Document

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
Form 10-Q

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended September 30, 2017
or
¨
 
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)
2045 East Innovation Circle
Tempe, AZ 85284
(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ
The number of outstanding shares of the registrant’s Common Stock as of October 27, 2017 was 239,279,604.
 




QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2017

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 2017 including expenditures in support of advanced packaging and test equipment, (2) our ability to fund our operating activities and financial requirements 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 and the availability of tax incentives, (6) the creation or 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 integration of acquired operations and implementation of an enterprise resource planning system, (15) our efforts to enlarge our customer base in certain geographic areas and markets, (16) demand for advanced packages in mobile devices and our technology leadership and potential growth in this market, (17) our expected rate of return for pension plan assets, and (18) other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intend” or the negative of these terms or other comparable terminology. Because such statements include risks and uncertainties, actual results may differ materially from those anticipated in such forward-looking statements as a result of various factors, including those set forth in the following report as well as in Part II, Item 1A of this Quarterly Report on Form 10-Q.


-1-

Table of Contents

PART I. FINANCIAL INFORMATION


Item 1.        Financial Statements

AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share data)
Net sales
$
1,135,027

 
$
1,086,014

 
$
3,038,074

 
$
2,872,022

Cost of sales
918,389

 
872,214

 
2,506,295

 
2,403,732

Gross profit
216,638

 
213,800

 
531,779

 
468,290

Selling, general and administrative
75,567

 
72,363

 
220,045

 
216,894

Research and development
42,834

 
26,822

 
128,658

 
84,145

Gain on sale of real estate

 

 
(108,109
)
 

Total operating expenses
118,401

 
99,185

 
240,594

 
301,039

Operating income
98,237

 
114,615

 
291,185

 
167,251

Interest expense
20,321

 
21,488

 
63,733

 
58,496

Interest expense, related party
180

 
1,243

 
1,715

 
3,727

Other (income) expense, net
3,354

 
6,657

 
11,028

 
9,607

Total other expense, net
23,855

 
29,388

 
76,476

 
71,830

Income before taxes
74,382

 
85,227

 
214,709

 
95,421

Income tax expense
18,752

 
24,086

 
51,764

 
29,319

Net income
55,630

 
61,141

 
162,945

 
66,102

Net income attributable to non-controlling interests
(1,195
)
 
(1,052
)
 
(3,009
)
 
(2,175
)
Net income attributable to Amkor
$
54,435

 
$
60,089

 
$
159,936

 
$
63,927

 
 
 
 
 
 
 
 
Net income attributable to Amkor per common share:
 
 
 
 
 

 
 

Basic
$
0.23

 
$
0.25

 
$
0.67

 
$
0.27

Diluted
$
0.23

 
$
0.25

 
$
0.67

 
$
0.27

 
 
 
 
 
 
 
 
Shares used in computing per common share amounts:
 
 
 
 
 

 
 
Basic
239,068

 
237,353

 
238,873

 
237,157

Diluted
239,640

 
238,192

 
239,610

 
237,586


The accompanying notes are an integral part of these statements.


- 2-

Table of Contents

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


 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Net income
$
55,630

 
$
61,141

 
$
162,945

 
$
66,102

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Adjustments to unrealized components of defined benefit pension plans
15

 
24

 
263

 
71

Foreign currency translation
(969
)
 
5,883

 
11,784

 
52,161

Total other comprehensive income (loss)
(954
)
 
5,907

 
12,047

 
52,232

Comprehensive income
54,676

 
67,048

 
174,992

 
118,334

Comprehensive income attributable to non-controlling interests
(1,195
)
 
(1,052
)
 
(3,009
)
 
(2,175
)
Comprehensive income attributable to Amkor
$
53,481

 
$
65,996

 
$
171,983

 
$
116,159


The accompanying notes are an integral part of these statements.


- 3-

Table of Contents

AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)


 
September 30,
2017
 
December 31,
2016
 
(In thousands, except per share data)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
519,449

 
$
549,518

Restricted cash
2,000

 
2,000

Accounts receivable, net of allowances
691,700

 
563,107

Inventories
314,207

 
267,990

Other current assets
39,116

 
27,081

Total current assets
1,566,472

 
1,409,696

Property, plant and equipment, net
2,706,715

 
2,564,648

Goodwill
25,076

 
24,122

Restricted cash
4,224

 
3,977

Other assets
109,782

 
89,643

Total assets
$
4,412,269

 
$
4,092,086

LIABILITIES AND EQUITY
Current liabilities:
 

 
 

Short-term borrowings and current portion of long-term debt
$
117,970

 
$
35,192

Trade accounts payable
562,330

 
487,430

Capital expenditures payable
289,780

 
144,370

Accrued expenses
385,659

 
338,669

Total current liabilities
1,355,739

 
1,005,661

Long-term debt
1,243,697

 
1,364,638

Long-term debt, related party

 
75,000

Pension and severance obligations
179,112

 
166,701

Other non-current liabilities
50,871

 
76,682

Total liabilities
2,829,419

 
2,688,682

Commitments and contingencies (Note 15)


 


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; 285,019 and 284,479 shares issued; and 239,079 and 238,665 shares outstanding, in 2017 and 2016, respectively
285

 
284

Additional paid-in capital
1,901,381

 
1,895,089

Accumulated deficit
(143,621
)
 
(303,557
)
Accumulated other comprehensive income (loss)
18,309

 
6,262

Treasury stock, at cost, 45,940 and 45,814 shares, in 2017 and 2016, respectively
(215,917
)
 
(214,490
)
Total Amkor stockholders’ equity
1,560,437

 
1,383,588

Non-controlling interests in subsidiaries
22,413

 
19,816

Total equity
1,582,850

 
1,403,404

Total liabilities and equity
$
4,412,269

 
$
4,092,086


The accompanying notes are an integral part of these statements.


- 4-

Table of Contents

AMKOR TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
162,945

 
$
66,102

Depreciation and amortization
435,667

 
416,517

Gain on sale of real estate
(108,109
)
 

Other operating activities and non-cash items
(9,763
)
 
(4,382
)
Changes in assets and liabilities
(66,829
)
 
13,379

Net cash provided by operating activities
413,911

 
491,616

Cash flows from investing activities:
 

 
 

Payments for property, plant and equipment
(413,974
)
 
(481,670
)
Proceeds from sale of property, plant and equipment
133,320

 
13,687

Acquisition of business, net of cash acquired
(43,771
)
 

Other investing activities
(1,600
)
 
(143
)
Net cash used in investing activities
(326,025
)
 
(468,126
)
Cash flows from financing activities:
 

 
 

Proceeds from revolving credit facilities
75,000

 
115,000

Payments of revolving credit facilities

 
(155,000
)
Proceeds from short-term debt
50,333

 
27,594

Payments of short-term debt
(52,068
)
 
(36,211
)
Proceeds from issuance of long-term debt
223,976

 
45,000

Payments of long-term debt
(398,755
)
 
(12,955
)
Payments of long-term debt, related party
(17,837
)
 

Payment of deferred consideration for purchase of facility
(3,890
)
 

Payments of capital lease obligations
(4,123
)
 
(1,691
)
Other financing activities
425

 
1,585

Net cash used in financing activities
(126,939
)
 
(16,678
)
Effect of exchange rate fluctuations on cash, cash equivalents and restricted cash
9,231

 
21,885

Net increase (decrease) in cash, cash equivalents and restricted cash
(29,822
)
 
28,697

Cash, cash equivalents and restricted cash, beginning of period
555,495

 
527,348

Cash, cash equivalents and restricted cash, end of period
$
525,673

 
$
556,045

Non-cash investing and financing activities:
 
 
 
Property, plant and equipment included in capital expenditures payable
$
290,738

 
$
179,768

Equipment acquired through capital lease
$
929

 
$
4,908


The accompanying notes are an integral part of these statements.


- 5-

Table of Contents

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



1.    Interim Financial Statements

Basis of Presentation. The Consolidated Financial Statements and related disclosures as of September 30, 2017, and for the three and nine months ended September 30, 2017 and 2016, are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The December 31, 2016, 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, 2016, filed on Form 10-K with the SEC on February 24, 2017. The results of operations for the three and nine months ended September 30, 2017, 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 May 22, 2017, we completed the purchase of Nanium, S.A. ("Nanium"). Nanium's financial results have been included in our Consolidated Financial Statements from the date of acquisition (Note 3).

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

Goodwill. The balance of goodwill in our Consolidated Balance Sheets reflects adjustments for foreign currency translation.

2.    New Accounting Standards

Recently Adopted Standards

In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, Inventory - Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 requires inventory to be subsequently measured using the lower of cost and net realizable value, thereby eliminating the market value approach. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 and is applied prospectively. We adopted ASU 2015-11 at January 1, 2017. The adoption of ASU 2015-11 did not have a significant impact on our financial statements or disclosure.

In January 2017, the FASB issued ASU 2017-04, Intangible - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.  ASU 2017-04 simplifies the goodwill impairment test by eliminating the second step of the current two-step impairment test.  ASU 2017-04 is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019 and is applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  We adopted ASU 2017-04 at January 1, 2017. The adoption of ASU 2017-04 did not have a significant impact on our financial statements or disclosure.



- 6-

Table of Contents

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 permits the use of either full retrospective or modified retrospective methods of adoption. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date by one year to December 15, 2017, for interim and annual reporting periods beginning after that date. In March, April, May and December 2016, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively, which provide supplemental guidance and clarification to ASU 2014-09. In September 2017, the FASB issued ASU 2017-13, which provides supplemental guidance and clarification to ASU 2014-09. The new standard will result in a change to the timing of revenue recognition, whereby revenue will be recognized "over time" as services are performed rather than at a "point in time", generally upon shipment. We are continuing to evaluate the impact that this new standard will have on our financial statements and disclosure, and expect to use the full retrospective transition method.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases the lessee would recognize a straight-line lease expense. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018 using a modified retrospective approach. Early adoption is permitted. In September 2017, the FASB issued ASU 2017-13, which provides supplemental guidance and clarification to ASU 2016-02. We are currently evaluating the impact that this guidance may have on our financial statements and disclosure.

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires that the service cost component of net periodic pension costs be presented in the same line item as other compensation costs and all other components of net periodic pension costs to be presented in the statement of income as nonoperating expenses. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted and should be applied retrospectively. We are currently evaluating the impact that this guidance may have on our financial statements and disclosure.

3.    Acquisition

On May 22, 2017, we completed the purchase of 100% of the shares of Nanium, a provider of wafer-level fan-out semiconductor packaging solutions. 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 goodwill as a result of the acquisition. 




- 7-


Table of Contents

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


4.    Other Income and Expense

Other income and expense consists of the following:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Interest income
$
(843
)
 
$
(334
)
 
$
(2,309
)
 
$
(1,033
)
Foreign currency (gain) loss, net
(454
)
 
7,124

 
8,678

 
11,506

Loss on debt retirement
4,424

 

 
4,835

 

Other
227

 
(133
)
 
(176
)
 
(866
)
Other (income) expense, net
$
3,354

 
$
6,657

 
$
11,028

 
$
9,607


5.    Income Taxes

Our income tax expense of $51.8 million for the nine months ended September 30, 2017 primarily reflects 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 monitor on an ongoing basis our ability to utilize our deferred tax assets and whether there is a need for a related valuation allowance. In evaluating our ability to recover our deferred tax assets in the jurisdictions from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations. For most of our foreign deferred tax assets, we consider it more likely than not that we will have sufficient taxable income to allow us to realize these deferred tax assets.

