AMKR 6.30.14 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 June 30, 2014
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 July 25, 2014 was 237,106,589.
 




QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2014

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 2014 including expenditures in support of customer demand in the mobile communications market and 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 changes in capacity utilization on our 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 and the potential impact of our unrecognized tax benefits on our effective tax rate, (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 shop floor management system, (15) our view of the outcome of our dispute with Tessera and our estimates regarding the possible amount of, and funding for, any payments due in conjunction with such dispute, (16) the anticipated schedule for construction of our new factory and research and development facility in Korea, (17) our ownership of J-Devices and consolidation of J-Devices' results into our consolidated financial statements, (18) our efforts to enlarge our customer base in certain geographic areas and markets and (19) 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 various factors, including those set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q.


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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
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share data)
Net sales
$
767,459

 
$
746,059

 
$
1,463,503

 
$
1,433,588

Cost of sales
616,745

 
607,680

 
1,183,969

 
1,180,256

Gross profit
150,714

 
138,379

 
279,534

 
253,332

Selling, general and administrative
67,674

 
65,618

 
130,098

 
125,177

Research and development
22,079

 
14,308

 
43,124

 
28,614

Total operating expenses
89,753

 
79,926

 
173,222

 
153,791

Operating income
60,961

 
58,453

 
106,312

 
99,541

Interest expense
22,537

 
23,739

 
46,259

 
45,817

Interest expense, related party
1,242

 
3,192

 
2,484

 
6,684

Other (income) expense, net
(5,699
)
 
12,876

 
(5,663
)
 
10,654

Total other expense, net
18,080

 
39,807

 
43,080

 
63,155

Income before taxes and equity in earnings of unconsolidated affiliate
42,881

 
18,646

 
63,232

 
36,386

Income tax expense (benefit)
12,511

 
(10,238
)
 
17,440

 
(6,209
)
Income before equity in earnings of unconsolidated affiliate
30,370

 
28,884

 
45,792

 
42,595

Equity in earnings of J-Devices
20,036

 
1,445

 
25,797

 
1,500

Net income
50,406

 
30,329

 
71,589

 
44,095

Net income attributable to noncontrolling interests
(885
)
 
(602
)
 
(1,435
)
 
(986
)
Net income attributable to Amkor
$
49,521

 
$
29,727

 
$
70,154

 
$
43,109

Net income attributable to Amkor per common share:
 
 
 
 
 

 
 

Basic
$
0.21

 
$
0.18

 
$
0.31

 
$
0.27

Diluted
$
0.21

 
$
0.14

 
$
0.30

 
$
0.21

Shares used in computing per common share amounts:
 
 
 
 
 

 
 
Basic
232,891

 
160,886

 
224,868

 
156,672

Diluted
236,872

 
235,111

 
236,182

 
235,099


The accompanying notes are an integral part of these statements.


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Table of Contents

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


 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net income
$
50,406

 
$
30,329

 
$
71,589

 
$
44,095

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Adjustments to unrealized components of defined benefit pension plans, net of tax of ($345), ($9), ($366) and $49
486

 
75

 
606

 
217

Foreign currency translation adjustment
(12,493
)
 
(744
)
 
(11,808
)
 
(3,100
)
Equity interest in J-Devices' other comprehensive income (loss), net of tax of $0, ($1,087), $0 and $202
562

 
(2,155
)
 
3,706

 
(4,051
)
Total other comprehensive loss
(11,445
)
 
(2,824
)
 
(7,496
)
 
(6,934
)
Comprehensive income
38,961

 
27,505

 
64,093

 
37,161

Comprehensive income attributable to noncontrolling interests
(885
)
 
(602
)
 
(1,435
)
 
(986
)
Comprehensive income attributable to Amkor
$
38,076

 
$
26,903

 
$
62,658

 
$
36,175


The accompanying notes are an integral part of these statements.


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Table of Contents

AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)


 
June 30,
2014
 
December 31,
2013
 
(In thousands, except per share data)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
525,935

 
$
610,442

Restricted cash
2,681

 
2,681

Accounts receivable, net of allowances
455,838

 
385,542

Inventories
205,668

 
200,423

Other current assets
57,803

 
33,328

Total current assets
1,247,925

 
1,232,416

Property, plant and equipment, net
2,153,818

 
2,006,553

Investments
134,717

 
105,214

Restricted cash
2,247

 
2,234

Other assets
70,666

 
80,881

Total assets
$
3,609,373

 
$
3,427,298

LIABILITIES AND EQUITY
Current liabilities:
 

 
 

Short-term borrowings and current portion of long-term debt
$
10,000

 
$
61,350

Trade accounts payable
555,805

 
365,334

Accrued expenses
252,048

 
264,252

Total current liabilities
817,853

 
690,936

Long-term debt
1,451,111

 
1,516,390

Long-term debt, related party
75,000

 
75,000

Pension and severance obligations
159,936

 
165,073

Other non-current liabilities
14,423

 
14,959

Total liabilities
2,518,323

 
2,462,358

Commitments and contingencies (Note 17)


 


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, 281,782 and 262,109 shares issued, and 236,252 and 216,702 shares outstanding, in 2014 and 2013, respectively
282

 
262

Additional paid-in capital
1,875,533

 
1,812,530

Accumulated deficit
(577,194
)
 
(647,348
)
Accumulated other comprehensive loss
(7,751
)
 
(255
)
Treasury stock, at cost, 45,530 and 45,407 shares in 2014 and 2013, respectively
(212,455
)
 
(211,449
)
Total Amkor stockholders’ equity
1,078,415

 
953,740

Noncontrolling interests in subsidiaries
12,635

 
11,200

Total equity
1,091,050

 
964,940

Total liabilities and equity
$
3,609,373

 
$
3,427,298


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,
 
2014
 
2013
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
71,589

 
$
44,095

Depreciation and amortization
220,389

 
195,785

Loss on debt retirement

 
11,619

Gain on sale of subsidiary to J-Devices
(9,155
)
 

Other operating activities and non-cash items
(24,000
)
 
(13,947
)
Changes in assets and liabilities
(23,570
)
 
(36,702
)
Net cash provided by operating activities
235,253

 
200,850

Cash flows from investing activities:
 

 
 

Payments for property, plant and equipment
(230,392
)
 
(222,674
)
Proceeds from sale of property, plant and equipment
1,634

 
25,093

Cash transferred on sale of subsidiary to J-Devices, net of proceeds
(15,774
)
 

Payments from J-Devices

 
8,843

Investment in J-Devices

 
(67,372
)
Purchase of short-term investment
(20,000
)
 

Proceeds from short-term investment
20,000

 

Other investing activities
(353
)
 
(2,032
)
Net cash used in investing activities
(244,885
)
 
(258,142
)
Cash flows from financing activities:
 

 
 

Borrowings under revolving credit facilities

 
5,000

Payments under revolving credit facilities

 
(5,000
)
Proceeds from issuance of long-term debt
80,000

 
293,000

Payments of long-term debt
(140,000
)
 

Payments for debt issuance costs

 
(3,357
)
Payments for the retirement of debt

 
(11,619
)
Payment of deferred consideration for an acquisition
(18,763
)
 

