009, Amkor and Toshiba Corporation (“Toshiba”) invested in Nakaya Microdevices Corporation (“NMD”) and formed a joint venture to provide semiconductor packaging and test services in Japan. As a result of the transaction, NMD changed its name to J-Devices Corporation. In April 2013, we completed the exercise of our option to increase our ownership interest in J-Devices from 30% to 60% for an aggregate purchase price of ¥6.7 billion ($67.4 million). J-Devices is now owned 60% by Amkor, 34% by the former shareholders of NMD and 6% by Toshiba.

At September 30, 2013, our investment includes our 60% equity interest and options to acquire additional equity interests. The options are exercisable at our discretion and permit us to increase our ownership interest in J-Devices up to 66% in 2014 by purchasing shares owned by Toshiba and up to 80% in 2015 and thereafter by purchasing shares owned by the other shareholders. In 2014 and beyond, Toshiba has the option, at its discretion, to sell shares it owns to us. If we decline Toshiba's offer to sell their shares to us, then J-Devices shall have the obligation to purchase the shares. If J-Devices is unable to fulfill its obligation to purchase the shares offered by Toshiba, then we will be obligated to purchase the shares offered by Toshiba. The options in 2014 and 2015 become exercisable in the fourth quarter of such year, and if exercised, we would expect closing to occur in the first half of the following year, subject to regulatory approval. After we own 80% or more shares, the original shareholders of NMD have a put option which allows them to sell their shares to us. The exercise price for all options is payable in cash and is determined using a formula based upon the net book value and a multiple of earnings before interest, taxes, depreciation and amortization of J-Devices.

The governance provisions currently applicable to J-Devices restrict our ability, even with our majority ownership, to cause J-Devices to take certain actions without the consent of the other investors. Accordingly, we account for our investment in J-Devices using the equity method of accounting. Under the equity method of accounting, we recognize our proportionate share of J-Devices' net income or loss, which is after J-Devices' income taxes in Japan, during each accounting period as a change in our investment in unconsolidated affiliate. In addition, we record equity method adjustments as a change in our investment in unconsolidated affiliate. Because our incremental proportionate share of J-Devices' equity exceeded the cost


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Table of Contents

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


of our additional investment, these adjustments include the amortization of a $5.1 million basis difference. For the three and nine months ended September 30, 2013, our equity in earnings in J-Devices, net of J-Devices' income taxes in Japan, was $3.2 million and $4.7 million, respectively. For the three and nine months ended September 30, 2012, our equity in earnings in J-Devices, net of J-Devices' income taxes in Japan, was $2.5 million and $5.4 million, respectively.

In conjunction with entering into the joint venture, one of our subsidiaries in Japan purchased packaging and test equipment from Toshiba and leased the equipment to J-Devices under an agreement which was accounted for as a direct financing lease. At the end of the lease in October 2012, J-Devices exercised an option to purchase the remaining packaging and test equipment for ¥761.4 million. In January 2013, we received payment of ¥761.4 million ($8.8 million) for the purchased equipment.

12.    Accrued Expenses

Accrued expenses consist of the following:
 
September 30,
2013
 
December 31,
2012
 
(In thousands)
Payroll and benefits
$
79,570

 
$
56,651

Deferred revenue and customer advances
52,968

 
52,773

Accrued interest
44,275

 
19,048

Accrued royalties (Note 17)
43,324

 
33,324

Acquisition payable (Note 3)
19,459

 

Accrued severance plan obligations (Note 14)
10,411

 
9,516

Income taxes payable
8,549

 
8,341

Other accrued expenses
32,287

 
33,311

Total accrued expenses
$
290,843

 
$
212,964


Accrued royalties relate to our estimate of royalties due as a result of our pending patent license arbitration (Note 17).



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Table of Contents

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


13.    Debt

Following is a summary of short-term borrowings and long-term debt:
 
September 30,
2013
 
December 31,
2012
 
(In thousands)
Debt of Amkor Technology, Inc.:
 

 
 

Senior secured credit facilities:
 

 
 

$150 million revolving credit facility, LIBOR plus 1.5%-2.25%, due June 2017
$

 
$

Senior notes:
 

 
 

7.375% Senior notes, due May 2018
345,000

 
345,000

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

 
400,000

6.375% Senior notes, due October 2022 (1)
525,000

 
300,000

Senior subordinated notes:
 

 
 

6.0% Convertible senior subordinated notes (2)
56,350

 
250,000

Debt of subsidiaries:
 

 
 

Amkor Technology Korea, Inc.:
 
 
 
$41 million revolving credit facility, foreign currency funding-linked base rate plus 2.00%, due June 2016 (3)

 

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

 
100,000

Term loan, LIBOR plus 3.80%, due June 2016 (4)
10,000

 