We maintain a valuation allowance on all our U.S. net deferred tax assets, including our net operating loss carryforwards. Such valuation allowances are released as the related tax benefits are realized or when sufficient 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 increased from $23.1 million at December 31, 2016, to $25.2 million as of September 30, 2017. Most of our unrecognized tax benefits would reduce our effective tax rate, if recognized. Our unrecognized tax benefits are subject to change for effective settlement of examinations, changes in the recognition threshold of tax positions, the expiration of statues of limitations and other factors. Tax return examinations involve uncertainties, and there can be no assurance that the outcome of examinations will be favorable.

6.    Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income attributable to Amkor common stockholders by the weighted-average number of common shares outstanding during the period. The weighted-average number of common shares outstanding is reduced for treasury stock.

Diluted EPS is computed based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares include outstanding stock options and unvested restricted shares.



- 8-


Table of Contents

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


The following table summarizes the computation of basic and diluted EPS:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands,
except per share data)
Net income available to Amkor common stockholders
$
54,435

 
$
60,089

 
$
159,936

 
$
63,927

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding — basic
239,068

 
237,353

 
238,873

 
237,157

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options and restricted share awards
572

 
839

 
737

 
429

Weighted-average number of common shares outstanding — diluted
239,640

 
238,192

 
239,610

 
237,586

Net income attributable to Amkor per common share:
 

 
 

 
 

 
 

Basic
$
0.23

 
$
0.25

 
$
0.67

 
$
0.27

Diluted
0.23

 
0.25

 
0.67

 
0.27


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 anti-dilutive:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Stock options and restricted share awards
3,483

 
1,284

 
3,463

 
2,020


7.    Equity and Accumulated Other Comprehensive Income (Loss)

Changes in equity consist of the following:
 
Attributable
to Amkor
 
Attributable to
Non-controlling
Interests
 
Total
 
(In thousands)
Equity at December 31, 2016
$
1,383,588

 
$
19,816

 
$
1,403,404

Net income
159,936

 
3,009

 
162,945

Other comprehensive income (loss)
12,047

 

 
12,047

Issuance of stock through employee share-based compensation plans
2,421

 

 
2,421

Treasury stock acquired through surrender of shares for tax withholding
(1,427
)
 

 
(1,427
)
Share-based compensation
3,872

 

 
3,872

Subsidiary dividends paid to non-controlling interests

 
(412
)
 
(412
)
Equity at September 30, 2017
$
1,560,437

 
$
22,413

 
$
1,582,850



- 9-


Table of Contents

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


 
Attributable
to Amkor
 
Attributable to
Non-controlling
Interests
 
Total
 
(In thousands)
Equity at December 31, 2015
$
1,200,286

 
$
17,250

 
$
1,217,536

Net income
63,927

 
2,175

 
66,102

Other comprehensive income (loss)
52,232

 

 
52,232

Issuance of stock through employee share-based compensation plans
2,600

 

 
2,600

Treasury stock acquired through surrender of shares for tax withholding
(446
)
 

 
(446
)
Share-based compensation
2,449

 

 
2,449

Subsidiary dividends paid to non-controlling interests

 
(413
)
 
(413
)
Equity at September 30, 2016
$
1,321,048

 
$
19,012

 
$
1,340,060


Changes in accumulated other comprehensive income (loss), net of tax, consist of the following:
 
Defined Benefit Pension
 
Foreign Currency Translation
 
Total
 
(In thousands)
Accumulated other comprehensive income (loss) at December 31, 2016
$
1,138

 
$
5,124

 
$
6,262

Other comprehensive income (loss) before reclassifications

 
11,784

 
11,784

Amounts reclassified from accumulated other comprehensive income (loss)
263

 

 
263

Other comprehensive income (loss)
263

 
11,784

 
12,047

Accumulated other comprehensive income (loss) at September 30, 2017
$
1,401

 
$
16,908

 
$
18,309

 
Defined Benefit Pension
 
Foreign Currency Translation
 
Total
 
(In thousands)
Accumulated other comprehensive income (loss) at December 31, 2015
$
(1,425
)
 
$
(659
)
 
$
(2,084
)
Other comprehensive income (loss) before reclassifications

 
52,161

 
52,161

Amounts reclassified from accumulated other comprehensive income (loss)
71

 

 
71

Other comprehensive income (loss)
71

 
52,161

 
52,232

Accumulated other comprehensive income (loss) at September 30, 2016
$
(1,354
)
 
$
51,502

 
$
50,148


Amounts reclassified out of accumulated other comprehensive income (loss) are included as a component of net periodic pension cost (Note 13).



- 10-


Table of Contents

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


8.    Factoring of Accounts Receivable

In certain foreign locations, we use non-recourse factoring arrangements with third-party financial institutions to manage our working capital and cash flows. Under this program, we sell receivables to a financial institution for cash at a discount to the face amount. As part of the factoring arrangements, we perform certain collection and administrative functions for the receivables sold. For the three and nine months ended September 30, 2017, we sold accounts receivable totaling $135.1 million and $400.4 million, net of discounts and fees of $1.3 million and $2.9 million, respectively. For the three and nine months ended September 30, 2016, we sold accounts receivable totaling $161.6 million and $431.8 million, net of discounts and fees of $0.8 million and $1.7 million, respectively.

9.    Inventories

Inventories consist of the following:
 
September 30,
2017
 
December 31, 2016
 
(In thousands)
Raw materials and purchased components
$
204,613

 
$
173,035

Work-in-process
109,594

 
94,955

Total inventories
$
314,207

 
$
267,990


10.    Property, Plant and Equipment

Property, plant and equipment consist of the following:
 
September 30,
2017
 
December 31, 2016
 
(In thousands)
Land
$
224,932

 
$
240,719

Land use rights
26,845

 
26,845

Buildings and improvements
1,379,559

 
1,362,007

Machinery and equipment
4,875,904

 
4,483,523

Software and computer equipment
198,723

 
205,969

Furniture, fixtures and other equipment
15,654

 
21,313

Construction in progress
90,972

 
87,037

Total property, plant and equipment
6,812,589

 
6,427,413

Accumulated depreciation and amortization
(4,105,874
)
 
(3,862,765
)
Total property, plant and equipment, net
$
2,706,715

 
$
2,564,648




- 11-


Table of Contents

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


The following table summarizes our depreciation expense:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Depreciation expense
$
148,099

 
$
140,728

 
$
434,394

 
$
414,687


We had $42.4 million and $44.8 million of costs for our factory and research and development facility in Korea ("K5") in construction in progress as of September 30, 2017 and December 31, 2016, respectively.

As part of our plan to consolidate factory operations in Korea, we sold the land and buildings comprising our K1 factory in May 2017 for $142.4 million.  We received 10% of the sale price at signing in November 2016 and the balance at closing, at which time we recognized a pre-tax gain of $108.1 million.

11.    Accrued Expenses

Accrued expenses consist of the following:
 
September 30,
2017
 
December 31,
2016
 
(In thousands)
Payroll and benefits
$
144,922

 
$
117,636

Deferred revenue and customer advances
70,665

 
65,653

Income taxes payable
44,171

 
37,961

Accrued settlement costs
37,147

 
35,304

Accrued interest
23,495

 
13,046

Accrued severance plan obligations
16,220

 
14,053

Other accrued expenses
49,039

 
55,016

Total accrued expenses
$
385,659

 
$
338,669



- 12-

Table of Contents

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


12.    Debt

Following is a summary of short-term borrowings and long-term debt:
 
September 30,
2017
 
December 31,
2016
 
(In thousands)
Debt of Amkor Technology, Inc.:
 

 
 

Senior secured credit facilities:
 

 
 

$200 million revolving credit facility, LIBOR plus 1.25%-1.75%, due
December 2019 (1)
$

 
$

Senior notes:
 

 
 

6.625% Senior notes, due June 2021 (2)
200,000

 
400,000

6.375% Senior notes, due October 2022
524,971

 
524,971

Debt of subsidiaries:
 

 
 

Amkor Technology Korea, Inc.:
 
 
 
$75 million revolving credit facility, foreign currency funding-linked base rate plus 1.60%, due June 2018 (3)
75,000

 

Term loan, LIBOR plus 2.70%, due December 2019
55,000

 
55,000

Term loan, foreign currency funding-linked base rate plus 1.32%, due May 2020
150,000

 
150,000

Term loan, fixed rate at 3.70%, due May 2020 (4)
120,000

 

Term loan, fund floating rate plus 1.60%, due June 2020 (5)
86,000

 
86,000

Term loan, LIBOR plus 2.60%, due May 2018 (4)

 
120,000

Term loan, foreign currency funding-linked base rate plus 1.33%, due May 2020 (3)

 
80,000

J-Devices Corporation:
 
 
 
Short-term term loans, variable rate (6)
21,180

 
22,230

Term loans, fixed rate at 0.53%, due April 2018
10,124

 
19,460

Term loan, fixed rate at 0.86%, due June 2022 (7)
42,218

 

Term loan, fixed rate at 0.60%, due July 2022 (8)
8,888

 

Other:
 
 
 
Revolving credit facility, TAIFX plus a bank-determined spread, due
November 2020 (Taiwan) (9)
20,000

 
20,000

Term loan, LIBOR plus 1.80%, due December 2019 (China) (10)
49,500

 

 
1,362,881

 
1,477,661

Less: Unamortized premium and deferred debt costs, net
(1,214
)
 
(2,831
)
Less: Short-term borrowings and current portion of long-term debt
(117,970
)
 
(35,192
)
Long-term debt (including related party)
$
1,243,697

 
$
1,439,638


(1)
Our $200.0 million senior secured revolving credit facility has a letter of credit sub-limit facility of $25.0 million. Principal is payable at maturity. The availability for the revolving credit facility is based on the amount of our eligible accounts receivable. As of September 30, 2017, we had availability of $199.5 million under this facility, after reduction of $0.5 million of outstanding standby letters of credit.
(2)
In July 2017, we redeemed $200.0 million aggregate principal amount of the outstanding $400.0 million of our 6.625% Senior Notes due 2021 ("Notes"), which included $17.5 million held by a related party. In accordance with the terms of the indenture governing the Notes, the redemption price was 101.656% of the principal amount