Proceeds from the issuance of stock through share-based compensation plans
4,826

 

Payments of tax withholding for restricted shares
(1,006
)
 
(172
)
Net cash (used in) provided by financing activities
(74,943
)
 
277,852

Effect of exchange rate fluctuations on cash and cash equivalents
68

 
2,399

Net (decrease) increase in cash and cash equivalents
(84,507
)
 
222,959

Cash and cash equivalents, beginning of period
610,442

 
413,048

Cash and cash equivalents, end of period
$
525,935

 
$
636,007

Non cash investing and financing activities:
 
 
 
Common stock issuance for conversion and exchange in 2014 and 2013, respectively, of 6.0% Convertible senior subordinated notes due April 2014, $150 million related party in 2013
$
56,350

 
$
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 June 30, 2014, and for the three and six months ended June 30, 2014 and 2013, are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The December 31, 2013, 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, 2013, filed on Form 10-K with the SEC on February 28, 2014. The results of operations for the three and six months ended June 30, 2014, 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 June 30, 2014, we completed the sale of our Japanese subsidiary to J-Devices, our 60% owned equity-method joint venture in Japan. The financial results of the entity were included in our consolidated financial statements up to the date of sale (Note 4). 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).

The U.S. dollar is our reporting currency and the functional currency for our foreign subsidiaries. Effective June 30, 2014, we changed the functional currency for our sales office in Japan to the U.S. dollar primarily due to an increase in the mix of our U.S. dollar denominated sales. The change in functional currency is applied on a prospective basis.

Beginning with the year ended December 31, 2013, we reclassified equity in earnings of unconsolidated affiliate from other expense (income) to below income tax expense in our Consolidated Statements of Income for all periods presented. The reclassification had no impact on net income.

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 March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 was adopted on January 1, 2014. On June 30, 2014, we sold our controlling interest in a foreign subsidiary. The sale resulted in a gain upon release of the cumulative translation adjustment associated with the entity (Note 4).



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


Recently Issued Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and changes in judgments. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and permits the use of either full retrospective or modified retrospective methods of adoption. Early adoption is not permitted. We are currently evaluating the method of adoption and the impact that this guidance will have on our financial statements and disclosure.

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 $61.2 million, based on the net asset value at closing. We paid $42.4 million in cash at closing and paid the remaining $18.8 million in March 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.    Sale of Subsidiary to J-Devices

On June 30, 2014, we sold 100% of the shares of our wholly-owned subsidiary engaged in semiconductor packaging and test operations in Japan to J-Devices Corporation ("J-Devices"), our 60% owned equity-method joint venture in Japan, for ¥1.1 billion ($11.1 million). For additional information regarding our investment in J-Devices, we refer you to Note 12. We received ¥0.1 billion ($1.0 million) in cash from J-Devices at closing and will receive the remaining ¥1.0 billion ($10.1 million) by June 30, 2015. We recognized a net gain on the sale of $9.2 million in our consolidated financial statements in other (income) expense, net, which includes a gain of $12.6 million from the release of accumulated foreign currency translation adjustments associated with the entity (Note 9). J-Devices recognized a gain of $14.7 million on the transaction in its consolidated financial statements as the fair value of the net assets acquired exceeded the purchase price. The gain recognized by J-Devices increased our equity in earnings of J-Devices by $8.8 million for the three and six months ended June 30, 2014. The combined net gain we recognized for the three and six months ended June 30, 2014, was $18.0 million.

5.    Share-Based Compensation Plans

The following table presents share-based compensation expense attributable to stock options and restricted shares.
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Stock options
$
386

 
$
151

 
$
777

 
$
255

Restricted shares
489

 
497

 
1,070

 
927

Total share-based compensation expense
$
875

 
$
648

 
$
1,847

 
$
1,182




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


The following table presents share-based compensation expense as included in the Consolidated Statements of Income:
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Selling, general and administrative
$
764

 
$
565

 
1,613

 
1,030

Research and development
111

 
83

 
234

 
152

Total share-based compensation expense
$
875

 
$
648

 
$
1,847

 
$
1,182


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

Stock Options

The following table summarizes our stock option activity for the six months ended June 30, 2014:
 
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, 2013
4,873

 
$
6.52

 
 
 
 

Granted
260

 
7.64

 
 
 
 

Exercised
(747
)
 
6.46

 
 
 
 

Forfeited or expired
(340
)
 
12.30

 
 
 
 

Outstanding at June 30, 2014
4,046

 
$
6.12

 
6.58
 
$
20,566

Fully vested at June 30, 2014 and expected to vest thereafter
4,015

 
$
6.13

 
6.56
 
$
20,373

Exercisable at June 30, 2014
1,955

 
$
7.55

 
3.84
 
$
7,197


The following assumptions were used to calculate the weighted average fair values of the options granted:
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Expected life (in years)
6.0

 
6.2

 
6.1

 
6.2

Risk-free interest rate
2.0
%
 
1.0
%
 
2.0
%
 
1.0
%
Volatility
57
%
 
60
%
 
58
%
 
60
%
Dividend yield

 

 

 

Weighted average grant date fair value per option granted
$
5.01

 
$
2.53

 
$
4.20

 
$
2.53

 
Total unrecognized compensation expense from stock options, net of a forfeiture estimate, was $4.8 million as of June 30, 2014, which is expected to be recognized over a weighted-average period of approximately 3.0 years beginning July 1, 2014.



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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, 2014:
 
Number of
Shares
(In thousands)
 
Weighted
Average
Grant-Date
Fair Value
(Per share)
Nonvested at December 31, 2013
1,172

 
$
4.83

Awards granted

 

Awards vested
(294
)
 
5.09

Awards forfeited
(11
)
 
4.84

Nonvested at June 30, 2014
867

 
$
4.74


Total unrecognized compensation cost, net of a forfeiture estimate, was $3.4 million as of June 30, 2014, which is expected to be recognized over a weighted average period of approximately 2.5 years beginning July 1, 2014.

6.    Other Income and Expense

Other income and expense consists of the following:
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Interest income
$
(831
)
 
$
(676
)
 
$
(1,542
)
 
$
(1,503
)
Foreign currency loss, net
4,213

 
2,041

 
4,547

 
875

Loss on debt retirement
622

 
11,619

 
757

 
11,619

Gain on sale of subsidiary to J-Devices (Note 4)
(9,155
)
 

 
(9,155
)
 

Other income, net
(548
)
 
(108
)
 
(270
)
 
(337
)
Total other (income) expense, net
$
(5,699
)
 
$
12,876

 
$
(5,663
)
 
$
10,654


7.    Income Taxes

Our income tax expense of $17.4 million for the six months ended June 30, 2014, primarily reflects expense related to income taxes at certain of our foreign operations and foreign withholding taxes. Our income tax expense also reflects income taxed in foreign jurisdictions where we benefit from tax holidays.

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.