Term loan, LIBOR plus 3.90% or 3.94%, due July 2017
150,000

 
137,000

Term loan, foreign currency funding-linked base rate plus 1.75%, due September 2017 (5)
10,000

 

Term loan, LIBOR plus 3.70%, due December 2019 (6)
48,000

 
13,000

Other:
 
 
 
Revolving credit facility, TAIFX plus a bank-determined spread, due April 2015 (Taiwan) (7)

 

 
1,644,350

 
1,545,000

Add: Unamortized premium (1)
6,527

 

Less: Short-term borrowings and current portion of long-term debt
(56,350
)
 

Long-term debt (including related party)
$
1,594,527

 
$
1,545,000

(1)
In September 2012, ATI issued $300.0 million of 6.375% Senior Notes due October 2022 (the “2022 Notes”). The 2022 Notes were issued at par and are senior unsecured obligations. Interest is payable semi-annually on April 1 and October 1 of each year, and commenced April 1, 2013. In May 2013, we issued an additional $225.0 million of 6.375% Senior Notes due October 2022 (the “Additional 2022 Notes”) under the same terms as the 2022 Notes. The Additional 2022 Notes were issued at a premium of 103% or $6.8 million. The net proceeds from the issuance of the Additional 2022 Notes were designated for general corporate purposes. We incurred $3.4 million of debt issuance costs associated with the Additional 2022 Notes.
(2)
In April 2009, we issued $250 million of our 6.0% Convertible Senior Subordinated Notes due April 2014 (the “2014 Notes”). The 2014 Notes are convertible at any time prior to the maturity date into our common stock at a price of approximately $3.02 per share, subject to adjustment. The 2014 Notes are subordinated to the prior payment in full of all of our senior debt. The 2014 Notes were purchased by certain qualified institutional buyers and an entity controlled by Mr. James J. Kim, our Executive Chairman of the Board of Directors. Mr. Kim's affiliate


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Table of Contents

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


purchased $150.0 million of the 2014 Notes. In June 2013, we completed a tender offer for the 2014 Notes and exchanged $193.7 million of the 2014 Notes, including the $150.0 million held by Mr. Kim's affiliate, for an aggregate 64.0 million shares of our common stock and a cash payment of $11.6 million. The cash payment was equivalent to the remaining coupons for the tendered notes and was recorded as a charge in our Consolidated Statements of Income for the nine months ended September 30, 2013.
(3)
In June 2012, Amkor Technology Korea, Inc., a Korean subsidiary (“ATK”) entered into a $41.0 million revolving credit facility with a Korean Bank with a term of 12 months. Principal is payable upon maturity and interest is paid monthly. The loan is collateralized with substantially all the land, factories and equipment at our ATK facilities. In June 2013, the facility was amended by extending the term by three years to June 2016. The facility now bears interest at the foreign currency funding-linked base rate plus 2.00% (4.13% as of September 30, 2013). As of September 30, 2013, $41.0 million was available to be borrowed for general working capital purposes.
(4)
In April 2013, ATK entered into a loan agreement with a Korean bank pursuant to which ATK may borrow up to $150.0 million for a term of three years. The loan is collateralized by substantially all the land, factories and equipment located at our ATK facilities. Principal is payable at maturity. Interest is due quarterly beginning three months after the first draw down date. Interest is payable at a rate of LIBOR plus 3.80% (4.07% as of September 30, 2013). As of September 30, 2013, $140.0 million was available to be borrowed for general working capital purposes and the repayment of inter-company debt.
(5)
In March 2013, ATK entered into a loan agreement with a Korean bank pursuant to which ATK may borrow up to $150.0 million for a term of four and a half years. The loan is collateralized by substantially all the land, factories and equipment located at our ATK facilities. Principal is payable in quarterly installments of $5.0 million starting in December 2014, with the remaining balance due at maturity. Interest is paid quarterly, at a foreign currency funding-linked base rate plus 1.75% (3.96% as of September 30, 2013). As of September 30, 2013, $140.0 million was available to be borrowed for capital expenditures.
(6)
In November 2012, ATK entered into a loan agreement with a Korean Bank pursuant to which ATK may borrow up to $100.0 million by November 2013 for a term of seven years. The loan is collateralized by substantially all the land, factories and equipment located at our ATK facilities. Principal is payable upon maturity. Interest is payable quarterly in arrears, at LIBOR plus 3.70% (3.97% as of September 30, 2013). As of September 30, 2013, $52.0 million was available to be borrowed for capital expenditures.
(7)
In September 2012, Amkor Technology Taiwan Ltd, a subsidiary in Taiwan, entered into a revolving credit facility. The credit facility bears interest at the Taipei Foreign Exchange ("TAIFX") six month U.S. dollar rate plus a bank-determined spread. Availability under the revolving credit facility was originally $44.0 million and subsequent availability steps down $5.0 million every six months from the original available balance. Principal is payable at maturity. As of September 30, 2013, $34.0 million was available to be drawn for general corporate purposes and capital expenditures.
The debt of Amkor Technology, Inc. is structurally subordinated in right of payment to all existing and future debt and other liabilities of our subsidiaries. Our collateralized bank debt agreements and the indentures governing our senior and senior subordinated notes contain a number of affirmative and negative covenants which could restrict our operations. We were in compliance with all of our covenants as of September 30, 2013.