- 13-


Table of Contents

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


of the Notes, plus accrued and unpaid interest. We recorded a $3.3 million loss on extinguishment related to the premium paid on the call of the Notes and a $1.1 million charge for the write-off of the associated unamortized debt issuance costs.  The redemption of the Notes was funded with cash on hand. In addition, during the nine months ended September 30, 2017, our related party sold all of its remaining Notes in the open market reducing the long-term debt, related party balance to zero.
(3)
In April 2017, we decreased the revolving credit facility from $100.0 million to $75.0 million. Principal is payable at maturity, which was extended in June 2017 for one year to June 2018. Interest is payable monthly in arrears, at a foreign currency funding-linked base rate plus 1.60% (3.75% as of September 30, 2017). In April 2017, we borrowed $75.0 million on this facility and repaid the outstanding balance of $80.0 million on our term loan due May 2020.
(4)
In May 2017, we entered into a $120.0 million term loan agreement to repay the $120.0 million term loan due in 2018. The new term loan agreement extended the maturity date to 2020 and changed the interest rate to a fixed rate. Principal is payable at maturity. Interest is payable quarterly in arrears at a fixed rate of 3.7%.
(5)
In May 2015, we entered into a term loan agreement pursuant to which we may borrow up to $150.0 million for capital expenditures. Principal is payable at maturity. Interest is payable quarterly in arrears, at a fund floating rate plus 1.60% (3.20% as of September 30, 2017). As of September 30, 2017, $64.0 million was available to be borrowed.
(6)
We entered into various short-term term loans which mature semiannually. Principal is payable in monthly installments. Interest is payable monthly, at TIBOR plus 0.15% to 0.38% (weighted-average of 0.24% as of September 30, 2017). As of September 30, 2017, $11.6 million was available to be drawn.
(7)
In June 2017, we entered into a ¥5.0 billion term loan agreement for capital expenditures. Principal is payable in quarterly installments of ¥250.0 million. Interest is payable quarterly in arrears, at a fixed rate of 0.86%. In June 2017, we borrowed ¥5.0 billion.
(8)
In July 2017, we entered into a ¥1.0 billion term loan agreement for capital expenditures. Principal is payable in quarterly installments of ¥50.0 million. Interest is payable in arrears, at a fixed rate of 0.60%. In July 2017, we borrowed ¥1.0 billion.
(9)
In November 2015, we entered into a $39.0 million revolving credit facility. Principal is payable at maturity. Interest is payable monthly, at TAIFX plus a bank determined spread (2.64% as of September 30, 2017). As of September 30, 2017, $19.0 million was available to be drawn.
(10)
In December 2016, we entered into a $50.0 million term loan agreement. Principal is payable in semiannual installments of $0.5 million, with the remaining balance due at maturity. Interest is payable quarterly, at LIBOR plus 1.80% (3.11% as of September 30, 2017). In January 2017, we borrowed $50.0 million.
Our foreign debt is generally collateralized by the land, buildings and equipment in the respective locations. The carrying value of the collateral exceeds the carrying amount of the debt.
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 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 debt covenants at September 30, 2017.



- 14-


Table of Contents

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


13.    Pension Plans

Foreign Defined Benefit Pension Plans

Our subsidiaries in Japan, Korea, Malaysia, the Philippines and Taiwan sponsor defined benefit pension plans. Charges to expense are based upon actuarial analyses. The components of net periodic pension cost for these defined benefit pension plans are as follows:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Service cost
$
8,445

 
$
9,024

 
$
25,215

 
$
25,684

Interest cost
1,009

 
925

 
3,029

 
2,753

Expected return on plan assets
(1,124
)
 
(961
)
 
(3,385
)
 
(2,864
)
Amortization of prior service cost

 
9

 
31

 
26

Recognized actuarial loss
18

 
24

 
62

 
71

Net periodic pension cost
$
8,348

 
$
9,021

 
$
24,952

 
$
25,670


Defined Contribution Pension Plans

We sponsor defined contribution pension plans in Korea, Malaysia, Taiwan and the U.S. The following table summarizes our defined contribution expense:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Defined contribution expense
$
2,230

 
$
1,939

 
$
8,009

 
$
7,106


14.    Fair Value Measurements

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

The fair values of cash, accounts receivable, trade accounts payable, capital expenditures payable, and certain other current assets and accrued expenses approximate carrying values because of their short-term nature. The carrying value of certain other non-current assets and liabilities approximates fair value. Our assets and liabilities recorded at fair value on a recurring basis include cash equivalent money market funds and restricted cash money market funds. We also review goodwill for impairment annually during the fourth quarter of each year. 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.



- 15-


Table of Contents

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


Recurring fair value measurements consist of the following:
 
September 30,
2017
 
December 31,
2016
 
(In thousands)
Cash equivalent money market funds (Level 1)
$
56,335

 
$
39,548

Restricted cash money market funds (Level 1)
2,000

 
2,000


We also measure certain assets and liabilities, including property, plant and equipment and goodwill, at fair value on a nonrecurring basis.

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:
 
September 30, 2017
 
December 31, 2016
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
(In thousands)
Senior notes (Level 1)
$
745,922

 
$
723,757

 
$
954,765

 
$
922,140

Revolving credit facilities and term loans (Level 2)
638,677

 
637,910

 
551,793

 
552,690

Total debt
$
1,384,599

 
$
1,361,667

 
$
1,506,558

 
$
1,474,830


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

15.    Commitments and Contingencies

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. Although the outcome of these matters is uncertain, 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. 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 we believe they are material and there is at least a reasonable possibility that a loss has been incurred. Attorney fees related to legal matters are expensed as incurred.


- 16-


Table of Contents


Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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. To achieve these goals, we are focused on generating increased value from our investments in 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 our corporate average. This is particularly true in the mobile device market, where growth has outpaced the semiconductor industry rate. Advanced packages are now the preferred choice in both the high-end and the mid-range segments of the smartphone market, which together account for a high portion of mobile phone semiconductor value. The demand for advanced packages is also being driven by second-wave mobile device customers, who are transitioning out of wirebond into wafer-level and flip-chip packages. We believe that our technology leadership and this technology transition create significant growth opportunities for us.

We typically look for opportunities in the advanced packaging and test area where we can generate reasonably quick returns on investments made for customers seeking leading edge technologies. We also focus on developing a second wave of customers to fill the capacity that becomes available when leading edge customers transition to newer packaging and test equipment and platforms. For example, we are currently working to expand our sales to Chinese and Taiwanese fabless chip companies that make up a significant portion of the mid-tier and entry-level segments of the mobile device market where much of the growth is occurring. In addition, we are seeking out new customers and deepening our engagement with existing customers. This includes an expanded emphasis on the automotive market where semiconductor content continues to grow and in the analog area for our mainstream wirebond technologies.

From time to time, we identify attractive opportunities to grow our customer base and expand the markets we serve. For example, in May 2017 we acquired Nanium which will strengthen our position in the market for wafer-level packaging. In 2009 we invested in J-Devices, a joint venture to provide semiconductor packaging and test services in Japan. We increased our investment in J-Devices to 60% in 2013 and to 100% in 2015 through the exercise of additional options. We believe that selective growth through joint ventures, acquisitions and other strategic investments can help diversify our revenue streams, improve our profits, broaden our portfolio of services and continue our technological leadership.

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

As a supplier in the semiconductor industry, our business is cyclical and impacted by broad economic factors, such as world-wide gross domestic product and consumer spending. Historically, 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 upturns and 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 appropriate level of liquidity is important to our business and depends on, among other things, the performance of our


- 17-

Table of Contents


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 $49.0 million or 4.5% to $1,135.0 million for the three months ended September 30, 2017 from $1,086.0 million for the three months ended September 30, 2016. The increase was attributable to increased demand in nearly all of our end markets.

Gross margin for the three months ended September 30, 2017 decreased to 19.1% from 19.7% for the three months ended September 30, 2016. The decline in gross margin was primarily attributable to an increase in employee compensation costs at our factories and factory consolidation activities in Japan.

On May 22, 2017, we completed the acquisition of Nanium, a provider of wafer-level fan-out semiconductor packaging solutions. Nanium's financial results have been included in our Consolidated Financial Statements from the date of acquisition.

In May 2017, we sold the land and buildings comprising our K1 factory for $142.4 million which resulted in a pre-tax gain of $108.1 million.

Our capital expenditures are primarily for investments in advanced packaging and test equipment and totaled $414.0 million for the nine months ended September 30, 2017, compared to $481.7 million for the nine months ended September 30, 2016. Our capital expenditures in the first nine months of 2016 included $161.0 million for construction of our K5 facility in Korea.

Net cash provided by operating activities was $413.9 million for the nine months ended September 30, 2017, compared to $491.6 million for the nine months ended September 30, 2016. This decrease was primarily due to changes in working capital, partially offset by higher sales and gross profit.


Results of Operations

The following table sets forth certain operating data as a percentage of net sales for the periods indicated:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Materials
37.1
%
 
37.2
%
 
36.0
%
 
37.5
%
Labor
15.2
%
 
14.6
%
 
16.0
%
 
15.5
%
Other manufacturing costs
28.6
%
 
28.5
%
 
30.5
%
 
30.7
%
Gross margin
19.1
%
 
19.7
%
 
17.5
%
 
16.3
%
Operating income
8.7
%
 
10.6
%
 
9.6
%
 
5.8
%
Net income attributable to Amkor
4.8
%
 
5.5
%
 
5.3
%
 
2.2
%



- 18-

Table of Contents


Net Sales
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(In thousands, except percentages)
Net sales
$
1,135,027

 
$
1,086,014

 
$
49,013

 
4.5
%
 
$
3,038,074

 
$
2,872,022

 
$
166,052

 
5.8
%

The increase in net sales for the three and nine months ended September 30, 2017, compared to the three and nine months ended September 30, 2016, was primarily attributable to increased demand in nearly all of our end markets. The increase in demand was partially offset by movements in foreign currency exchange rates which unfavorably impacted net sales.

Gross Margin
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(In thousands, except percentages)
Gross profit
$
216,638

 
$
213,800

 
$
2,838

 
$
531,779

 
$
468,290

 
$
63,489

Gross margin
19.1
%
 
19.7
%
 
(0.6
)%
 
17.5
%
 
16.3
%
 
1.2
%

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, there tends to be a direct relationship between our revenue levels and gross margin where relatively modest increases or decreases can have a significant effect.

Gross margin decreased for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily due to increased employee compensation costs and factory consolidation activities in Japan. Gross margin increased for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to higher net sales, product mix and related operating leverage on our fixed costs, partially offset by costs associated with factory consolidation activities in Japan.

Selling, General and Administrative
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(In thousands, except percentages)
Selling, general and administrative
$
75,567

 
$
72,363

 
$
3,204

 
4.4
%
 
$
220,045

 
$
216,894

 
$
3,151

 
1.5
%

Selling, general and administrative expenses for the three and nine months ended September 30, 2017 increased compared to the three and nine months ended September 30, 2016 primarily due to an increase in employee compensation costs. The increase for the nine months ended September 30, 2017 was partially offset by net proceeds received from a one-time legal settlement in April 2017.

Research and Development
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(In thousands, except percentages)
Research and development
$
42,834

 
$
26,822

 
$
16,012

 
59.7
%
 
$
128,658

 
$
84,145

 
$
44,513

 
52.9
%



- 19-

Table of Contents


Research and development activities are focused on developing new packaging and test services and improving the efficiency and capabilities of our existing production processes. The costs related to our technology and product development projects are included in research and development expense until the project moves into production. Once production begins, the costs related to production become part of the cost of sales, including ongoing depreciation for the equipment previously held for research and development activities. Research and development expenses for the three and nine months ended September 30, 2017 increased compared to the three and nine months ended September 30, 2016, primarily due to development and other costs associated with our new K5 factory and research and development facility in Korea. The increase was partially offset by reductions in costs for projects that moved into production.