Unrecognized tax benefits represent reserves for potential tax deficiencies or reductions in tax benefits that could result from federal, state or foreign tax audits. Our gross unrecognized tax benefits decreased from $27.1 million at December 31, 2013, to $6.9 million as of June 30, 2014, primarily as a result of the application of a tax law change and the settlement of a tax examination in a certain foreign jurisdiction. At June 30, 2014, all of our unrecognized tax benefits would reduce our effective tax rate, if recognized. 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)


8.    Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income attributable to Amkor common stockholders by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding includes restricted shares held by retirement eligible recipients and is reduced for treasury stock. We grant restricted shares which entitle recipients to voting and nonforfeitable dividend rights from the date of grant therefore our unvested share-based compensation awards are considered participating securities and are included in the computation of EPS pursuant to the two-class method.

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
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share data)
Net income attributable to Amkor
$
49,521

 
$
29,727

 
$
70,154

 
$
43,109

Income allocated to participating securities
(184
)
 
(251
)
 
(269
)
 
(374
)
Net income available to Amkor common stockholders — basic
49,337

 
29,476

 
69,885

 
42,735

Adjustment for dilutive securities on net income:
 

 
 

 
 

 
 

Net income reallocated to participating securities
3

 
58

 
9

 
80

Interest on 6.0% convertible notes due 2014, net of tax
132

 
3,609

 
1,039

 
7,626

Net income attributable to Amkor — diluted
$
49,472

 
$
33,143

 
$
70,933

 
$
50,441

 
 
 
 
 
 
 
 
Weighted average shares outstanding — basic
232,891

 
160,886

 
224,868

 
156,672

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options
1,115

 
10

 
609

 
14

6.0% convertible notes due 2014
2,866

 
74,215

 
10,705

 
78,413

Weighted average shares outstanding — diluted
236,872

 
235,111

 
236,182

 
235,099

Net income attributable to Amkor per common share:
 

 
 

 
 

 
 

Basic
$
0.21

 
$
0.18

 
$
0.31

 
$
0.27

Diluted
0.21

 
0.14

 
0.30

 
0.21


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
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Stock options and restricted share awards
1,114

 
4,092

 
1,563

 
4,165




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Table of Contents

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


9.    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, 2013
$
953,740

 
$
11,200

 
$
964,940

Net income
70,154

 
1,435

 
71,589

Other comprehensive loss
(7,496
)
 

 
(7,496
)
Issuance of stock through employee share-based compensation plans
4,826

 

 
4,826

Treasury stock acquired through surrender of shares for tax withholding
(1,006
)
 

 
(1,006
)
Share-based compensation expense
1,847

 

 
1,847

Conversion of debt to common stock
56,350

 

 
56,350

Equity at June 30, 2014
$
1,078,415

 
$
12,635

 
$
1,091,050

 
Attributable
to Amkor
 
Attributable to
Noncontrolling
Interests
 
Total
 
(In thousands)
Equity at December 31, 2012
$
657,955

 
$
8,839

 
$
666,794

Net income
43,109

 
986

 
44,095

Other comprehensive loss
(6,934
)
 

 
(6,934
)
Treasury stock acquired through surrender of shares for tax withholding
(172
)
 

 
(172
)
Share-based compensation expense
1,182

 

 
1,182

Exchange of debt for common stock
195,034

 

 
195,034

Equity at June 30, 2013
$
890,174

 
$
9,825

 
$
899,999


The following table reflects the changes in accumulated other comprehensive income and loss, net of tax:
 
Defined Benefit Pension
 
Foreign Currency Translation
 
Equity Interest in J-Devices' Other Comprehensive Income (Loss)
 
Total
 
(In thousands)
Accumulated other comprehensive (loss) income at
December 31, 2013
$
(1,013
)
 
$
11,451

 
$
(10,693
)
 
$
(255
)
Other comprehensive income before reclassifications

 
779

 
3,706

 
4,485

Amounts reclassified from accumulated other comprehensive (loss) income
606

 
(12,587
)
 

 
(11,981
)
Other comprehensive income (loss)
606

 
(11,808
)
 
3,706

 
(7,496
)
Accumulated other comprehensive loss at
June 30, 2014
$
(407
)
 
$
(357
)
 
$
(6,987
)
 
$
(7,751
)


- 11-


Table of Contents

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


 
Defined Benefit Pension
 
Foreign Currency Translation
 
Equity Interest in J-Devices' Other Comprehensive Income (Loss)
 
Total
 
(In thousands)
Accumulated other comprehensive (loss) income at
December 31, 2012
$
(5,373
)
 
$
16,346

 
$
268

 
$
11,241

Other comprehensive loss before reclassifications

 
(3,100
)
 
(4,051
)
 
(7,151
)
Amounts reclassified from accumulated other comprehensive (loss) income
217

 

 

 
217

Other comprehensive income (loss)
217

 
(3,100
)
 
(4,051
)
 
(6,934
)
Accumulated other comprehensive (loss) income at
June 30, 2013
$
(5,156
)
 
$
13,246

 
$
(3,783
)
 
$
4,307


Amounts reclassified out of accumulated other comprehensive (loss) income are included as a component of net periodic pension cost (Note 15) or other (income) expense, net as a result of the release of accumulated foreign currency translation adjustments associated with the sale of our subsidiary in Japan (Note 4).

10.    Inventories

Inventories consist of the following:
 
June 30,
2014
 
December 31, 2013
 
(In thousands)
Raw materials and purchased components
$
147,280

 
$
147,292

Work-in-process
58,388

 
53,131

Total inventories
$
205,668

 
$
200,423


11.    Property, Plant and Equipment

Property, plant and equipment consist of the following:
 
June 30,
2014
 
December 31, 2013
 
(In thousands)
Land
$
207,986

 
$
208,048

Land use rights
26,845

 
26,845

Buildings and improvements
919,379

 
911,258

Machinery and equipment
3,748,385

 
3,577,045

Software and computer equipment
206,247

 
193,641

Furniture, fixtures and other equipment
15,453

 
17,430

Construction in progress
48,430

 
27,039

Total property, plant and equipment
5,172,725

 
4,961,306

Less accumulated depreciation and amortization
(3,018,907
)
 
(2,954,753
)
Total property, plant and equipment, net
$
2,153,818

 
$
2,006,553




- 12-


Table of Contents

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
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Cost of sales
$
101,594

 
$
90,805

 
$
201,361

 
$
179,973

Selling, general and administrative
3,926

 
3,860

 
7,362

 
7,995

Research and development
6,240

 
3,114

 
11,073

 
6,109

Total depreciation expense
$
111,760

 
$
97,779

 
$
219,796

 
$
194,077


As of June 30, 2014, we have capitalized interest of $5.1 million associated with our spending for land and design costs in anticipation of building a new factory and research and development center in Korea.

12.    Investments

Investments consist of the following:
 
June 30,
2014
 
December 31,
2013
 
Carrying
Value
(In thousands)
 
Ownership
Interest
 
Carrying
Value
(In thousands)
 
Ownership
Interest
Investment in unconsolidated affiliate
$
134,717

 
60.0
%
 
$
105,214

 
60.0
%

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. We invested $16.7 million for our original 30% equity interest and options to acquire additional equity interests. 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 $67.4 million. J-Devices is owned 60% by Amkor, 34% by the former shareholders of NMD and 6% by Toshiba.