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Table of Contents

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


14.    Pension and Severance Plans

Foreign Defined Benefit Pension Plans

Our subsidiaries in Japan, Malaysia, the Philippines and Taiwan sponsor defined benefit pension plans that cover substantially all of their respective employees who are not covered by statutory plans. Charges to expense are based upon actuarial analyses. The components of net periodic pension cost for these defined benefit plans are as follows:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Components of net periodic pension cost and total pension expense:
 

 
 

 
 

 
 

Service cost
$
1,500

 
$
1,561

 
$
4,373

 
$
4,789

Interest cost
842

 
817

 
2,363

 
2,439

Expected return on plan assets
(852
)
 
(800
)
 
(2,646
)
 
(2,370
)
Amortization of transition obligation
3

 
2

 
7

 
6

Amortization of prior service cost
50

 
54

 
148

 
179

Recognized actuarial loss
33

 
51

 
99

 
154

Net periodic pension cost
1,576

 
1,685

 
4,344

 
5,197

Curtailment (gain) loss
(148
)
 

 
(148
)
 
1,089

Settlement gain
(209
)
 

 
(209
)
 
(100
)
Total pension expense
$
1,219

 
$
1,685

 
$
3,987

 
$
6,186


During the nine months ended September 30, 2012, we recognized net curtailment and settlement losses of $1.0 million, resulting from the remeasurement of our defined benefit plan in Japan due to reductions in workforce (Note 19).

For the three and nine months ended September 30, 2013, we contributed $0.1 million and $0.3 million to the defined benefit pension plans, respectively. We expect to contribute approximately $2.5 million to the pension plans during the remainder of 2013. For the three and nine months ended September 30, 2012, we contributed $0.1 million and $0.3 million to the defined benefit pension plans, respectively.

Korean Severance Plan

Our subsidiary in Korea participates in an accrued severance plan that covers employees with at least one year of service. To the extent eligible employees are terminated, our subsidiary in Korea would be required to make lump-sum severance payments on behalf of these eligible employees based on their length of service, seniority and rate of pay at the time of termination. Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date. Our contributions to the National Pension Plan of the Republic of Korea are deducted from accrued severance benefit liabilities.



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Table of Contents

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


The provision recorded for severance benefits for the three and nine months ended September 30, 2013, was $6.9 million and $19.8 million, respectively. The provision recorded for severance benefits for the three and nine months ended September 30, 2012, was $7.0 million and $14.6 million, respectively. The balance of our Korean severance obligation consists of the following:
 
September 30,
2013
 
December 31,
2012
 
(In thousands)
Current (Accrued expenses)
$
10,411

 
$
9,516

Non-current (Pension and severance obligations)
127,590

 
116,997

Total Korean severance obligation
$
138,001

 
$
126,513


15.    Treasury Stock

Stock Repurchase Program

Our Board of Directors previously authorized the repurchase of up to $300.0 million of our common stock, exclusive of any fees, commissions or other expenses. The purchase of stock under the program may be made in the open market or through privately negotiated transactions. Since inception of the program, we have purchased a total of 45.0 million shares at an aggregate purchase price of $208.4 million, net of $0.9 million of commissions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, the cash needs and investment opportunities for the business, price, applicable legal requirements and other factors. Our stock repurchase program has been and is expected to be funded with available cash and may be suspended or discontinued at any time.

During the three and nine months ended September 30, 2013, we made no purchases under the stock repurchase program. During the three and nine months ended September 30, 2012, we purchased 8.4 million and 16.5 million shares of common stock for an aggregate purchase price of $41.8 million and $79.5 million, respectively, net of $0.2 million and $0.3 million of commissions, respectively, for an average price of $4.99 and $4.83, respectively. At September 30, 2013, there were no unsettled shares, and there was approximately $91.6 million available to repurchase common stock pursuant to the stock repurchase program.

16.    Fair Value Measurements

The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows: Level 1, defined as quoted market prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities and Level 3, defined as unobservable inputs that are not corroborated by market data.

Our assets and liabilities recorded at fair value on a recurring basis include cash equivalent money market funds, restricted cash money market funds and foreign currency forward contracts. Cash equivalent money market funds and restricted cash money market funds 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 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 are valued using quoted market prices in active markets for identical assets.