Other Income and Expense
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(In thousands, except percentages)
Interest expense, including related party
$
20,501

 
$
22,731

 
$
(2,230
)
 
(9.8
)%
 
$
65,448

 
$
62,223

 
$
3,225

 
5.2
 %
Foreign currency (gain) loss, net
(454
)
 
7,124

 
(7,578
)
 
>(100)%

 
8,678

 
11,506

 
(2,828
)
 
(24.6
)%
Other (income) expense, net
3,808

 
(467
)
 
4,275

 
>(100)%

 
2,350

 
(1,899
)
 
4,249

 
>(100)%

Total other expense, net
$
23,855

 
$
29,388

 
$
(5,533
)
 
(18.8
)%
 
$
76,476

 
$
71,830

 
$
4,646

 
6.5
 %

Interest expense decreased for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily due to the redemption of our 6.625% Senior Notes due 2021 in July 2017. The early repayment of the Notes resulted in a loss on debt retirement of $4.4 million included in other (income) expense, net for the three and nine months ended September 30, 2017. Interest expense increased for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. During the first quarter of 2016, we capitalized $4.4 million of interest on our outstanding debt in connection with the construction of K5. The capitalization of interest resulted in lower interest expense in the nine months ended September 30, 2016.

We recorded a net foreign currency gain for the three months ended September 30, 2017 and a loss for the nine months ended September 30, 2017 as compared with a foreign currency loss, net in the prior year periods. These changes year over year were due to foreign currency exchange rate movements and the associated impact on our net monetary exposure at our foreign subsidiaries.

Income Tax Expense
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(In thousands)
Income tax expense
$
18,752

 
$
24,086

 
$
(5,334
)
 
$
51,764

 
$
29,319

 
$
22,445


Generally, our annual effective tax rate is below the U.S. federal tax rate of 35% because most of our income is taxed in foreign jurisdictions in the Asia Pacific region, where we benefit from tax holidays or tax rates lower than the U.S. statutory rate. Our income tax expense includes foreign withholding taxes and minimum taxes. The increase in our income tax expense for the nine months ended September 30, 2017 is primarily attributable to an increase in profit before tax which includes the pre-tax gain on the sale of the land and buildings comprising our K1 factory in May 2017. We refer you to Note 10 of our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

Our income tax expense reflects the applicable tax rates in effect in the various countries in which our income is earned and is subject to volatility depending on the relative mix of earnings in each location. During the nine months ended September 30, 2017 and 2016, our subsidiaries in Korea, Malaysia, the Philippines and Taiwan operated under tax holidays


- 20-

Table of Contents


which will continue to expire in whole or in part at various dates through 2025. We expect our effective tax rate to increase as the tax holidays expire because income earned in these jurisdictions will become subject to higher statutory income tax rates.

Liquidity and Capital Resources

We assess our liquidity based on our current expectations regarding sales, operating expenses, capital spending, debt service requirements and other funding needs. Based on this assessment, we believe that our cash flow from operating activities, together with existing cash and cash equivalents and availability under our credit facilities, will be sufficient to fund our working capital, capital expenditure, debt service and other financial requirements for at least the next twelve months. Our liquidity is 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 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.

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 credit facilities and proceeds from any additional debt or equity financings. As of September 30, 2017, we had cash and cash equivalents of $519.4 million. Included in our cash balance as of September 30, 2017, is $423.6 million held offshore by our foreign subsidiaries. We have the ability to access cash held offshore by our foreign subsidiaries primarily through the repayment of intercompany debt obligations. Consequently, we would not expect to incur a significant amount of income tax if we were to remit cash currently held offshore to the U.S. through these facilities. If we were to distribute this offshore cash to the U.S. as dividends from our foreign subsidiaries, in some cases 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.

The borrowing base under our $200.0 million first lien senior secured revolving credit facility is limited to the amount of our eligible accounts receivable. As of September 30, 2017, we had availability of $199.5 million under this facility, after reduction of $0.5 million of outstanding standby letters of credit. Our foreign subsidiaries had $19.0 million available to be drawn under secured revolving credit facilities and $75.6 million available to be borrowed under secured term loan credit facilities for working capital purposes and capital expenditures. In April 2017, we borrowed $75.0 million on our revolving credit facility in Korea and repaid the outstanding balance of $80.0 million on our term loan due May 2020.

As of September 30, 2017, we had $1,361.7 million of debt. Our scheduled principal repayments on debt include $24.8 million due over the remainder of 2017, $96.4 million due in 2018, $173.7 million due in 2019, $326.7 million due in 2020, $210.7 million due in 2021 and $530.7 million due thereafter. We were in compliance with all debt covenants at September 30, 2017, and we expect to remain in compliance with these covenants for at least the next twelve months.

In July 2017, we redeemed $200.0 million of the outstanding $400.0 million of our 6.625% Senior Notes due 2021. The note redemption was funded with cash on hand. We refer you to Note 12 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

In certain foreign locations, we use non-recourse factoring arrangements with third-party financial institutions to manage our working capital and cash flows. Under this program, we sell receivables to a financial institution for cash at a discount to the face amount. Available capacity under these programs is dependent on the level of our trade accounts receivable eligible to be sold, the financial institutions' willingness to purchase such receivables and the limits provided by the financial institutions. As such, these factoring arrangements can be reduced or eliminated at any time due to market conditions and changes in the credit worthiness of customers. For the nine months ended September 30, 2017 and 2016, we sold accounts receivable totaling $400.4 million and $431.8 million, net of discounts and fees of $2.9 million and $1.7 million, respectively. At September 30, 2017 and December 31, 2016, there were outstanding receivables of $170.9 million and $184.6 million, respectively, which had been sold to financial institutions under these arrangements.
 


- 21-

Table of Contents


In order to reduce our debt 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 in part 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. From time to time, Amkor Technology, Inc. also guarantees certain debt of our subsidiaries.

Our subsidiary in Korea maintains an unfunded severance plan that covers certain employees that were employed prior to August 1, 2015. As of September 30, 2017, the severance liability was $142.4 million. Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date. For service periods subsequent to August 1, 2015, employees participate in either a defined benefit pension plan or a defined contribution pension plan.

Under the terms of a January 2015 patent license litigation settlement, Amkor agreed to pay a total of $155.0 million in 16 equal quarterly recurring payments commencing in the first quarter of 2015 and continuing through the fourth quarter of 2018. As of September 30, 2017, we owe $48.4 million under the settlement.

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 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 September 30, 2017, 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, the current market price of our stock, applicable legal requirements and other factors. We have not purchased any stock under the plan since 2012.

Investments

We make significant capital expenditures in order to service the demand of our customers, which are primarily focused on investments in advanced packaging and test equipment. We expect 2017 capital expenditures to be approximately $550 million. During the nine months ended September 30, 2017, our capital expenditures totaled $414.0 million. Ultimately, the amount of our 2017 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.

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."



- 22-

Table of Contents


Cash Flows

Net cash provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2017 and 2016, was as follows:
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
(In thousands)
Operating activities
$
413,911

 
$
491,616

Investing activities
(326,025
)
 
(468,126
)
Financing activities
(126,939
)
 
(16,678
)

Operating activities:   Our cash flows provided by operating activities for the nine months ended September 30, 2017, decreased by $77.7 million compared to the nine months ended September 30, 2016, primarily due to changes in working capital, partially offset by higher sales and gross profit.

Investing activities:   Our cash flows used in investing activities are principally for payments for property, plant and equipment, which decreased compared to the nine months ended September 30, 2016, primarily due to the completion of the initial phase of K5 construction in December 2016. The net cash used in investing activities for the nine months ended September 30, 2017, also included a payment for the acquisition of Nanium and receipt of the remaining proceeds for the sale of the K1 factory in Korea.

Financing activities:   The net cash used in financing activities for the nine months ended September 30, 2017, was primarily driven by the redemption of our Senior Notes due 2021, partially offset by the net borrowings in China and Japan. The net cash used in financing activities for the nine months ended September 30, 2016 was driven by net repayments in Japan, Korea and Taiwan.

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 payments for property, plant and equipment, plus proceeds from the sale of and insurance recovery for property, plant and equipment, if applicable. 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 expenditures. 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.
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
(In thousands)
Net cash provided by operating activities
$
413,911

 
$
491,616

Payments for property, plant and equipment
(413,974
)
 
(481,670
)
Proceeds from sale of property, plant and equipment
133,320

 
13,687

Free cash flow
$
133,257

 
$
23,633




- 23-

Table of Contents


Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2017, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
 
 
 
Payments Due for Year Ending December 31,
 
Total
 
2017 -
Remaining
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
(In thousands)
Total debt
$
1,362,881

 
$
24,764

 
$
96,371

 
$
173,666

 
$
326,666

 
$
210,666

 
$
530,748

Scheduled interest payment obligations (1)
282,873

 
28,888

 
65,803

 
62,996

 
51,503

 
40,197

 
33,486

Purchase obligations (2)
137,056

 
99,170

 
26,376

 
2,194

 
1,818

 
1,549

 
5,949

Operating lease obligations
114,714

 
7,466

 
25,498

 
20,901

 
13,195

 
10,329

 
37,325

Severance obligations (3)
142,377

 
4,055

 
14,530

 
13,030

 
11,706

 
10,501

 
88,555

Settlement payments (4)
48,438

 
9,688

 
38,750

 

 

 

 

Total contractual obligations
$
2,088,339

 
$
174,031

 
$
267,328

 
$
272,787

 
$
404,888

 
$
273,242

 
$
696,063

(1)
Represents interest payment obligations calculated using stated coupon rates for fixed rate debt and interest rates applicable at September 30, 2017, for variable rate debt.
(2)
Represents off-balance sheet purchase obligations for capital expenditures and long-term supply contracts outstanding at September 30, 2017.
(3)
Represents estimated benefit payments for our Korean subsidiary severance plan.
(4)
Represents settlement payments for patent license litigation. At September 30, 2017, the total obligation is $48.4 million of which $37.1 million is a current liability, $9.7 million is a non-current liability and $1.6 million will be imputed into interest over time.
In addition to the obligations identified in the table above, other non-current liabilities recorded in our Consolidated Balance Sheet at September 30, 2017, include:
$48.7 million of net foreign pension plan obligations, for which the timing and actual amount of impact on our future cash flow is uncertain.
$25.9 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 September 30, 2017, 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.

Contingencies, Indemnifications and Guarantees

We refer you to Note 15 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.

Critical Accounting Policies

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016. During the three months ended September 30, 2017, there have been no significant changes in our critical accounting policies as reported in our 2016 Annual Report on Form 10-K.



- 24-

Table of Contents


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.

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 and functional currency and the functional currency for our subsidiaries, except for J-Devices, where the Japanese Yen is the functional currency.

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 September 30, 2017, to assess the potential impact of fluctuations in exchange rates for all foreign denominated assets and liabilities. Assuming that all foreign currencies appreciated 10% against the U.S. dollar, our income before taxes for the nine months ended September 30, 2017 would have been approximately $18 million lower, due to the remeasurement of monetary assets and liabilities.

In addition, we have foreign currency exchange rate exposure on our results of operations. For the nine months ended September 30, 2017, approximately 73% of our net sales were denominated in U.S. dollars. Our remaining net sales were principally denominated in Japanese Yen for local country sales. For the nine months ended September 30, 2017, approximately 50% 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. To the extent that the U.S. dollar weakens against these Asian-based currencies, similar foreign currency denominated income and expenses 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 September 30, 2017, to assess the potential impact of fluctuations in exchange rates for all foreign denominated sales and operating expenses. Assuming that all foreign currencies appreciated 10% against the U.S. dollar, our operating income for the nine months ended September 30, 2017 would have been approximately $60 million lower.