On June 30, 2014, J-Devices purchased 100% of the shares of our wholly-owned subsidiary engaged in semiconductor packaging and test operations in Japan. For additional information regarding this transaction, we refer you to Note 4.

At June 30, 2014, our investment includes our 60% equity interest and options to acquire additional equity interests. The remaining 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 its 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 on the net book value and a multiple of earnings before interest, taxes, depreciation and amortization of J-Devices.



- 13-

Table of Contents

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


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. J-Devices' financial information is converted to U.S. GAAP and translated into U.S. dollars using Japanese yen as the functional currency. In addition, we record equity method adjustments as a change in our investment. The equity method adjustments include the amortization of basis differences as a result of the cost of our investment differing from our proportionate share of J-Devices' equity.

13.    Accrued Expenses

Accrued expenses consist of the following:
 
June 30,
2014
 
December 31,
2013
 
(In thousands)
Payroll and benefits
$
69,629

 
$
75,909

Deferred revenue and customer advances
52,822

 
44,764

Accrued royalties (Note 17)
43,324

 
43,324

Accrued interest
21,369

 
21,807

Income taxes payable
17,117

 
17,528

Accrued severance plan obligations (Note 15)
11,794

 
11,197

Acquisition payable (Note 3)

 
17,897

Other accrued expenses
35,993

 
31,826

Total accrued expenses
$
252,048

 
$
264,252


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



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Table of Contents

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


14.    Debt

Following is a summary of short-term borrowings and long-term debt:
 
June 30,
2014
 
December 31,
2013
 
(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
525,000

 
525,000

Senior subordinated notes:
 

 
 

6.0% Convertible senior subordinated notes, due April 2014 (1)

 
56,350

Debt of subsidiaries:
 

 
 

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

 

Term loan, LIBOR plus 3.70%, due June 2016 (2)
70,000

 
70,000

Term loan, foreign currency funding-linked base rate plus 2.00%, due March 2017 (3)
80,000

 

Term loan, LIBOR plus 3.90% or 3.94%, due July 2017 (4)
30,000

 
90,000

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

 
10,000

Term loan, LIBOR plus 3.70%, due December 2019
70,000

 
70,000

Term loan, foreign currency funding-linked base rate plus 2.30%, due March 2015 (3)

 
80,000

Other:
 
 
 
Revolving credit facility, TAIFX plus a bank-determined spread, due April 2015 (Taiwan) (6)

 

 
1,530,000

 
1,646,350

Add: Unamortized premium
6,111

 
6,390

Less: Short-term borrowings and current portion of long-term debt
(10,000
)
 
(61,350
)
Long-term debt (including related party)
$
1,526,111

 
$
1,591,390

(1)
In April 2009, we issued $250.0 million of our 6.0% Convertible senior subordinated notes due April 2014 (the “2014 Notes”). The 2014 Notes were 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. In June 2013, we completed a tender offer for the 2014 Notes and exchanged $193.7 million of the 2014 Notes for an aggregate 64.0 million shares of our common stock and a cash payment of $11.6 million. In April 2014, holders of the 2014 Notes converted the remaining outstanding principal amount of $56.4 million into 18.6 million shares of our common stock.
(2)
In April 2013, we entered into a term loan agreement with a Korean bank pursuant to which we may borrow up to $150.0 million through April 2016 for general working capital purposes and the repayment of inter-company debt. The loan is collateralized by substantially all the land, factories and equipment located at our facilities in Korea. Principal is payable at maturity. Interest is due quarterly, at a rate of LIBOR plus 3.70% (3.93% as of June 30, 2014). As of June 30, 2014, $80.0 million was available to be borrowed.


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Table of Contents

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


(3)
In March 2014, we entered into a term loan agreement with a Korean bank pursuant to which we borrowed $80.0 million. The loan is collateralized by substantially all the land, factories and equipment located at our facilities in Korea. Principal is payable at maturity. Interest is due monthly, at a foreign currency funding-linked base rate plus 2.00% (3.58% as of June 30, 2014). Proceeds were used to prepay our term loan due March 2015.
(4)
In June 2012, we entered into a term loan agreement for five years with a Korean bank collateralized by substantially all the land, factories and equipment located at our facilities in Korea. Principal is payable at maturity. Interest is due quarterly, at LIBOR plus 3.90% (4.13% as of June 30, 2014). In April 2014, we prepaid $60.0 million of the outstanding balance of the term loan.
(5)
In March 2013, we entered into a loan agreement with a Korean bank pursuant to which we may borrow up to $150.0 million through September 2017. The loan is collateralized by substantially all the land, factories and equipment located at our facilities in Korea. Principal is payable in quarterly installments of $5.0 million starting in December 2014, with the remaining balance due at maturity. Interest is due quarterly, at a foreign currency funding-linked base rate plus 1.75% (3.38% as of June 30, 2014). At June 30, 2014, $140.0 million was available to be borrowed for capital expenditures.
(6)
In September 2012, Amkor Technology Taiwan Ltd, a subsidiary in Taiwan, entered into a revolving credit facility. 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 June 30, 2014, $24.0 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. The agreements governing our indebtedness contain a number of affirmative and negative covenants which restrict our ability to pay dividends and could restrict our operations. We have never paid a dividend to our stockholders, and we do not have any present plans for doing so. We were in compliance with all of our covenants at June 30, 2014.

15.    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
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Service cost
$
1,449

 
$
1,399

 
$
2,873

 
$
2,873

Interest cost
794

 
746

 
1,573

 
1,521

Expected return on plan assets
(781
)
 
(883
)
 
(1,547
)
 
(1,794
)
Amortization of transition obligation

 
2

 
75

 
4

Amortization of prior service cost
50

 
49

 
99

 
98

Recognized actuarial loss
16

 
33

 
33

 
66

Net periodic pension cost
1,528

 
1,346

 
3,106

 
2,768




- 16-


Table of Contents

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


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.

The provision recorded for severance benefits for the three and six months ended June 30, 2014, was $1.2 million and $6.8 million, respectively. The provision recorded for severance benefits for the three and six months ended June 30, 2013, was $7.3 million and $12.8 million, respectively. The balance of our Korean severance obligation consists of the following:
 
June 30,
2014
 
December 31,
2013
 
(In thousands)
Current (Accrued expenses)
$
11,794

 
$
11,197

Non-current (Pension and severance obligations)
140,484

 
133,935

Total Korean severance obligation
$
152,278

 
$
145,132


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 and restricted cash money market funds. 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.

We also measure certain assets and liabilities, including property, plant and equipment, intangible assets and our investment in J-Devices, at fair value on a nonrecurring basis. For the three and six months ended June 30, 2014 and 2013, 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.