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


Our forward contracts are not traded on an exchange and are therefore valued using conventional calculations or models that are primarily based on observable inputs such as foreign currency exchange rates. During the nine months ended September 30, 2013, we entered into foreign currency forward contracts to serve as an economic hedge for the payments related to the agreement to purchase land in Korea (see Note 9). The forward contracts are not designated as hedges for accounting purposes and changes in the fair value of these forward contracts are recorded immediately in earnings in foreign currency (gain) loss, net in our Consolidated Statements of Income. In August 2013, we settled one forward contract, with a notional amount of $39.5 million. The total notional value for the remaining forward contracts was $49.2 million. The fair value of the forward contracts at September 30, 2013, was recorded as an asset of $1.2 million in other current assets in our Consolidated Balance Sheets.

We also measure certain assets and liabilities, including property, plant and equipment, intangible assets and J-Devices, at fair value on a nonrecurring basis. For the three and nine months ended September 30, 2013 and 2012, such measurements included the consideration of third party valuation reports based on a combination of market and cost approach valuation techniques. The valuation reports contained various inputs including semiconductor industry data, replacement costs, price lists and general information regarding the assets being evaluated. Nonrecurring fair value measurements related to property, plant and equipment impairments reflect the fair value of the assets at the dates the impairments were taken during the period. Our fair value measurements consist of the following:
 
September 30,
2013
 
December 31, 2012
 
(In thousands)
Recurring fair value measurements:
 
 
 
Assets:
 
 
 
Cash equivalent money market funds (Level 1)
$
322,866

 
$
151,066

Restricted cash money market funds (Level 1)
2,681

 
2,680

Foreign currency forward contracts (Level 2)
1,167

 

 
 
 
 
Nonrecurring fair value measurements:
 
 
 
Long-lived assets held for use or disposal (Level 3)
$
1,055

 
$
868

 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Losses on long-lived assets held for use or disposal (Level 3)
$
578

 
$
250

 
$
1,446

 
$
586


For the three and nine months ended September 30, 2013, impairment losses on property, plant and equipment of $0.5 million and $0.8 million, respectively, were recorded in research and development with the remainder recorded in cost of sales. For the three and nine months ended September 30, 2012, all impairment losses on property, plant and equipment were recorded as cost of sales.

We measure the fair value of our debt on a quarterly basis for disclosure purposes. The following table presents the fair value of financial instruments that are not recorded at fair value on a recurring basis:


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


 
September 30, 2013
 
December 31, 2012
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
(In thousands)
Senior notes (Level 1)
$
1,262,938

 
$
1,276,527

 
$
1,061,945

 
$
1,045,000

Convertible senior subordinated notes (Level 1)
83,325

 
56,350

 
371,975

 
250,000

Term loans (Level 2)
302,698

 
318,000

 
269,200

 
250,000

Total debt
$
1,648,961

 
$
1,650,877

 
$
1,703,120

 
$
1,545,000


The estimated fair value of the debt is based primarily on quoted market prices reported on or near the respective balance sheet dates for our senior and senior subordinated notes. The estimated fair value for the debt of our subsidiaries was calculated using a discounted cash flow analysis, which utilized market based assumptions including bond and credit default swap indices and was adjusted for credit risk.

17.    Commitments and Contingencies

We have a letter of credit sub-facility of $25.0 million under our $150.0 million senior secured revolving credit facility that matures in June 2017. As of September 30, 2013, we had $0.3 million of standby letters of credit outstanding and had an additional $24.7 million available for letters of credit. Such standby letters of credit are used in the ordinary course of our business and are collateralized by our cash balances.

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

Legal Proceedings

We are involved in claims and legal proceedings and may become involved in other legal matters arising in the ordinary course of our business. We evaluate these claims and legal matters on a case-by-case basis to make a determination as to the impact, if any, on our business, liquidity, results of operations, financial condition or cash flows. Except as indicated below, we 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.

In accordance with the accounting guidance for loss contingencies, including legal proceedings, lawsuits, pending claims and other legal matters, we accrue for a loss contingency when we conclude that the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. When the reasonable estimate of the loss is within a range of amounts, and no amount in the range constitutes a better estimate than any other amount, we accrue for the amount at the low end of the range. We adjust our accruals from time to time as we receive additional information, but the loss we incur may be significantly greater than or less than the amount we have accrued. We disclose loss contingencies if there is at least a reasonable possibility that a loss has been incurred. Attorney fees related to legal matters are expensed as incurred.

Proceedings with Tessera, Inc.

Since March 2006, we have been involved in several proceedings with Tessera, Inc. (“Tessera”) related to a license agreement (the “License Agreement”) entered into in 1996 between Tessera and our predecessor. The proceedings generally involve disputes about whether or not Amkor owes Tessera royalties under the License Agreement with respect to certain packages and the termination of the License Agreement. The main proceeding that is pending is with the International Court of Arbitration of the International Chamber of Commerce (the “ICC”) captioned Amkor Technology, Inc. v. Tessera, Inc. (the “2009 Tessera Arbitration”), which we initiated in August 2009. In that proceeding, the ICC arbitration panel issued partial awards and interim orders finding that royalties are due to Tessera with respect to certain asserted patents and packages and


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


that the License Agreement was terminated by Tessera as of February 17, 2011. The arbitration panel reserved for later decision the issues of the amount of royalties and pre-judgment interest due, and the allocation of costs.