There are inherent limitations in the sensitivity analysis presented, primarily the assumption that foreign exchange rate movements across multiple jurisdictions would change instantaneously in an equal fashion. 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.

Our Consolidated Financial Statements are impacted by changes in exchange rates at entities where the local currency is the functional currency. The effect of foreign exchange rate translation for these entities was a gain of $11.8 million and $52.2 million for the nine months ended September 30, 2017 and 2016, respectively, and was recognized as an adjustment to equity through other comprehensive income (loss).



- 25-

Table of Contents


Interest Rate Risk

We have interest rate risk with respect to our debt. Our fixed and variable rate debt includes foreign borrowings and revolving credit facilities. Our fixed rate debt also consists of senior notes. Changes in interest rates have different impacts on the fixed and variable rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the fair value of the debt instrument but has no impact on interest expense or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows but does not generally impact the fair value of the instrument.

The table below presents the interest rates, maturities and fair value of our fixed and variable rate debt as of September 30, 2017:
 
2017 - Remaining
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
Fair Value
 
($ in thousands)
Debt
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed rate debt
$
6,035

 
$
17,420

 
$
10,666

 
$
130,666

 
$
210,666

 
$
530,748

 
$
906,201

 
$
926,604

Average interest rate
0.7
%
 
0.7
%
 
0.8
%
 
3.5
%
 
6.3
%
 
6.3
%
 
5.7
%
 
 
Variable rate debt
$
18,729

 
$
78,951

 
$
163,000

 
$
196,000

 
$

 
$

 
$
456,680

 
$
457,995

Average interest rate
0.4
%
 
3.6
%
 
3.7
%
 
3.4
%
 
%
 
%
 
3.4
%
 
 
Total debt
$
24,764

 
$
96,371

 
$
173,666

 
$
326,666

 
$
210,666

 
$
530,748

 
$
1,362,881

 
$
1,384,599


For information regarding the fair value of our long-term debt, see Note 14 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 4.        Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports to the Securities and Exchange Commission ("SEC") is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended. In designing and evaluating the disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017, and concluded those disclosure controls and procedures were effective as of that date.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As previously reported, we are implementing an enterprise resource planning system in a multi-year program in certain of our factories.


- 26-

Table of Contents


PART II. OTHER INFORMATION

Item 1.        Legal Proceedings

Information about legal proceedings is set forth in Note 15 and Note 17 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016, respectively.

Item 1A.     Risk Factors

The factors discussed below are cautionary statements that identify important factors and risks that could cause actual results to differ materially from those anticipated by the forward-looking statements contained in this report. For more information regarding the forward-looking statements contained in this report, see the Table of Contents of this Quarterly Report on Form 10-Q. You should carefully consider the risks and uncertainties described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing Amkor. Additional risks and uncertainties not presently known to us may also impair our business operations. The occurrence of any of the following risks could affect our business, liquidity, results of operations, financial condition or cash flows.

Dependence on the Highly Cyclical Semiconductor Industry - We Operate in Volatile Industries and Industry Downturns and Declines in Global Economic and Financial Conditions Could Harm Our Performance.

Our business is impacted by market conditions in the semiconductor industry, which is cyclical by nature and impacted by broad economic factors, such as world-wide gross domestic product and consumer spending. The semiconductor industry has experienced significant and sometimes sudden and prolonged downturns in the past. For example, the financial crisis and global recession in 2008 and 2009 resulted in a downturn in the semiconductor industry that adversely affected our business and results of operations during those periods. The economic recovery since that time has been slow and uneven. If the industry or markets we compete in experience slower, or even negative growth, our business and results of operations may be adversely affected.

Since our business is, and will continue to be, dependent on the requirements of semiconductor companies for outsourced packaging and test services, any downturn in the semiconductor industry or any other industry that uses a significant number of semiconductor devices, such as telecommunications, consumer electronics, or computing, could have a material adverse effect on our business and operating results. During downturns, we have experienced, among other things, reduced demand, excess capacity and reduced sales. For example, generally soft economic conditions and a lack of compelling new mobile products constrained overall demand during 2015. Macroeconomic uncertainties and a cautious business climate are also expected to constrain the revenue growth in our business. It is difficult to predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, which, in turn, makes it more challenging for us to forecast our operating results, make business decisions and identify risks that may affect our business, sources and uses of cash, financial condition and results of operations. Additionally, if industry conditions deteriorate, we could suffer significant losses, as we have in the past, which could materially impact our business, liquidity, results of operations, financial condition and cash flows.

Fluctuations in Operating Results and Cash Flows - Our Operating Results and Cash Flows Have Varied and May Vary Significantly as a Result of Factors That We Cannot Control.

Many factors, including the impact of adverse economic conditions, could have a material adverse effect on our net sales, gross profit, operating results and cash flows, or lead to significant variability of quarterly or annual operating results. Our profitability and ability to generate cash from operations is principally dependent upon demand for semiconductors, the utilization of our capacity, semiconductor package mix, the average selling price of our services, our ability to manage our capital expenditures and our ability to control our costs including labor, material, overhead and financing costs.

Our net sales, gross profit, operating income and cash flows have historically fluctuated significantly from quarter to quarter as a result of many of the following factors, over which we have little or no control and which we expect to continue to impact our business:


- 27-

Table of Contents


fluctuation in demand for semiconductors and conditions in the semiconductor industry generally, as well as by specific customers, such as inventory reductions by our customers impacting demand in key markets;
our ability to achieve our major growth objectives, including: transitioning second-wave customers to advanced packages; expanding our sales to customers in Greater China and, in particular, in the mid-level and entry-level tiers of the mobile device market; and increasing our share of the automotive market;
changes in our capacity and capacity utilization rates;
changes in average selling prices which can occur quickly due to the absence of long-term agreements on price;
changes in the mix of the semiconductor packaging and test services that we sell;
the development, transition and ramp to high volume manufacture of more advanced silicon nodes and evolving wafer, packaging and test technologies, may cause production delays, lower manufacturing yields and supply constraints for new wafers and other materials;
absence of backlog, the short-term nature of our customers’ commitments, double bookings by customers and deterioration in customer forecasts and the impact of these factors, including the possible delay, rescheduling and cancellation of large orders, or the timing and volume of orders relative to our production capacity;
changes in costs, quality, availability and delivery times of raw materials, components and equipment;
changes in labor costs to perform our services;
wage inflation and fluctuations in commodity prices, including gold, copper and other precious metals;
the timing of expenditures in anticipation of future orders;
changes in effective tax rates;
the availability and cost of financing;
intellectual property transactions and disputes;
high leverage and restrictive covenants;
warranty and product liability claims and the impact of quality excursions and customer disputes and returns;
costs associated with legal claims, indemnification obligations, judgments and settlements;
international events, such as the United Kingdom's vote to leave the European Union, political instability, civil disturbances or environmental or natural events, such as earthquakes like the recent ones in Japan, that impact our operations;
pandemic illnesses that may impact our labor force and our ability to travel;
costs of acquisitions and divestitures and difficulties integrating acquisitions;
our ability to attract and retain qualified personnel to support our global operations;
fluctuations in foreign exchange rates;
fluctuations in our manufacturing yields;
our ability to penetrate new end markets or expand our business in existing end markets;
dependence on key customers or concentration of customers in certain end markets, such as mobile communications and automotive and
restructuring charges, asset write-offs and impairments.



- 28-

Table of Contents


It is often difficult to predict the impact of these factors upon our results for a particular period. The downturn in the global economy and the semiconductor industry in 2009 increased the risks associated with the foregoing factors as customer forecasts became more volatile, and there was less visibility regarding future demand and significantly increased uncertainty regarding the economy, credit markets and consumer demand. The slow rate of economic growth in the U.S. and elsewhere and economic uncertainty worldwide could continue to cause volatility in customer forecasts and reduce our visibility regarding future demand in the semiconductor industry. These factors may have a material and adverse effect on our business, liquidity, results of operations, financial condition and cash flows or lead to significant variability of quarterly or annual operating results. In addition, these factors may adversely affect our credit ratings which could make it more difficult and expensive for us to raise capital and could adversely affect the price of our securities.

Absence of Backlog - The Lack of Contractually Committed Customer Demand May Adversely Affect Our Sales.

Our packaging and test business does not typically operate with any material backlog. Our quarterly net sales from packaging and test services are substantially dependent upon our customers’ demand in that quarter. None of our customers have committed to purchase any significant amount of packaging or test services or to provide us with binding forecasts of demand for packaging and test services for any future period, in any material amount. In addition, we sometimes experience double booking by customers and our customers often reduce, cancel or delay their purchases of packaging and test services for a variety of reasons including industry-wide, customer-specific and Amkor-specific reasons. This makes it difficult for us to forecast our capacity utilization and net sales in future periods. Since a large portion of our costs is fixed and our expense levels are based in part on our expectations of future sales, we may not be able to adjust costs in a timely manner to compensate for any sales shortfall. If we are unable to adjust costs in a timely manner, our margins, operating results, financial condition and cash flows would be adversely affected.

High Fixed Costs - Due to Our High Percentage of Fixed Costs, We Will Be Unable to Maintain Satisfactory Gross Margins if We Are Unable to Achieve Relatively High Capacity Utilization Rates.

Our operations are characterized by relatively high fixed costs. Our profitability depends in part not only on pricing levels for our packaging and test services, but also on the efficient utilization of our human resources and packaging and test equipment. Increases or decreases in our capacity utilization can significantly affect gross margins. In periods of low demand, we experience relatively low capacity utilization in our operations, which leads to reduced margins during that period. Transitions between different packaging technologies, such as the transition from gold wirebond to flip chip and copper wirebond packages, can also impact our capacity utilization if we do not efficiently redeploy our equipment for other packaging and test opportunities. For example, in 2011 the migration of some customer demand from wirebond to flip chip packages resulted in under-utilized wirebond assets which negatively impacted our capacity utilization and gross margin. We cannot assure you that we will be able to achieve consistently high capacity utilization, and if we fail to do so, our gross margins will be negatively impacted. If our gross margins decrease, our business, liquidity, results of operations, financial condition and cash flows could be materially adversely affected.

In addition, our fixed operating costs have increased in recent years in part as a result of our efforts to expand our capacity through significant capital expenditures. Forecasted customer demand for which we have made capital investments may not materialize, especially if industry conditions deteriorate. As a result, our sales may not adequately cover fixed costs resulting in reduced profit levels or causing significant losses, both of which may adversely impact our business, liquidity, results of operations, financial condition and cash flows.

Guidance - Our Failure to Meet Our Guidance or Analyst Projections Could Adversely Impact the Trading Prices of Our Securities.

We periodically provide guidance to investors with respect to certain financial information for future periods. Securities analysts also periodically publish their own projections with respect to our future operating results. As discussed above under “Fluctuations in Operating Results and Cash Flows - Our Operating Results and Cash Flows Have Varied and May Vary Significantly as a Result of Factors That We Cannot Control,” our operating results and cash flows vary significantly and are difficult to accurately predict. Volatility in customer forecasts and fluctuations in global consumer demand make it particularly difficult to predict future results. To the extent we fail to meet or exceed our own guidance or the analyst projections for any reason, the trading prices of our securities may be adversely impacted. Moreover, even if we do meet


- 29-

Table of Contents


or exceed that guidance or those projections, if analysts and investors do not react favorably, or if analysts were to discontinue providing coverage of our company, the trading prices of our securities may be adversely impacted.