- 17-


Table of Contents

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


Our fair value measurements consist of the following:
 
June 30,
2014
 
December 31,
2013
 
(In thousands)
Recurring fair value measurements:
 
 
 
Assets:
 
 
 
Cash equivalent money market funds (Level 1)
$
224,307

 
$
300,352

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

 
2,681

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

 
$
1,055

 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Losses on long-lived assets held for use or disposal (Level 3)
$
183

 
$
388

 
$
469

 
$
868


We measure the fair value of our debt for disclosure purposes. The following table presents the fair value of financial instruments that are not recorded at fair value on a recurring basis:
 
June 30, 2014
 
December 31, 2013
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
(In thousands)
Senior notes (Level 1)
$
1,350,374

 
$
1,276,111

 
$
1,321,443

 
$
1,276,390

Convertible senior subordinated notes (Level 1)

 

 
102,585

 
56,350

Term loans (Level 2)
260,000

 
260,000

 
320,000

 
320,000

Total debt
$
1,610,374

 
$
1,536,111

 
$
1,744,028

 
$
1,652,740


The estimated fair value of our senior and convertible senior subordinated notes is based primarily on quoted market prices reported on or near the respective balance sheet dates. The estimated fair value of our term loans was calculated using a discounted cash flow analysis, which utilized market based assumptions including forward interest rates adjusted for credit risk.



- 18-


Table of Contents

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


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 June 30, 2014, 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 Technologies, 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, the termination of the License Agreement and post-termination infringement. 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 Arbitration”), which we initiated in August 2009. In that proceeding, the ICC arbitration panel has previously ruled that royalties are due to Tessera with respect to certain asserted patents and packages and that the License Agreement was terminated by Tessera as of February 17, 2011. In May 2014, and as amended in June 2014, the arbitration panel awarded Tessera $113 million plus interest for these past royalties due under the License Agreement. The award bears simple interest at 3% per annum from the date the unpaid royalties were due under the License Agreement to the date of the award and at 10% from the date of the award until paid. The other pending arbitration proceedings with Tessera include a request for arbitration by Tessera filed in May 2011 seeking undisclosed damages and a declaration that the License Agreement had been terminated, and a continuation of the 2009 proceeding related to three additional U.S. patents.

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 (U.S. Patent No. 6,046,076, the "'076 patent") that the arbitration panel found to be royalty bearing in the 2009 Arbitration. In November 2013, the parties agreed to stay the Delaware litigation, which stay expired with the May 2014 award. In May 2014, Amkor moved the Delaware court to vacate the arbitration panel's award on the ground that the arbitration panel exceeded its powers in granting the award and on other grounds. The motion is pending.



- 19-


Table of Contents

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


In February 2013, 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 July 2014, Tessera filed a motion in the Superior Court to enforce the arbitration panel's amended June 2014 award. We intend to contest this motion. A hearing on this motion is scheduled for August 2014.

In April 2013, we initiated an inter partes review (the “IPR”) proceeding with the Patent Trial and Appeal Board at the United States Patent and Trademark Office (“U.S. PTO”), requesting it to find certain claims of the ‘076 patent unpatentable, including the two claims we were found to practice during the 2009 Arbitration. In October 2013, the U.S. PTO determined that there is a reasonable likelihood that we will prevail in challenging those claims and certain others. A merits hearing was held in the IPR in June 2014 and a decision is pending.

Although the arbitration panel has awarded Tessera royalties of $113 million plus interest, most of the royalties awarded to Tessera relate to Amkor's alleged use of the ‘076 patent and the period following termination of the License Agreement. The award by the arbitration panel must be confirmed by the courts before Tessera can enforce the award against Amkor, and we believe that a favorable outcome in the IPR or in the other pending proceedings may materially and adversely impact Tessera’s ability to confirm and collect on the arbitration panel's award and any other claims for damages.

As a result of the arbitration panel's award and other recent developments, the potential impact of the IPR proceeding on the arbitration panel's award, and our position regarding potential royalties due to Tessera following the termination of the License Agreement, our estimate of the possible range of royalties due to Tessera in the 2009 Arbitration is from $11 million to $113 million (net of royalties previously paid in 2012 and excluding interest). Our accrual for these royalties was $43.3 million at June 30, 2014.

The ultimate amount of damages and interest we may owe to Tessera in connection with the several pending proceedings could be more or less than our estimate of the possible range of royalties due in the 2009 Arbitration, and could be more or less than the amount we expect the arbitration panel to award. The final outcome of our litigation with Tessera depends upon a number of complex factors, including whether we receive a favorable ruling in the above proceedings and other factors. We may adjust our accrual as information develops or upon the issuance of new rulings. As of June 30, 2014, we have $5.4 million accrued for interest related to these royalties, and we expect to record our estimate of interest accruing with the passage of time. We strongly dispute Tessera's claims in these proceedings and intend to vigorously defend against them. However, the final outcome of these matters is uncertain, and an adverse result could have a material adverse effect on our results of operations, financial condition and cash flows.

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 alleged that Carsem has infringed on one or more of our MicroLeadFrame ("MLF") packaging technology patent claims, including an action we initiated with the U.S. International Trade Commission (the “ITC”) in Washington, D.C., under Section 337 of the Tariff Act of 1930.

In April 2014, the ITC made a final determination that Carsem violated Section 337 of the Tariff Act and issued a limited exclusion order barring Carsem from importing into the U.S. any of its products that infringe certain of our patent claims.

In May 2014, the parties entered into a settlement agreement to end all pending proceedings related to the dispute, and Carsem paid Amkor an agreed sum for such settlement. Under the terms of the agreement, Carsem and Amkor have granted each other non-exclusive licenses to their respective MLP and MLF patents worldwide.



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


18.    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” generally consists of pension plan curtailments and settlements and foreign currency adjustments.
 
Employee
Separation Costs
 
(In thousands)
Accrual at December 31, 2013
$

Charges
3,889

Cash Payments
(3,973
)
Non-cash Amounts
84

Accrual at June 30, 2014
$

 
Employee
Separation Costs
 
(In thousands)
Accrual at December 31, 2012
$
1,607

Charges
5,988

Cash Payments
(7,609
)
Non-cash Amounts
14

Accrual at June 30, 2013
$


During the three and six months ended June 30, 2014 and 2013, we reduced our workforce through workforce reduction programs. During the three and six months ended June 30, 2014, we recorded $2.5 million and $3.9 million in charges, respectively. During the three and six months ended June 30, 2013, we recorded $2.0 million and $6.0 million, respectively.
All charges related primarily to cost of sales.



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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. Our financial goals are sales growth and improved profitability, and we are focusing on the following strategies to achieve these goals: leveraging our investment in services for advanced technologies, improving utilization of existing assets and selectively growing our scale and scope through strategic investments.

We are an industry leader in developing and commercializing cost-effective advanced packaging and test technologies. These advanced technology solutions provide increased value to our customers while typically generating gross margins above the corporate average. This is particularly true in the mobile device market, where growth has outpaced the industry rate.

In the advanced packaging and test area, we look for opportunities where we can recover our investment over one to two years. As leading edge customers transition to newer packaging and test equipment and platforms, capacity frees up that can be used without significant additional investment to serve other customers. As part of our strategy, we are focused on developing a second wave of customers in order to more effectively utilize these assets. For example, we have a concerted effort to increase our sales to Chinese and Taiwanese fabless chip companies, since they dominate the mid-tier and entry-level segments of the mobile device market where most of the growth is occurring. We are also continuing efforts to seek out and engage new customers in the analog area for our mainstream wirebond technologies. Another area of expanded emphasis is the automotive market where semiconductor content continues to grow. These efforts to enlarge our customer base will continue during 2014 as we target these and other customers to grow our revenue and improve the overall utilization of our assets.