In July 2012, Tessera filed a complaint in the U.S. District Court for the District of Delaware. The complaint seeks injunctive relief and damages with respect to Amkor's alleged infringement of one of the U.S. patents that the arbitration panel found to be royalty bearing in the 2009 Tessera Arbitration. We strongly dispute Tessera's claims and intend to vigorously defend against them. However, the outcome of this matter is uncertain, and an adverse decision could have a material adverse effect on our results of operations, financial condition and cash flows.

In February 2013, Tessera publicly announced its intention to seek an amount in excess of $150 million in the 2009 Tessera Arbitration. That same month, we filed a petition in the Superior Court for San Francisco County to vacate or correct a portion of the arbitration panel’s interim order relating to the panel’s authority to award royalties for the period after the termination of the License Agreement. The Superior Court has denied our request and we have appealed that decision to the California First District Court of Appeal.

In October 2013, the arbitration panel issued another interim order which included, among other things, some substantive findings concerning the calculation of royalties under the License Agreement.

We recorded a charge to cost of goods sold in 2012 of $50.0 million representing our estimate of the low end of the range of possible royalties owed to Tessera and a charge of $6.0 million for related interest due to date in respect of the 2009 Tessera Arbitration. As a result of the latest interim order, we estimate the possible range of royalties due to Tessera to be from $60 million to $115 million (excluding interest). Because we believe that no amount in the range constitutes a better estimate than any other amount within that range, we recorded a charge to cost of goods sold of $10.0 million during the three months ended September 30, 2013, to increase our accrual for royalties to the low end of the range. Of the $60.0 million of charges we have recognized for royalties, we paid $16.7 million to Tessera in August 2012, plus related interest.

As of September 30, 2013, our accrual for royalties was $43.3 million, and our estimate of the possible range of royalties due to Tessera (net of the royalties paid in August 2012) is from $43.3 million to $98.3 million. The ultimate amount of damages and interest is subject to determination by the arbitration panel based on a number of complex factors, including the panel's determination of which package families the patents apply to, whether those packages meet criteria previously laid out by the panel, overlaps among the packages, the final date through which royalties are applicable and other factors. The final award could be more than the amounts paid or recognized. We may record additional charges as information develops or upon the issuance of the final award. We expect to record our estimate of interest accruing with the passage of time.

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

Since November 2003, we have been involved in several proceedings against Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc. (collectively “Carsem”) in which we allege that with its Carsem Dual and Quad Flat No-Lead Packages, Carsem has infringed on one or more of our MicroLeadFrame packaging technology patent claims. We initiated the action with the U.S International Trade Commission (the “ITC”) in Washington, D.C. seeking, under Section 337 of the Tariff Act of 1930, an exclusion order barring the importation by Carsem of infringing products. We also filed a complaint against Carsem in the U.S. District Court for the Northern District of California, alleging patent infringement and seeking an injunction, damages and costs. This District Court action has been stayed pending resolution of the ITC case.

The ITC determined that certain Carsem Dual and Quad Flat No-Lead Packages infringe some patent claims of Amkor's U.S. Patent No. 6,433,277 (the "277 Patent") but that these infringed claims are invalid and, as a result, there is no violation of the Tariff Act. We appealed the ITC's ruling of invalidity for the claims of the 277 Patent to the U.S. Court of Appeals for the Federal Circuit (the "Federal Circuit").

In 2012, the Federal Circuit reversed the ITC's determination of invalidity on the 277 Patent, denied Carsem's petition for a rehearing and remanded the matter to the ITC for further proceedings consistent with its ruling.



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


On January 10, 2013, in response to Carsem, Inc.’s requests for reexamination of the 277 Patent, the United States Patent and Trademark Office issued an Office Action rejecting all of the 277 Patent claims as invalid. Amkor believes that all of the 277 Patent claims are valid and filed a response to the Office Action in March 2013 contesting this finding.

18.    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 may engage with us for both packaging and test services, or for packaging or test services individually. We have concluded that our packaging and test services constitute a group of similar services within each reportable segment.

The accounting policies for segment reporting are the same as those for our Consolidated Financial Statements as a whole. We evaluate our operating segments based on gross profit and gross property, plant and equipment. We do not specifically identify and allocate total assets by operating segment. Summarized financial information concerning reportable segments is shown in the following table. The “other” column includes corporate adjustments, gross property, plant and equipment of our corporate and sales offices and capital additions that do not directly support manufacturing operations, such as research and development and infrastructure projects.
 