Declining Average Selling Prices - Historically There Has Been Downward Pressure on the Prices of Our Packaging and Test Services.

Prices for packaging and test services have generally declined over time, and sometimes prices can change significantly in relatively short periods of time. We expect downward pressure on average selling prices for our packaging and test services to continue in the future, and this pressure may intensify during downturns in business. If we are unable to offset a decline in average selling prices by developing and marketing new packages with higher prices, reducing our purchasing costs, recovering more of our material cost increases from our customers and reducing our manufacturing costs, our business, liquidity, results of operations, financial condition and cash flows could be materially adversely affected.

Decisions by Our Integrated Device Manufacturer and Foundry Customers to Curtail Outsourcing May Adversely Affect Our Business.

Historically, we have been dependent on the trend in outsourcing of packaging and test services by IDM customers. Our IDM and foundry customers continually evaluate the need for outsourced services against their own in-house packaging and test services. As a result, at any time and for a variety of reasons, IDMs and foundries may decide to shift some or all of their outsourced packaging and test services to internally sourced capacity.

The reasons IDMs and foundries may shift their outsourced business to internal capacity include:
their desire to realize higher utilization of their existing packaging and test capacity, especially during downturns in the semiconductor industry;
their unwillingness to disclose proprietary technology;
their possession of more advanced packaging and test technologies and
the guaranteed availability of their own packaging and test capacity.
In addition, to the extent we limit capacity commitments for certain customers, these customers may increase their level of in-house packaging and test capabilities, which could make it more difficult for us to regain their business when we have available capacity.

In a downturn in the semiconductor industry, IDMs and foundries could respond by shifting some or all outsourced packaging and test services to internally serviced capacity on a short-term basis. Also, the IDMs and foundries could curtail or reverse the trend of outsourcing packaging and test services. If we experience a significant loss of IDM or foundry business, it could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows, especially during a prolonged industry downturn.

Our Substantial Indebtedness Could Adversely Affect Our Financial Condition and Prevent Us from Fulfilling Our Obligations.

We have a significant amount of indebtedness, and the terms of the agreements governing our indebtedness allow us and our subsidiaries to incur more debt, subject to certain limitations. As of September 30, 2017, our total debt balance was $1,361.7 million, of which $118.0 million was classified as a current liability and $562.2 million was collateralized indebtedness at our subsidiaries. We may consider investments in joint ventures, increased capital expenditures or acquisitions which may increase our indebtedness. If new debt is added to our consolidated debt level, the related risks that we face could intensify.

Our substantial indebtedness could:
make it more difficult for us to satisfy our obligations with respect to our indebtedness, including our obligations under our indentures to purchase notes tendered as a result of a change in control of Amkor;


- 30-

Table of Contents


increase our vulnerability to general adverse economic and industry conditions;
limit our ability to fund future working capital, capital expenditures, research and development and other business opportunities, including joint ventures and acquisitions;
require us to dedicate a substantial portion of our cash flow from operations to service payments of interest and principal on our debt, thereby reducing the availability of our cash flow to fund future working capital, capital expenditures, research and development expenditures and other general corporate requirements;
increase the volatility of the price of our common stock;
limit our flexibility to react to changes in our business and the industry in which we operate;
place us at a competitive disadvantage to any of our competitors that have less debt;
limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds;
limit our ability to refinance our existing indebtedness, particularly during periods of adverse credit market conditions when refinancing indebtedness may not be available under interest rates and other terms acceptable to us or at all and
increase our cost of borrowing.
We May Have Difficulty Funding Liquidity Needs.

We assess our liquidity based on our current expectations regarding sales, operating expenses, capital spending and debt service requirements and other funding needs. Our liquidity is affected by, among other things, the performance of our business, our capital expenditure and other investment levels and our ability to repay debt and other long-term obligations out of our operating cash flows or with the proceeds of debt or equity financings.

We operate in a capital-intensive industry. We had capital expenditures of $414.0 million during the nine months ended September 30, 2017. Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures and other investments, which are generally made in advance of the related revenues and without firm customer commitments. Ultimately the actual amount of our capital expenditures for 2017 and thereafter may vary materially and will depend on several factors. These factors include, among others, the amount, timing and implementation of our capital projects, including those under review and those not yet planned, the performance of our business, economic and market conditions, the cash needs and investment opportunities for the business, the need for additional capacity and facilities and the availability of cash flows from operations or financing.

In addition, we have a significant level of debt, which requires significant scheduled principal and interest payments in the coming years. The sources funding our operations, including making capital expenditures and other investments and servicing principal and interest obligations with respect to our debt, are cash flows from our operations, existing cash and cash equivalents, borrowings under available debt facilities, or proceeds from any additional debt or equity financing.

The health of the worldwide banking system and capital markets affects our liquidity. If financial institutions that have extended credit commitments to us are adversely affected by the conditions of the U.S., foreign or international banking system and capital markets, they may refuse or be unable to fund borrowings under their credit commitments to us. Volatility in the banking system and capital markets could also make it difficult or more expensive for us to maintain our existing credit facilities or refinance our debt.

The trading price of our common stock has been, and is likely to continue to be, highly volatile and could be subject to wide fluctuations. Such fluctuations could impact our decision or ability to utilize the equity markets as a potential source of our funding needs in the future.



- 31-

Table of Contents


In addition, there is a risk that we could fail to generate the necessary net income or operating cash flows to meet the funding needs of our business due to a variety of factors, including the other factors discussed in this "Risk Factors" section. If we fail to generate the necessary cash flows or we are unable to access the capital markets when needed, our liquidity may be adversely impacted.

Restrictive Covenants in the Indentures and Agreements Governing Our Current and Future Indebtedness.

The indentures and agreements governing our existing debt, and debt we may incur in the future, contain, or may contain, affirmative and negative covenants that materially limit our ability to take certain actions, including our ability to incur debt, pay dividends and repurchase stock, make certain investments and other payments, enter into certain mergers and consolidations, engage in sale leaseback transactions and encumber and dispose of assets. In addition, our future debt agreements may contain financial covenants and ratios.

The breach of any of these covenants by us or the failure by us to meet any of the financial ratios or conditions could result in a default under any or all of such indebtedness. If a default occurs under any such indebtedness, all of the outstanding obligations thereunder could become immediately due and payable, which could result in a default under our other outstanding debt and could lead to an acceleration of obligations related to other outstanding debt. The existence of such a default or event of default could also preclude us from borrowing funds under our revolving credit facilities. Our ability to comply with the provisions of the indentures, credit facilities and other agreements governing our outstanding debt and indebtedness we may incur in the future can be affected by events beyond our control and a default under any debt instrument, if not cured or waived, could have a material adverse effect on us.

We Have Significant Severance Plan Obligations Associated With Our Manufacturing Operations in Korea Which Could Reduce Our Cash Flow and Negatively Impact Our Financial Condition.

Our subsidiary in Korea maintains an unfunded severance plan, under which we have an accrued liability of $142.4 million as of September 30, 2017. The plan covers certain employees that were employed prior to August 1, 2015. In the event of a significant layoff or other reduction in our labor force in Korea, our subsidiary in Korea would be required to make lump-sum severance payments under the plan, which could have a material adverse effect on our liquidity, financial condition and cash flows.

If We Fail to Maintain an Effective System of Internal Controls, We May Not be Able to Accurately Report Financial Results or Prevent Fraud.

Effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. We must annually evaluate our internal procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires management and our independent registered public accounting firm to assess the effectiveness of internal control over financial reporting.

Internal controls may not prevent or detect misstatements because of their inherent limitations, including the possibility of human error, the circumvention or overriding of controls, fraud or corruption. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that the internal controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We assess our internal controls and systems on an ongoing basis, and from time-to-time, we update and make modifications to our global enterprise resource planning system. We have implemented several significant enterprise resource planning modules and expect to implement additional enterprise resource planning modules in the future. In addition, we have implemented new shop floor management systems in certain of our factories and integrated the acquired operations of Amkor Technology Malaysia Sdn. Bhd. into our overall internal control over financial reporting. In December 2015, we acquired the operations of J-Devices, and we integrated those operations into our overall internal control over financial reporting. Although we continue to monitor and assess our internal controls for these systems and operations, there is a risk that deficiencies may occur that could constitute significant deficiencies or, in the aggregate, a material weakness.



- 32-

Table of Contents


In addition, in May 2017, we completed our acquisition of Nanium, S.A. ("Nanium"). We are continuing to integrate the acquired operations into our overall internal control over financial reporting. Although we have extended our oversight and monitoring processes that support internal control over financial reporting to include the acquired operations, there is a risk that deficiencies may occur that could constitute significant deficiencies or in the aggregate a material weakness.

If we fail to remedy any deficiencies or maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties or shareholder litigation. In addition, failure to maintain adequate internal controls could result in financial statements that do not accurately reflect our operating results or financial condition.

We Face Warranty Claims, Product Return and Liability Risks, the Risk of Economic Damage Claims and the Risk of Negative Publicity if Our Packages Fail.

Our packages are incorporated into a number of end products, and our business is exposed to warranty claims, product return and liability risks, the risk of economic damage claims and the risk of negative publicity if our packages fail.

We receive warranty claims from our customers which occur from time to time in the ordinary course of our business. If we were to experience an unusually high incidence of warranty claims, we could incur significant costs and our business could be adversely affected. In addition, we are exposed to the product and economic liability risks and the risk of negative publicity affecting our customers. Our sales may decline if any of our customers are sued on a product liability claim. We also may suffer a decline in sales from the negative publicity associated with such a lawsuit or with adverse public perceptions in general regarding our customers' products. Further, if our packages are delivered with defects, we could incur additional development, repair or replacement costs or suffer other economic losses, and our credibility and the market's acceptance of our packages could be harmed.

Risks Associated with International Operations - We Depend on Our Factories and Operations in China, Japan, Korea, Malaysia, the Philippines, Portugal and Taiwan. Many of Our Customers' and Vendors' Operations Are Also Located Outside of the U.S.

We provide packaging and test services through our factories and other operations located in China, Japan, Korea, Malaysia, the Philippines, Portugal and Taiwan. Substantially all of our property, plant and equipment is located outside of the United States. Moreover, many of our customers and the vendors in our supply chain are located outside the U.S.  The following are some of the risks we face in doing business internationally:
changes in consumer demand resulting from deteriorating conditions in local economies;
regulations and policies imposed by U.S. or foreign governments, such as tariffs, customs, duties and other restrictive trade barriers, antitrust and competition, tax, currency and banking, privacy, labor, environmental, health and safety;
laws, rules, regulations and policies within China and other countries that may favor domestic companies over non-domestic companies, including customer- or government-supported efforts to promote the development and growth of local competitors;
the payment of dividends and other payments by non-U.S. subsidiaries may be subject to prohibitions, limitations or taxes in local jurisdictions;
fluctuations in currency exchange rates, particularly with the recent acquisition of J-Devices;
political and social conditions, such as civil unrest and terrorism;
disruptions or delays in shipments caused by customs brokers or government agencies;
difficulties in attracting and retaining qualified personnel and managing foreign operations, including foreign labor disruptions;
difficulty in enforcing contractual rights and protecting our intellectual property rights;
potentially adverse tax consequences resulting from tax laws in the U.S. and in foreign jurisdictions in which we operate and


- 33-

Table of Contents


local business and cultural factors that differ from our normal standards and practices, including business practices that we are prohibited from engaging in by the Foreign Corrupt Practices Act and other anti-corruption laws and regulations.
In particular, we have significant facilities and other investments in South Korea, and there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and long-range missile programs as well as its military actions in the region. Furthermore, there has been a history of conflict and a recent rise in tensions among other countries in the region.