From time to time, we also see attractive opportunities to grow our customer base and expand markets. For example, in 2009 we invested in J-Devices Corporation, a joint venture to provide semiconductor packaging and test services in Japan. In 2013, we increased our investment in J-Devices to 60%. In July 2013, we acquired Toshiba’s power discrete semiconductor packaging and test business in Malaysia. The financial results of this entity have been included in our Consolidated Financial Statements from the date of acquisition. In addition to adding a new revenue stream from our existing customer, Toshiba, we are attracting other power discrete customers. We believe that selective growth through joint ventures, acquisitions and other strategic investments can help diversify our revenue streams, improve our profits and continue our technological leadership. We expect to continue to evaluate similar opportunities.

Our IDM customers include: Intel Corporation; Micron Technology, Inc.; STMicroelectronics N.V.; Texas Instruments Incorporated and Toshiba Corporation. Our fabless customers include: Altera Corporation; Broadcom Corporation; LSI Corporation and Qualcomm Incorporated. Our contract foundry customers include: GlobalFoundries Inc. and Taiwan Semiconductor Manufacturing Company Limited.

Our business is impacted by market conditions in the semiconductor industry, which is cyclical 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 Form 10-Q.

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 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.

Financial Highlights

Our net sales increased $21.4 million or 2.9% to $767.5 million for the three months ended June 30, 2014, from $746.1 million for the three months ended June 30, 2013. The increase was driven by incremental business from our newly acquired power discrete business in Malaysia, the ramp of a fingerprint sensor product to high volume and strong demand for wafer services and NAND memory supporting mobile communications. These increases were partially offset by lower net sales for other services related to mobile communications products.

Gross margin for the three months ended June 30, 2014, increased to 19.6% from 18.5% for the three months ended June 30, 2013. The increase in gross margin was attributable to higher net sales of products with lower material costs as a percentage of net sales and lower costs for gold. These increases in gross margin were partially offset by increases in manufacturing overhead costs and higher depreciation expense.

On June 30, 2014, we completed the sale of our wholly-owned subsidiary in Japan to J-Devices, our 60% equity-method joint venture in Japan. As a result of this transaction, we recognized a net gain of $9.2 million, which included the release of accumulated foreign currency translation adjustments associated with the sold entity. J-Devices also recognized a gain of $14.7 million on the transaction as the fair value of the net assets acquired exceeded the purchase price, which resulted in an increase in our equity in earnings of J-Devices by $8.8 million. The combined net gain we recognized for the three months ended June 30, 2014, was $18.0 million.

Our capital expenditures totaled $230.4 million for the six months ended June 30, 2014, compared to $222.7 million for the six months ended June 30, 2013. Our spending was primarily focused on investments in advanced packaging and test equipment supporting mobile communications products.

Net cash provided by operating activities was $235.3 million for the six months ended June 30, 2014, compared to $200.9 million for the six months ended June 30, 2013. The increase is primarily attributable to improved profitability.



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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
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Net sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Materials
37.2
%
 
41.7
%
 
37.0
%
 
42.1
%
Labor
14.0
%
 
14.0
%
 
14.3
%
 
14.4
%
Other manufacturing costs
29.2
%
 
25.8
%
 
29.6
%
 
25.8
%
Gross margin
19.6
%
 
18.5
%
 
19.1
%
 
17.7
%
Operating income
7.9
%
 
7.8
%
 
7.3
%
 
6.9
%
Income before taxes and equity in earnings of unconsolidated affiliate
5.6
%
 
2.5
%
 
4.3
%
 
2.5
%
Net income attributable to Amkor
6.5
%
 
4.0
%
 
4.8
%
 
3.0
%

Net Sales
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(In thousands, except percentages)
Net sales
$
767,459

 
$
746,059

 
$
21,400

 
2.9
%
 
$
1,463,503

 
$
1,433,588

 
$
29,915

 
2.1
%

The increase in net sales for the three and six months ended June 30, 2014, compared to the three and six months ended June 30, 2013, was primarily driven by incremental business from our newly acquired power discrete business in Malaysia, the ramp of a fingerprint sensor product to high volume and strong demand for wafer services and NAND memory supporting mobile communications. These increases were partially offset by lower net sales for other services related to mobile communications products.

Gross Margin
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(In thousands, except percentages)
Gross profit
$
150,714

 
$
138,379

 
$
12,335

 
$
279,534

 
$
253,332

 
$
26,202

Gross margin
19.6
%
 
18.5
%
 
1.1
%
 
19.1
%
 
17.7
%
 
1.4
%

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. Gross margin for the three and six months ended June 30, 2014, increased compared to the three and six months ended June 30, 2013. The increase in gross margin was attributable to higher net sales of products with lower material costs as a percentage of net sales and lower costs for gold, which is used in many of our wirebond products. These increases in gross margin were partially offset by increases in manufacturing overhead costs and higher depreciation expense.



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Selling, General and Administrative Expenses
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(In thousands, except percentages)
Selling, general and administrative
$
67,674

 
$
65,618

 
$
2,056

 
3.1
%
 
$
130,098

 
$
125,177

 
$
4,921

 
3.9
%

Selling, general and administrative expenses for the three and six months ended June 30, 2014, increased compared to the three and six months ended June 30, 2013. The increase was attributable to incremental costs from our newly acquired power discrete business in Malaysia and higher employee incentive compensation costs, partially offset by lower professional fees associated with acquisitions and investments.

Research and Development
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(In thousands, except percentages)
Research and development
$
22,079

 
$
14,308

 
$
7,771

 
54.3
%
 
$
43,124

 
$
28,614

 
$
14,510

 
50.7
%

Research and development activities are focused on developing new packaging and test services and improving the efficiency and capabilities of our existing production processes. Areas of focus include 2.5D and 3D packaging, including embedded die, silicon interposers and through silicon via technologies, fine pitch copper pillar packaging and wafer-level processing in support of advanced wafer nodes. The increase in research and development expenses for the three and six months ended June 30, 2014, compared to the three and six months ended June 30, 2013, was driven by expanded development activities related to 20 nanometer chipsets with strategic customers, increased depreciation expense from research and development investments and higher employee compensation costs.

Other Income and Expense
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(In thousands, except percentages)
Interest expense, including related party
$
23,779

 
$
26,931

 
$
(3,152
)
 
(11.7
)%
 
$
48,743

 
$
52,501

 
$
(3,758
)
 
(7.2
)%
Other (income) expense, net
(5,699
)
 
12,876

 
(18,575
)
 
>(100)%

 
(5,663
)
 
10,654

 
(16,317
)
 
>(100)%

Total other expense, net
$
18,080

 
$
39,807

 
$
(21,727
)
 
(54.6
)%
 
$
43,080

 
$
63,155

 
$
(20,075
)
 
(31.8
)%

Interest expense for the three and six months ended June 30, 2014, decreased primarily as a result of the June 2013 exchange of $193.7 million and the April 2014 conversion of $56.3 million of our 6.0% Convertible senior subordinated notes for shares of our common stock. Other (income) expense, net for the three and six months ended June 30, 2013, included a charge of $11.6 million related to the June 2013 cash payment we made to holders of the convertible notes. Other (income) expense, net for the three and six months ended June 30, 2014, included a $9.2 million net gain on the sale of a subsidiary to J-Devices. This gain was partially offset by foreign currency losses at various Asian subsidiaries due to unfavorable exchange rate movements.