Packaging
 
Test
 
Other
 
Total
 
(In thousands)
Three months ended September 30, 2013
 
 
 
 
 
 
 
Net sales
$
655,294

 
$
112,693

 
$

 
$
767,987

Depreciation expense
67,357

 
30,291

 

 
97,648

Gross profit
105,366

 
35,642

 

 
141,008

Capital additions
39,927

 
37,370

 
19,758

 
97,055

Three months ended September 30, 2012
 
 
 
 
 
 
 
Net sales
$
615,933

 
$
79,420

 
$

 
$
695,353

Depreciation expense
60,493

 
24,679

 

 
85,172

Gross profit
96,550

 
20,237

 

 
116,787

Capital additions
63,982

 
92,737

 
16,698

 
173,417

Nine months ended September 30, 2013
 
 
 
 
 
 
 
Net sales
$
1,895,462

 
$
306,113

 
$

 
$
2,201,575

Depreciation expense
191,720

 
85,901

 

 
277,621

Gross profit
296,074

 
98,266

 

 
394,340

Capital additions
209,833

 
117,217

 
53,129

 
380,179

Nine months ended September 30, 2012
 
 
 
 
 
 
 
Net sales
$
1,808,111

 
$
228,779

 
$

 
$
2,036,890

Depreciation expense
177,294

 
69,866

 

 
247,160

Gross profit
251,851

 
59,237

 

 
311,088

Capital additions
184,836

 
176,966

 
84,965

 
446,767

Gross property, plant and equipment
 
 
 
 
 
 
 
September 30, 2013
$
3,559,727

 
$
1,187,768

 
$
117,958

 
$
4,865,453

December 31, 2012
3,372,071

 
1,076,513

 
150,469

 
4,599,053




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


19.    Exit Activities and Reductions in Force

As part of our ongoing efforts to improve our manufacturing operations and manage costs, we regularly evaluate our staffing levels and facility requirements compared to business needs. The following table summarizes our exit activities and reduction in force initiatives associated with these efforts. “Charges” represents the initial charge related to the exit activity. “Cash Payments” consists of the utilization of “Charges.” “Non-cash Amounts” consists of asset impairments, pension plan curtailments and settlements and foreign currency adjustments.
 
Employee
Separation Costs
 
(In thousands)
Accrual at December 31, 2012
$
1,607

Charges, net
8,083

Cash Payments
(10,061
)
Non-cash Amounts
371

Accrual at September 30, 2013
$

 
Employee
Separation Costs
 
(In thousands)
Accrual at December 31, 2011
$

Charges, net
7,160

Cash Payments
(6,209
)
Non-cash Amounts
(951
)
Accrual at September 30, 2012
$


Reductions in Force

During the three and nine months ended September 30, 2013, we reduced our workforce through voluntary retirement and other workforce reduction programs. During the three months ended September 30, 2013, we recorded $2.1 million in net charges for termination benefits, of which $1.7 million and $0.4 million were charged to cost of sales and selling, general and administrative expenses, respectively. During the nine months ended September 30, 2013, we recorded $8.1 million in net charges for termination benefits, of which $6.8 million, $1.0 million and $0.3 million were charged to cost of sales; selling, general and administrative expenses and research and development expenses, respectively. All amounts were paid as of September 30, 2013.

During the nine months ended September 30, 2012, we reduced our workforce at one of our manufacturing operations. We recorded $7.2 million in charges for termination benefits including $1.0 million in net curtailment and settlement charges, of which $5.5 million, $1.6 million and $0.1 million were charged to cost of sales; selling, general and administrative expenses and research and development expenses, respectively. All amounts were paid as of December 31, 2012.



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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

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 individual transistors, or multiple transistors and other electronic elements combined into an integrated circuit (generally known as a “chip” or “die”), onto semiconductor material such as a silicon wafer. Each chip on the wafer is probe tested. The good chips are identified and the wafer is then separated into individual die. Each good die is then assembled into a package that typically encapsulates the die for protection and creates the electrical connections used to connect the package to a printed circuit board, module or other part of the electronic device. In some packages, chips are attached to a substrate or leadframe carrier through wirebonding or flip chip interconnects and then encased in a protective material. Or, for a wafer-level package, the electrical interconnections are created directly on the surface of the die (while the wafer is still intact) so that the chip may be attached directly to other parts of an electronic device 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. The test services we offer include probe testing and final testing.

Our packaging services are designed to meet application and chip specific requirements including the type of interconnect technology employed; size; thickness and electrical, mechanical and thermal performance. We are able to provide turnkey packaging and test services including semiconductor wafer bump, wafer probe, wafer backgrind, package design, packaging, test and drop shipment services.

Our 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. Historical trends indicate there has been a strong correlation between world-wide gross domestic product levels, consumer spending and semiconductor industry cycles. The semiconductor industry has experienced significant and sometimes prolonged cyclical downturns in the past. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery.