We Face Risks in Connection with the Continuing Development and Implementation of Changes to, and Maintenance and Security of, Our Management Information Systems.

We depend on our management information systems for many aspects of our business. Some of our key software has been developed by our own programmers, and this software may not be easily integrated with other software and systems. Our systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading, replacing or maintaining software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors, malfeasance or catastrophic events. In addition, security breaches could result in unauthorized disclosure of confidential information. From time to time we make additions or changes to our management information systems. For example, we have implemented new shop floor systems in certain of our factories, and we are integrating J-Devices' management information systems with our existing systems and processes. In addition, in May 2017, we acquired a factory in Portugal, and have begun to integrate its management information systems into our existing systems and processes. We face risks in connection with current and future projects to install or integrate new management information systems or upgrade our existing systems. These risks include:
we may face delays in the design and implementation of the system;
the cost of the systems may exceed our plans and expectations and
disruptions resulting from the implementation or integration of the systems may impact our ability to process transactions and delay shipments to customers, impact our results of operations or financial condition or harm our control environment.
Our business could be materially and adversely affected if our management information systems are disrupted or if we are unable to successfully install new systems or improve, upgrade, integrate or expand upon our existing systems.

We Face Risks Trying to Attract and Retain Qualified Employees to Support Our Operations.

Our success depends to a significant extent upon the continued service of our key senior management, sales and technical personnel, any of whom may be difficult to replace. Competition for qualified employees is intense, and our business could be adversely affected by the loss of the services of any of our existing key personnel, including senior management, as a result of competition or for any other reason. We do not have employment agreements with our key employees, including senior management or other contracts that would prevent our key employees from working for our competitors in the event they cease working for us. We cannot assure you that we will be successful in our efforts to retain key employees or in hiring and properly training sufficient numbers of qualified personnel and in effectively managing our growth. Our inability to attract, retain, motivate and train qualified new personnel could have a material adverse effect on our business.

Difficulties Consolidating and Integrating Our Operations - We Face Challenges as We Integrate Diverse Operations.

We have experienced, and expect to continue to experience, change in the scope and complexity of our operations resulting primarily from existing and future facility consolidations, strategic acquisitions, joint ventures and other partnering arrangements. Some of the risks from these activities include those associated with the following:
increasing the scope, geographic diversity and complexity of our operations;
conforming an acquired company's standards, practices, systems and controls with our operations;
increasing complexity from combining recent acquisitions of an acquired business;


- 34-

Table of Contents


unexpected losses of key employees or customers of an acquired business; other difficulties in the assimilation of acquired operations, technologies or products and
diversion of management and other resources from other parts of our operations and adverse effects on existing business relationships with customers.
In connection with these activities, we may:
use a significant portion of our available cash;
issue equity securities, which may dilute the ownership of current stockholders;
incur substantial debt;
incur or assume known or unknown contingent liabilities and
incur large, immediate accounting write offs and face antitrust or other regulatory inquiries or actions.
For example, the businesses we have acquired had, at the time of acquisition, multiple systems for managing their own production, sales, inventory and other operations. Migrating these businesses to our systems typically is a slow, expensive process requiring us to divert significant resources from other parts of our operations. We may continue to face these challenges in the future. For example, in July 2013 and May 2017, we completed the purchase of Amkor Technology Malaysia Sdn. Bhd. and Nanium, respectively. Additionally, we increased our investment in J-Devices to 100% in 2015 through the exercise of additional options. We are now integrating these acquired entities with our existing operations. As a result of the risks discussed above, the anticipated benefits of these or other future acquisitions, consolidations and partnering arrangements may not be fully realized, if at all, and these activities could have a material adverse effect on our business, financial condition and results of operations.

Dependence on Materials and Equipment Suppliers - Our Business May Suffer If the Cost, Quality or Supply of Materials or Equipment Changes Adversely Including Any Disruption that May Occur in the Supply of Certain Materials due to Regulations and Customer Requirements.

We obtain from various vendors the materials and equipment required for the packaging and test services performed by our factories. We source most of our materials, including critical materials such as leadframes, laminate substrates and gold wire, from a limited group of suppliers. A disruption to the operations of one or more of our suppliers could have a negative impact on our business. For example, the severe earthquake and tsunami in Japan in 2011 had a significant adverse effect on the electronics industry supply chain by impacting the supply of specialty chemicals, substrates, silicon wafers, equipment and other supplies to the electronics industry. In addition, we purchase the majority of our materials on a purchase order basis. Our business may be harmed if we cannot obtain materials and other supplies from our vendors in a timely manner, in sufficient quantities, at acceptable quality or at competitive prices. Some of our customers are also dependent on a limited number of suppliers for certain materials and silicon wafers. Shortages or disruptions in our customers' supply channels could have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, the shortage in the supply of 28 nanometer wafers to some of our customers in 2012 delayed or otherwise adversely impacted the demand for certain of our advanced packaging and test services.

Rules adopted by the SEC implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act impose diligence and disclosure requirements regarding the use of certain minerals originating from the conflict zones of the Democratic Republic of Congo and adjoining countries in our products. Industry associations and many of our customers have implemented initiatives to improve transparency and accountability concerning the supply of these materials and, in some cases, requiring us to certify that the covered materials we use in our packages do not come from the conflict areas. We may incur additional costs associated with complying with these requirements and customer initiatives. These requirements and customer initiatives could affect the pricing, sourcing and availability of materials used in the manufacture of semiconductor devices, and we cannot assure you that we will be able to obtain conflict-free materials in sufficient quantities and at competitive prices or that we will be able to verify the origin of all of the materials we use in our manufacturing process. If we are unable to meet these requirements and customer initiatives, it could adversely affect our business as some customers may move their business to other suppliers. Our reputation could also be adversely affected.



- 35-

Table of Contents


We purchase new packaging and test equipment to maintain and expand our operations. From time to time, increased demand for new equipment may cause lead times to extend beyond those normally required by equipment vendors. For example, in the past, increased demand for equipment caused some equipment suppliers to only partially satisfy our equipment orders in the normal time frame or to increase prices during market upturns for the semiconductor industry. The unavailability of equipment or failures to deliver equipment on a timely basis could delay or impair our ability to meet customer orders. If we are unable to meet customer orders, we could lose potential and existing customers. Generally, we acquire our equipment on a purchase order basis and do not enter into long-term equipment agreements. As a result, we could experience adverse changes in pricing, currency risk and potential shortages in equipment in a strong market, which could have a material adverse effect on our results of operations.

We are a large buyer of gold and other commodity materials including substrates and copper. The prices of gold and other commodities used in our business fluctuate. Historically, we have been able to partially offset the effect of commodity price increases through price adjustments to some customers and changes in our product designs that reduce the material content and cost, such as the use of shorter, thinner, gold wire and migration to copper wire. However, we typically do not have long-term contracts that permit us to impose price adjustments, and market conditions may limit our ability to do so. Significant price increases may adversely impact our gross margin in future periods to the extent we are unable to pass along past or future commodity price increases to our customers.

Customer Concentration and Loss of Customers - The Loss of Certain Customers or Reduced Orders or Pricing from Existing Customers May Have a Significant Adverse Effect on Our Operations and Financial Results.

We have derived and expect to continue to derive a large portion of our revenues from a small group of customers during any particular period due in part to the concentration of market share in the semiconductor industry. Our ten largest customers together accounted for 67% of our net sales for the year ended December 31, 2016, and two customers each accounted for more than 10% of our consolidated net sales during the period. In addition, we have significant customer concentration within our end markets. The loss of a significant customer, a business combination among our customers, a reduction in orders or decrease in price from a significant customer or disruption in any of our significant strategic partnerships or other commercial arrangements may result in a decline in our sales and profitability and could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows.

The demand for our services from each customer is directly dependent upon that customer's financial health, level of business activity and purchasing decisions, the quality and price of our services, our cycle time and delivery performance, the customer's qualification of additional competitors on products we package or test and a number of other factors. Each of these factors could vary significantly from year to year resulting in the loss or reduction of customer orders. Our business is likely to remain subject to this variability in order levels, and we cannot assure you that our key customers or any other customers will continue to place orders with us in the future at the same levels as in past periods.

For example, if a key customer decides to purchase wafers from a semiconductor foundry that provides packaging and test services, our business could be reduced if the customer also engages that foundry for related packaging and test services. We cannot assure that customer decisions regarding the purchase of semiconductor wafers will not significantly and adversely impact customer demand for our packaging and test services.
In addition, from time to time we may acquire or build new facilities, such as K5, or migrate existing business among our facilities. In connection with these facility changes, our customers require us to re-qualify the new facilities even though we have already qualified to perform the services at our other facilities. We cannot assure that we will successfully re-qualify or that our customers will not qualify our competitors and move the business for such services.

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.

We make significant investments in equipment and facilities in order to service the demand of our customers. For example, we expect that our 2017 capital expenditures will be approximately $550 million. The amount of our capital expenditures depends on several factors, including the performance of our business, our assessment of future industry and customer demand, our capacity utilization levels and availability, our liquidity position and the availability of financing. Our ongoing


- 36-

Table of Contents


capital expenditure requirements may strain our cash and short-term asset balances, and, in periods when we are expanding our capital base, we expect that depreciation expense and factory operating expenses associated with our capital expenditures to increase production capacity will put downward pressure on our gross margin, at least over the near term. From time to time, we also make significant capital expenditures based on specific business opportunities with one or a few key customers, and the additional equipment purchased may not be readily usable to support other customers. If demand is insufficient to fill our capacity, or we are unable to efficiently redeploy such equipment, our capacity utilization and gross margin could be negatively impacted. Our capital expenditures or cost per square foot may increase as we transition to new or more advanced packaging and test technologies because, among other things, new equipment used for these technologies is generally more expensive and often our existing equipment cannot be redeployed in whole or part for these technologies.

Furthermore, if we cannot generate or raise additional funds to pay for capital expenditures, particularly in some of the advanced packaging and bumping areas, as well as research and development activities, our growth and future profitability may be adversely affected. Our ability to obtain external financing in the future is subject to a variety of uncertainties, including:
our future financial condition, results of operations and cash flows;
general market conditions for financing;
volatility in fixed income, credit and equity markets and
economic, political and other global conditions.
The lead time needed to order, install and put into service various capital investments is often significant, and, as a result, we often need to commit to capital expenditures in advance of our receipt of firm orders or advance deposits based on our view of anticipated future demand with only very limited visibility. Although we seek to limit our exposure in this regard, in the past we have from time to time expended significant capital for additional equipment or facilities for which the anticipated demand did not materialize for a variety of reasons, many of which were outside of our control. To the extent this occurs in the future, our business, liquidity, results of operations, financial condition and cash flows could be materially adversely affected.