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Income Tax Expense (Benefit)
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(In thousands, except percentages)
Income tax expense (benefit)
$
12,511

 
$
(10,238
)
 
$
22,749

 
>(100)%
 
$
17,440

 
$
(6,209
)
 
$
23,649

 
>(100)%

Generally, our effective tax rate is below the U.S. federal tax rate of 35% because we have experienced 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. Our income tax expense for the three and six months ended June 30, 2014, was attributable to income tax on profits earned in certain foreign jurisdictions and foreign withholding taxes. During the three and six months ended June 30, 2013, we recorded discrete income tax benefits of $8.6 million for the reversal of a deferred tax liability associated with the undistributed earnings of our investment in J-Devices and $6.6 million for the release of a valuation allowance on deferred tax assets at one of our foreign jurisdictions, which more than offset our income tax on profits earned in certain foreign jurisdictions and foreign withholding taxes.

During 2014 and 2013, our subsidiaries in Korea, Malaysia, the Philippines and Taiwan operated under tax holidays which will continue to expire in whole or in part at various dates through 2022. We expect our effective tax rate to increase as the tax holidays expire as income earned in these jurisdictions will then be subject to higher statutory income tax rates.

Equity in Earnings of J-Devices
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(In thousands, except percentages)
Equity in earnings of
J-Devices
$
20,036

 
$
1,445

 
$
18,591

 
>100%
 
25,797

 
1,500

 
24,297

 
>100%

Our equity in earnings of J-Devices for the three and six months ended June 30, 2014, increased compared to the three and six months ended June 30, 2013. This increase was partially due to $8.8 million of additional equity in earnings resulting from the gain on J-Devices' purchase of our subsidiary in Japan. In addition, the increase was attributable to $8.1 million from the settlement of a take or pay arrangement under a manufacturing services agreement. The remaining increase was due to higher operating income as a result of J-Devices' strategy of consolidating its activities into a reduced number of facilities in order to improve asset utilization and the company's acquisition of three packaging and test facilities in June 2013. The increase in our equity in earnings of J-Devices for the six months ended June 30, 2014 was also attributable to an increase in our ownership interest in J-Devices from 30% to 60% in April 2013.

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 facilities, 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, other uses of our cash including the final amount of payments due in our pending patent license litigation, any purchases of stock under our stock repurchase program, any acquisitions or investments in joint ventures and our ability to either repay debt out of operating cash flow or refinance it at or prior to maturity with the proceeds of debt or equity offerings. There can be no assurance that we will generate the necessary net income or operating cash flows, or be able to borrow sufficient funds, 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 other factors discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q.



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Our primary source of cash and the source of funds for our operations are cash flows from operations, current cash and cash equivalents, borrowings under available debt facilities and proceeds from any additional debt or equity financings. As of June 30, 2014, we had cash and cash equivalents of $525.9 million. Included in our cash balance as of June 30, 2014, is $295.9 million held offshore by our foreign subsidiaries. If we were to distribute this offshore cash to the U.S. as repatriated earnings of our foreign subsidiaries, we would incur foreign withholding taxes; however, we would not incur a significant amount of U.S. federal income taxes, due to the availability of tax loss carryovers and foreign tax credits.

As of June 30, 2014, we had availability of $149.7 million under our $150.0 million first lien senior secured revolving credit facility. Our foreign subsidiaries had $65.0 million available to be drawn under secured revolving credit facilities for general corporate purposes, general working capital purposes and capital expenditures and $220.0 million available to be borrowed under secured term loan credit facilities for general working capital purposes, capital expenditures and repayment of inter-company debt.

As of June 30, 2014 we had $1,536.1 million of debt. Our scheduled principal repayments on debt include $5.0 million due in 2014, $5.0 million due in 2015, $70.0 million due in 2016, $110.0 million due in 2017, $345.0 million due in 2018 and $995.0 million due thereafter. In April 2014, holders of our 6.0% Convertible senior subordinated notes due April 2014 converted the remaining outstanding principal amount of $56.4 million into 18.6 million shares of our common stock, and we repaid $60.0 million of a foreign secured term loan credit facility maturing in July 2017. We were in compliance with all of our debt covenants at June 30, 2014, and we expect to remain in compliance with these covenants for at least the next twelve months.

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, through privately negotiated transactions or otherwise and is 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. These restrictions are determined by calculations based upon cumulative net income. We have never paid a dividend to our stockholders, and we do not have any present plans for doing so. Amkor Technology, Inc. also guarantees certain debt of our subsidiaries.

We sponsor an accrued severance plan for our subsidiary in Korea, 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. If we retain our existing severance plan, the deduction for severance expenses will be limited to severance payments made to retired employees, which results in a larger current income tax liability in Korea. If we decide to adopt a new plan, we would be required to fund a significant portion of the existing liability, which would provide a current tax deduction upon funding. Our Korean severance liability was $152.3 million as of June 30, 2014.

We refer you to Note 17 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of the pending litigation relating to Amkor's license agreement with Tessera. We expect to use cash on hand, proceeds from borrowings under our existing lines of credit or other sources to make any payments that become due in connection with our pending patent license litigation.

We operate in a capital intensive industry. Servicing our current and future customers may require that we incur significant operating expenses and make significant investments in equipment and facilities, which are generally made in advance of the related revenues and without any firm customer commitments.

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. At June 30, 2014, approximately $91.6 million was available to repurchase common stock pursuant to the stock repurchase program. The purchase of stock may be made in the open market or through privately negotiated transactions. 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. We have not purchased any stock under the plan since 2012.


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Investments

We make significant capital expenditures in order to service the demand of our customers. During the six months ended June 30, 2014, our capital expenditures totaled $230.4 million. Our spending was primarily focused on investments in packaging and test equipment supporting mobile communications products.

We have recently increased our forecast of 2014 capital expenditures to approximately $675 million in response to increased market demand and to capture certain growth opportunities related to mobile communications. Ultimately, the amount of our 2014 capital expenditures will depend on several factors including, among others, the timing and implementation of any capital projects under review, the performance of our business, economic and market conditions, the cash needs and investment opportunities for the business, the need for additional capacity to service anticipated customer demand and the availability of cash flows from operations or financing.

During 2013, we purchased land in anticipation of building a new 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. Over the next several years, we expect to spend around $300 million to $350 million for the construction of the facility. We anticipate beginning construction of our new factory and research and development center in the second half of 2014. Construction work is planned to continue through 2015 and into 2016. There can be no assurance that the new facility will proceed at all, or that the actual scope, costs, timeline or benefits of the project will be consistent with our current expectations.