Our net sales, gross profit, operating income, cash flows, liquidity and capital resources have historically fluctuated significantly from quarter to quarter as a result of many factors, including the seasonality of our business, the cyclical nature of the semiconductor industry and other factors discussed in Part II, Item 1A of this Quarterly Report.

On July 31, 2013, we completed the purchase of 100% of the shares of Toshiba Electronics Malaysia Sdn. Bhd., Toshiba’s power discrete semiconductor packaging and test operation in Malaysia. The financial results of the entity have been included in our Consolidated Financial Statements from the date of acquisition.

Our net sales increased $72.6 million or 10.4% to $768.0 million for the three months ended September 30, 2013, from $695.4 million for the three months ended September 30, 2012. The increase was driven by a $39.4 million or 6.4% increase in packaging net sales as well as a $33.3 million or 41.9% increase in test net sales. The increases in packaging and test net sales were driven by strong demand for NAND memory, test and wafer-level processing services supporting mobile communications, as well as incremental business from our newly acquired power discrete business in Malaysia. These increases were partially offset by a decrease in net sales of packaging services related to products in the consumer end market.

Gross margin for the three months ended September 30, 2013, increased to 18.4% from 16.8% for the three months ended September 30, 2012. The increase was primarily driven by higher net sales of wafer-level processing, NAND memory and test services supporting mobile communications. Our gross margin for the three months ended September 30, 2013, was negatively impacted by a $10.0 million charge to cost of sales relating to our pending patent license arbitration.

We operate in a capital intensive industry and have a significant level of debt. 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. We fund our operations, including capital expenditures and debt service requirements, with cash flows from operations, existing cash and cash equivalents, borrowings under available credit facilities and proceeds from any additional financing. Maintaining an


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appropriate level of liquidity is important to our business and depends on, among other things, the performance of our business, our capital expenditure levels and our ability to repay debt out of our operating cash flows or proceeds from debt or equity financings.

Driven by continued customer demand for services supporting mobile communications products, our capital additions totaled $380.2 million or 17.3% of net sales for the nine months ended September 30, 2013, compared to $446.8 million or 21.9% of net sales for the nine months ended September 30, 2012. During the nine months ended September 30, 2013, 55.2% of our capital additions were made in packaging, 30.8% in test and 14.0% in research and development and infrastructure projects. During the nine months ended September 30, 2012, 41.4% of our capital additions were made in packaging, 39.6% in test and 19.0% in research and development and infrastructure projects.

Net cash provided by operating activities was $375.2 million for the nine months ended September 30, 2013, compared to $284.4 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, we experienced negative free cash flow of $26.8 million, primarily due to our capital purchases to support anticipated customer demand for packaging and test services related to mobile communications. 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.


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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
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Materials
39.0
%
 
42.8
%
 
41.0
%
 
43.6
%
Labor
14.1
%
 
14.8
%
 
14.3
%
 
14.4
%
Other manufacturing costs
28.5
%
 
25.6
%
 
26.8
%
 
26.7
%
Gross margin
18.4
%
 
16.8
%
 
17.9
%
 
15.3
%
Depreciation and amortization
13.8
%
 
13.5
%
 
13.7
%
 
13.4
%
Operating income
7.6
%
 
7.8
%
 
7.2
%
 
5.4
%
Income before income taxes
5.0
%
 
4.6
%
 
3.5
%
 
2.2
%
Net income attributable to Amkor
3.3
%
 
3.2
%
 
3.1
%
 
1.7
%

Net Sales
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
Change
 
2013
 
2012
 
Change
 
(In thousands, except percentages)
Net sales
$
767,987

 
$
695,353

 
$
72,634

 
10.4
%
 
$
2,201,575

 
$
2,036,890

 
$
164,685

 
8.1
%
Packaging net sales
655,294

 
615,933

 
39,361

 
6.4
%
 
1,895,462

 
1,808,111

 
87,351

 
4.8
%
Test net sales
112,693

 
79,420

 
33,273

 
41.9
%
 
306,113

 
228,779

 
77,334

 
33.8
%

Net Sales. Net sales in the three and nine months ended September 30, 2013, increased compared to the three and nine months ended September 30, 2012, as a result of higher net sales of our packaging and test services.

Packaging Net Sales. The increase in packaging net sales for the three and nine months ended September 30, 2013 was primarily driven by strong demand for NAND memory and wafer-level processing services supporting mobile communications along with incremental business from our newly acquired power discrete business in Malaysia. Our investments supporting mobile communications have continued to drive our growth in this end market. The increase in packaging net sales for the nine months ended September 30, 2013, was also attributable to high demand for our flip chip packaging services. These increases in net sales were partially offset by weakness in demand for products in the consumer end market, including gaming and home electronics. For the nine months ended September 30, 2013, our packaging net sales were also impacted by weakness in the computing end market as net sales in the prior year benefitted from incremental demand from customers whose supply chains were disrupted by the flooding in Thailand.