In addition, during periods where customer demand exceeds our capacity, customers may transfer some or all of their business to other suppliers who are able to support their needs. To the extent this occurs, our business, liquidity, results of operations, financial condition and cash flows could be materially adversely affected.

In September 2014, we started the construction of K5. The land purchase agreement includes various construction, investment, hiring, regulatory and other compliance obligations. While we completed the initial phase of construction in December 2016, there can be no assurance regarding when K5 will be fully utilized, or that the actual scope, costs, timeline or benefits of the project will be consistent with our current expectations.

Impairment Charges - Any Impairment Charges Required Under U.S. GAAP May Have a Material Adverse Effect on Our Net Income.

Under U.S. GAAP, we review our long-lived assets including property, plant and equipment, intellectual property, goodwill and other intangibles for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. In addition, we review goodwill for impairment annually during the fourth quarter of each year. Factors we consider include significant under-performance relative to expected historical or projected future operating results, significant negative industry or economic trends and our market capitalization relative to net book value. We may be required in the future to record a significant charge to earnings in our financial statements during the period in which any impairment of our long-lived assets is determined. Such charges have had and could have a significant adverse impact on our results of operations and our operating flexibility under our debt covenants.

Litigation Incident to Our Business Could Adversely Affect Us.

We have been a party to various legal proceedings, including those described from time to time in our reports filed with the SEC, and may be a party to legal proceedings in the future. These proceedings could require significant management time and resources and, if an unfavorable ruling or outcome were to occur in these legal proceedings, there could be a material


- 37-

Table of Contents


adverse impact on our business, liquidity, results of operations, financial condition, cash flows and the trading price of our securities.

We Could Suffer Adverse Tax and Other Financial Consequences if There Are Changes in Tax Laws or Taxing Authorities Do Not Agree with Our Interpretation of Applicable Tax Laws, Including Whether We Continue to Qualify for Our Tax Holidays, or if We Are Required to Establish or Adjust Valuation Allowances on Deferred Tax Assets.

Our operations are subject to tax in multiple jurisdictions with complicated and varied tax regimes. Tax laws and income tax rates in these jurisdictions are subject to change due to economic and political conditions. Changes in U.S. or foreign tax laws could have a material adverse impact on our liquidity, results of operations, financial condition and cash flows. For example, in the U.S., there have been proposals to change U.S. tax laws that would significantly impact how U.S. corporations are taxed on foreign earnings. We earn a substantial portion of our income in foreign countries. In addition, changes in tax laws or regulations enacted in response to guidelines proposed by organizations such as the Organisation for Economic Co-operation and Development regarding transfer pricing and other international tax matters relating to multinational companies like Amkor could also adversely impact our future liability for income taxes in the jurisdictions where we operate. Although we cannot predict whether or in what form any of these proposals might be enacted into law, if adopted they could have a material adverse impact.

Our corporate structure and operations are based, in part, on interpretations of various U.S. and foreign tax laws, including withholding tax, compliance with tax holiday requirements, application of changes in tax law to our operations and other relevant laws of applicable taxing jurisdictions. From time to time, the taxing authorities of the relevant jurisdictions may conduct examinations of our income tax returns and other regulatory filings. We cannot assure you that the taxing authorities will agree with our interpretations, including whether we continue to qualify for our tax holidays. To the extent they do not agree, we may seek to enter into settlements with the taxing authorities which require significant payments or otherwise adversely affect our results of operations or financial condition. We may also appeal the taxing authorities' determinations to the appropriate governmental authorities, but we cannot be sure we will prevail. If we do not prevail, we may have to make significant payments or otherwise record charges (or reduce tax assets) that adversely affect our results of operations, financial condition and cash flows. Additionally, certain of our subsidiaries operate under tax holidays, which will expire in whole or in part at various dates in the future. As those tax holidays expire, our tax expense will increase as income from those jurisdictions becomes subject to higher statutory income tax rates, thereby reducing our liquidity and cash flow.

We monitor on an ongoing basis our ability to utilize our deferred tax assets and whether there is a need for a related valuation allowance. In evaluating our ability to recover our deferred tax assets, in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations. For most of our foreign deferred tax assets, we consider it more likely than not that we will have sufficient taxable income to allow us to realize these deferred tax assets. In the event taxable income falls short of current expectations, we may need to establish a valuation allowance against such deferred tax assets, which could materially affect our results of operations.

Intellectual Property - Our Business Will Suffer if We Are Not Able to Develop New Proprietary Technology, Protect Our Proprietary Technology and Operate Without Infringing the Proprietary Rights of Others.

The complexity and breadth of semiconductor packaging and test services are rapidly increasing. As a result, we expect that we will need to develop, acquire and implement new manufacturing processes and packaging technologies and tools in order to respond to competitive industry conditions and customer requirements. Technological advances also typically lead to rapid and significant price erosion and may make our existing packages less competitive or our existing inventories obsolete. If we cannot achieve advances in packaging design or obtain access to advanced packaging designs developed by others, our business could suffer.

The need to develop and maintain advanced packaging capabilities and equipment could require significant research and development, capital expenditures and acquisitions in future years. In addition, converting to new packaging designs or process methodologies could result in delays in producing new package types, which could adversely affect our ability to meet customer orders and adversely impact our business.



- 38-

Table of Contents


The process of seeking patent protection takes a long time and is expensive. There can be no assurance that patents will issue from pending or future applications or that, if patents are issued, the rights granted under the patents will provide us with meaningful protection or any commercial advantage. Any patents we do obtain will eventually expire, may be challenged, invalidated or circumvented and may not provide meaningful protection or other commercial advantage to us.
Some of our technologies are not covered by any patent or patent application. The confidentiality agreements on which we rely to protect these technologies may be breached and may not be adequate to protect our proprietary technologies. There can be no assurance that other countries in which we market our services will protect our intellectual property rights to the same extent as the U.S.

Our competitors may develop, patent or gain access to know-how and technology similar or superior to our own. In addition, many of our patents are subject to cross licenses, several of which are with our competitors. The semiconductor industry is characterized by frequent claims regarding the infringement of patent and other intellectual property rights. If any third party makes an enforceable infringement claim against us or our customers, we could be required to:
discontinue the use of certain processes or cease to provide the services at issue, which could curtail our business;
pay substantial damages;
develop non-infringing technologies, which may not be feasible or
acquire licenses to such technology, which may not be available on commercially reasonable terms or at all.
We may need to enforce our patents or other intellectual property rights, including our rights under patent and intellectual property licenses with third parties, or defend ourselves against claimed infringement of the rights of others through litigation, which could result in substantial cost and diversion of our resources. Furthermore, if we fail to obtain necessary licenses, our business could suffer, and we could be exposed to claims for damages and injunctions from third parties, as well as claims from our customers for indemnification. In the past, we have been involved in legal proceedings involving the acquisition and license of intellectual property rights, the enforcement of our existing intellectual property rights or the enforcement of the intellectual property rights of others. Unfavorable outcomes in any legal proceedings involving intellectual property could result in significant liabilities and could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows. The potential impact from the legal proceedings referred to in this Quarterly Report on Form 10-Q on our results of operations, financial condition and cash flows could change in the future.

Packaging and Test Processes Are Complex and Our Production Yields and Customer Relationships May Suffer from Defects in the Services We Provide or if We do Not Successfully Implement New Technologies.

Semiconductor packaging and test services are complex processes that require significant technological and process expertise. Defective packages primarily result from:
contaminants in the manufacturing environment;
human error;
equipment malfunction;
changing processes to address environmental requirements;
defective raw materials or
defective plating services.
Test is also complex and involves sophisticated equipment and software. Similar to many software programs, these software programs are complex and may contain programming errors or “bugs.” The test equipment is also subject to malfunction. In addition, the test process is subject to operator error.
These and other factors have, from time to time, contributed to lower production yields. They may also do so in the future, particularly as we adjust our capacity, change our processing steps or ramp new technologies. In addition, we must continue to develop and implement new packaging and test technologies, and expand our offering of packages to be competitive.


- 39-

Table of Contents


Our production yields on new packages, particularly those packages which are based on new technologies, typically are significantly lower than our production yields on our more established packages.

Our failure to maintain quality standards or acceptable production yields, if significant and prolonged, could result in loss of customers, increased costs of production, delays, substantial amounts of returned goods and claims by customers relating thereto. Any of these problems could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows.

In addition, in line with industry practice, new customers usually require us to pass a lengthy and rigorous qualification process that may take several months. If we fail to qualify packages with potential customers or existing customers, such failure could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Competition - We Compete Against Established Competitors in the Packaging and Test Business as Well as Internal Customer Capabilities and May Face Competition from New Competitors, Including Foundries.

The outsourced semiconductor packaging and test market is very competitive. We face substantial competition from established and emerging packaging and test service providers primarily located in Asia, including companies with significantly greater processing capacity, financial resources, local presence, research and development operations, marketing, technology and other capabilities. We also may face increased competition from domestic companies located in the People's Republic of China, or the PRC, where there are government-supported efforts to promote the development and growth of the local semiconductor industry. For example, STATS ChipPAC was acquired in 2015 by Jiangsu Electronics Technology Co., Ltd., a local PRC company. Our competitors may also have established relationships, or enter into new strategic relationships, with one or more of the large semiconductor companies that are our current or potential customers, or key suppliers to these customers. Consolidation among our competitors could also strengthen their competitive position. For example, in 2016, Advanced Semiconductor Engineering, Inc. and Siliconware Precision Industries Co., Ltd. announced their intention to become sister companies under a new joint holding company.

We also face competition from the internal capabilities and capacity of many of our current and potential IDM and foundry customers. In addition, we compete with contract foundries, such as Taiwan Semiconductor Manufacturing Company Limited and Samsung Electronics Co., Ltd., which offer full turnkey services from silicon wafer fabrication through packaging and final test. These semiconductor foundries, which are substantially larger and have greater financial resources than we do, have expanded their operations to include packaging and test services, and may continue to expand these capabilities in the future.

We cannot assure you that we will be able to compete successfully in the future against our existing or potential competitors or that our customers will not rely on internal sources for packaging and test services, or that our business, liquidity, results of operations, financial condition and cash flows will not be adversely affected by such increased competition. 

Environmental, Health & Safety Laws and Industry and Customer Initiatives - Future Environmental, Health & Safety Laws and Industry and Customer Initiatives Could Place Additional Burdens on Our Manufacturing Operations.

The semiconductor packaging process generates byproducts that are subject to extensive governmental regulations. For example, at our foreign facilities we produce liquid waste when semiconductor wafers are diced into chips with the aid of diamond saws, then cooled with running water. In addition, semiconductor packages have historically utilized metallic alloys containing lead (Pb) within the interconnect terminals typically referred to as leads, pins or balls. Environmental, health and safety laws and regulations in places we do business, impose various controls on the use, storage, handling, discharge and disposal of chemicals used in our production processes and on the factories we occupy and are increasingly imposing restrictions on the materials contained in semiconductor products. For example, the European Union's Restriction of Hazardous Substances in Electrical and Electronic Equipment directive and similar laws in other jurisdictions impose strict restrictions on the use of lead and other hazardous substances in electrical and electronic equipment. We may become lia