In October 2014, we expect to exercise our option to increase our 60% ownership in J-Devices to 66%, and in 2015, we expect to exercise our option to increase our ownership to 80%, subject to market and other conditions at the time of exercise. If we exercise our 80% option as planned, certain governance restrictions will lapse, and we will then begin consolidating J-Devices' results. 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.

In addition, we are subject to risks associated with our capital expenditures, including those discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q under the caption "Capital Expenditures - We Make Substantial Investments in Equipment and Facilities 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."

Contractual Obligations

The following table summarizes our contractual obligations at June 30, 2014, 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,
 
Total
 
2014 -
Remaining
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
(In thousands)
Total debt
$
1,530,000

 
$
5,000

 
$
5,000

 
$
70,000

 
$
110,000

 
$
345,000

 
$
995,000

Scheduled interest payment obligations (1)
604,136

 
47,752

 
95,066

 
93,647

 
89,423

 
75,445

 
202,803

Purchase obligations (2)
227,789

 
207,582

 
4,051

 
2,479

 
2,479

 
4,916

 
6,282

Operating lease obligations
61,286

 
8,976

 
15,386

 
6,409

 
6,322

 
5,955

 
18,238

Severance obligations (3)
152,278

 
5,897

 
10,680

 
9,843

 
9,079

 
8,386

 
108,393

Total contractual obligations
$
2,575,489

 
$
275,207

 
$
130,183

 
$
182,378

 
$
217,303

 
$
439,702

 
$
1,330,716

(1)
Scheduled interest payment obligations were calculated using stated coupon rates for fixed rate debt and interest rates applicable at June 30, 2014, for variable rate debt.
(2)
Represents purchase obligations for capital expenditures and long-term supply contracts outstanding at June 30, 2014.
(3)
Represents estimated benefit payments for our Korean subsidiary severance plan.


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In addition to the obligations identified in the table above, other non-current liabilities recorded in our Consolidated Balance Sheets at June 30, 2014, include:
$19.3 million of net foreign pension plan obligations and $1.8 million for employee-related liabilities, for which the timing and actual amount of our future cash flow is uncertain.
$6.4 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.
Off-Balance Sheet Arrangements

As of June 30, 2014, 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 17 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q 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, 2013. During the three months ended June 30, 2014, there have been no significant changes in our critical accounting policies as reported in our 2013 Annual Report on Form 10-K.

New Accounting Pronouncements

For information regarding recent accounting pronouncements, we refer you to Note 2 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Cash Flows

Net cash provided by (used in) operating, investing and financing activities for the six months ended June 30, 2014 and 2013, were as follows:
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
(In thousands)
Operating activities
$
235,253

 
$
200,850

Investing activities
(244,885
)
 
(258,142
)
Financing activities
(74,943
)
 
277,852


Operating activities:   Our cash flow provided by operating activities for the six months ended June 30, 2014, increased by $34.4 million compared to the six months ended June 30, 2013. The increase is primarily attributable to improved profitability.



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Investing activities:   Our cash flows used in investing activities for the six months ended June 30, 2014, decreased by $13.3 million compared to the six months ended June 30, 2013. The net cash used in investing activities for the six months ended June 30, 2014, reflected purchases of property, plant and equipment and cash transferred on the sale of our subsidiary to J-Devices, net of proceeds. The net cash used in investing activities for the six months ended June 30, 2013, reflected purchases of property, plant and equipment and a payment for an investment in J-Devices, offset by proceeds from the January 2013 sale of office space and land located in Chandler, Arizona.

Financing activities:   The net cash used in financing activities for the six months ended June 30, 2014, was driven by our repayment of borrowings at our subsidiary in Korea and the final payment for our newly acquired power discrete business in Malaysia. The net cash provided by financing activities for the six months ended June 30, 2013, primarily resulted from the issuance of senior notes and borrowings at our subsidiary in Korea.

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 purchases of property, plant and equipment. Free cash flow is not defined by U.S. GAAP. We believe free cash flow to be relevant and useful information to our investors because it provides them with additional information in assessing our liquidity, capital resources and financial operating results. Our management uses free cash flow in evaluating our liquidity, our ability to service debt and our ability to fund capital additions. However, free cash flow has certain limitations, including that it does not represent the residual cash flow available for discretionary expenditures since other, non-discretionary expenditures, such as mandatory debt service, are not deducted from the measure. The amount of mandatory versus discretionary expenditures can vary significantly between periods. This measure should be considered in addition to, and not as a substitute for, or superior to, other measures of liquidity or financial performance prepared in accordance with U.S. GAAP, such as net cash provided by operating activities. Furthermore, our definition of free cash flow may not be comparable to similarly titled measures reported by other companies. Our free cash flow was $4.9 million for the six months ended June 30, 2014, primarily due to improved profitability.
 
For the Six Months Ended
June 30,
 
2014
 
2013
 
(In thousands)
Net cash provided by operating activities
$
235,253

 
$
200,850

Purchases of property, plant and equipment
(230,392
)
 
(222,674
)
Free cash flow
$
4,861

 
$
(21,824
)

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 hedging instruments to manage currency and other risks.

Foreign Currency Risk
 

In order to reduce our exposure to foreign currency gains and losses, we generally use natural hedging techniques to reduce foreign currency rate risk. The U.S. dollar is our reporting currency and the functional currency for our foreign subsidiaries.

We have foreign currency exchange rate risk associated with the remeasurement of monetary assets and liabilities on our Consolidated Balance Sheets that are denominated in currencies other than the functional currency. We performed a sensitivity analysis of our foreign currency exposure as of June 30, 2014, 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, 2014, our income before taxes and equity in earnings of unconsolidated affiliate would have been approximately $18 million lower.


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In addition, we have foreign currency exchange rate exposure on our results of operations. For the six months ended June 30, 2014, approximately 93% of our net sales were denominated in U.S. dollars. Our remaining net sales were principally denominated in Korean won and Japanese yen for local country sales. For the six months ended June 30, 2014, approximately 60% of our cost of sales and operating expenses were denominated in U.S. dollars and were largely for raw materials and depreciation. The remaining portion of our cost of sales and operating expenses was principally denominated in the Asian currencies where our production facilities are located and largely consisted of 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, higher cost of sales and operating expenses, with cost of sales and operating expenses having the greater impact on our financial results. Similarly, our sales, cost of 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, 2014, 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, 2014, exchange rates of the U.S. dollar compared to all of these Asian-based currencies as of June 30, 2014, our operating income would have been approximately $46 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 J-Devices in Japan 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 balances will result in reduced sales, operating expenses, assets and liabilities. Similarly, our net 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 Sheets for the six months ended June 30, 2014 and 2013, was a net foreign translation gain of $0.8 million and a loss of $3.1 million, respectively, and was recognized as an adjustment to equity through other comprehensive loss.

Interest Rate Risk

We have interest rate risk with respect to our long-term debt. As of June 30, 2014, we had a total of $1,530.0 million of debt of which 83.0% was fixed rate debt and 17.0% was variable rate debt. The fixed rate debt consists of senior notes. Our variable rate debt principally relates to our foreign borrowings and revolving lines of credit and any amounts outstanding under our $150.0 million senior secured revolving credit facility under which no amounts were drawn as of June 30, 2014. As of