Packaging unit volume increased to 3.8 billion units during the three months ended September 30, 2013, compared to 2.2 billion units during the three months ended September 30, 2012. Packaging unit volume increased to 8.8 billion units during the nine months ended September 30, 2013, compared to 6.2 billion units during the nine months ended September 30, 2012. The increase for the three and nine months ended September 30, 2013, was primarily due to an increase in packaging services for discrete products from our newly acquired business in Malaysia, leadframe products and wafer-level processing services for mobile communications products.

Test Net Sales. The increase in test net sales in the three and nine months ended September 30, 2013 was primarily attributable to higher demand for test services for mobile communications and our continued investments in support of this end market as many of our mobile communications customers require turnkey packaging and test solutions.



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Cost of Sales
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
Change
 
2013
 
2012
 
Change
 
(In thousands, except percentages)
Cost of sales
$
626,979

 
$
578,566

 
$
48,413

 
8.4
%
 
$
1,807,235

 
$
1,725,802

 
$
81,433

 
4.7
%

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 decreased to 39.0% and 41.0% for the three and nine months ended September 30, 2013, respectively, from 42.8% and 43.6% for the three and nine months ended September 30, 2012, respectively. The decrease was primarily due to a change in mix to packaging and test services with lower material content.

Labor costs as a percentage of net sales decreased to 14.1% and 14.3% for the three and nine months ended September 30, 2013, respectively, from 14.8% and 14.4% for the three and nine months ended September 30, 2012, respectively. The decrease was primarily due to higher net sales of packaging and test services while our labor costs remained consistent. Increases in our employee compensation costs were offset by net savings from restructuring activities at our manufacturing operations.

Other manufacturing costs as a percentage of net sales increased to 28.5% for the three months ended September 30, 2013, from 25.6% for the three months ended September 30, 2012. Our other manufacturing costs for the three months ended September 30, 2013, included a charge of $10.0 million relating to our pending patent license arbitration. Other manufacturing costs as a percentage of net sales also increased as a result of higher depreciation expense due to our continued investments in property, plant and equipment to service the demand of our customers, primarily in support of mobile communications.

Other manufacturing costs as a percentage of net sales of 26.8% for the nine months ended September 30, 2013, remained consistent with other manufacturing costs as a percentage of sales of 26.7% for the nine months ended September 30, 2012. Our other manufacturing costs for the nine months ended September 30, 2013, included higher depreciation expense and a $10.0 million charge from our pending patent license arbitration. Our results for the nine months ended September 30, 2012, included a $30.0 million charge for the same arbitration.

Gross Profit
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
Change
 
2013
 
2012
 
Change
 
(In thousands, except percentages)
Gross profit
$
141,008

 
$
116,787

 
$
24,221

 
$
394,340

 
$
311,088

 
$
83,252

Gross margin
18.4
%
 
16.8
%
 
1.6
%
 
17.9
%
 
15.3
%
 
2.6
%

Gross profit and gross margin for the three and nine months ended September 30, 2013, increased compared to the three and nine months ended September 30, 2012. The increase in gross profit and gross margin was primarily driven by higher net sales of wafer-level processing, NAND memory and test services. Gross profit and gross margin for the three months ended September 30, 2013, were negatively impacted by a $10.0 million charge to cost of sales for our pending patent license arbitration, which related entirely to the packaging segment. Our results for the nine months ended September 30, 2012, included a $30.0 million charge for the same arbitration.


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Table of Contents


 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
Change
 
2013
 
2012
 
Change
 
(In thousands, except percentages)
Packaging gross profit
$
105,366

 
$
96,550

 
$
8,816

 
$
296,074

 
$
251,851

 
$
44,223

Packaging gross margin
16.1
%
 
15.7
%
 
0.4
%
 
15.6
%
 
13.9
%
 
1.7
%

Packaging Gross Profit. Gross profit and gross margin for packaging net sales for the three and nine months ended September 30, 2013, increased compared to the three and nine months ended September 30, 2012. The increase in gross profit and gross margin was primarily driven by higher net sales of wafer-level processing and NAND memory services. Gross profit and gross margin for packaging services for the three months ended September 30, 2013, were negatively impacted by a $10.0 million charge to cost of sales for our pending patent license arbitration, which related entirely to the packaging segment. Our results for the nine months ended September 30, 2013, included a $30.0 million charge for the same arbitration.
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
Change
 
2013
 
2012
 
Change
 
(In thousands, except percentages)
Test gross profit
$
35,642

 
$
20,237

 
$
15,405

 
$
98,266

 
$
59,237

 
$
39,029

Test gross margin
31.6
%
 
25