AMKR 12.31.12 10K

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2012
Commission File Number 000-29472
Amkor Technology, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
 
23-1722724
(I.R.S. Employer
Identification Number)
1900 South Price Road
Chandler, AZ 85286
(480) 821-5000
(Address of principal executive offices and zip code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
 
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
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, as amended, 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 such 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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Smaller reporting company o
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2012, based upon the closing price of the common stock as reported by the NASDAQ Global Select Market on that date, was approximately $356.5 million.
The number of shares outstanding of each of the issuer’s classes of common equity, as of January 25, 2013, was as follows: 153,210,566 shares of Common Stock, $0.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s Proxy Statement relating to its 2013 Annual Meeting of Stockholders, to be filed subsequently, are incorporated by reference into Part III of this Report where indicated.
 


Table of Contents

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All references in this Annual Report on Form 10-K to “Amkor,” “we,” “us,” “our” or the “company” are to Amkor Technology, Inc. and its subsidiaries. We refer to the Republic of Korea, which is also commonly known as South Korea, as “Korea”. All references to "J-Devices" and "Toshiba" are to J-Devices Corporation and Toshiba Corporation, respectively. Amounts preceded by ₩ are in Korean won, and amounts preceded by ¥ are in Japanese yen. Amkor®, Amkor Technology®, ChipArray®, FlipStack®, FusionQuad®, MicroLeadFrame® and TMV® are registered trademarks of Amkor Technology, Inc. All other trademarks appearing herein are held by their respective owners. Subsequent use of the above registered trademarks in this report may occur without the respective superscript symbol (®) in order to facilitate the readability of the report and are not a waiver of any rights that may be associated with the relevant trademarks.


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PART I

Item 1.
Business

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This business section contains forward-looking statements. 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. In evaluating these statements, you should specifically consider various factors, including the risks outlined in Part I, Item 1A of this Annual Report on Form 10-K. These factors may cause our actual results to differ materially from any forward-looking statement.

OVERVIEW

Amkor is one of the world’s leading providers of outsourced semiconductor packaging (sometimes referred to as assembly) and test services. Amkor pioneered the outsourcing of semiconductor packaging and test services through a predecessor corporation in 1968 and over the years we have built a leading position by:
Designing and developing new packaging and test technologies;
Offering a broad portfolio of packaging and test technologies and services;
Cultivating long-standing relationships with our customers, which include many of the world’s leading semiconductor companies, and collaborating with original equipment manufacturers (“OEMs”) and equipment and material suppliers;
Developing a cost competitive cost structure with disciplined capital investment and building expertise in high-volume manufacturing processes and
Having a diversified operational scope with research and development, engineering and production capabilities at various facilities throughout China, Japan, Korea, the Philippines, Taiwan and the United States (“U.S.”).
Packaging and test are integral steps in the process of manufacturing semiconductor devices. The semiconductor manufacturing process begins with the fabrication of individual transistors, or multiple transistors and other electronic elements combined into an integrated circuit (generally known as a “chip” or “die”), onto semiconductor material such as a silicon wafer. Each chip on the wafer is probe tested. The good chips are identified and the wafer is then separated into individual die. Each good die is then assembled into a package that typically encapsulates the die for protection and creates the electrical connections used to connect the package to a printed circuit board, module or other part of the electronic device. In some packages, chips are attached to a substrate or leadframe carrier through wirebonding or flip chip interconnects and then encased in a protective material. Or, for a wafer-level package, the electrical interconnections are created directly on the surface of the die (while the wafer is still intact) so that the chip may be attached directly to other parts of an electronic device without a substrate or leadframe. The packages are then tested using sophisticated equipment to ensure that each packaged chip meets its design and performance specifications. The test services we offer include probe testing and final testing.

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

Our customers include, among others: Altera Corporation; Analog Devices, Inc.; Broadcom Corporation; Intel Corporation; LSI Corporation; Qualcomm Incorporated; Sony Corporation; STMicroelectronics N.V.; Texas Instruments Incorporated and Toshiba Corporation. The outsourced semiconductor packaging and test market is very competitive. We also compete with the internal semiconductor packaging and test capabilities of many of our customers.



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AVAILABLE INFORMATION

Amkor files annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the “SEC”). You may read and copy any document we file at the SEC’s Public Reference Room, 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room. The SEC maintains a web site that contains annual, quarterly and current reports, proxy statements and other information that issuers (including Amkor) file electronically with the SEC. The SEC’s web site is http://www.sec.gov.

Amkor’s web site is http://www.amkor.com. Amkor makes available free of charge through its web site, our annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; Forms 3, 4 and 5 filed on behalf of directors and executive officers and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We also make available, free of charge, through our web site, our Corporate Governance Guidelines, the charters of the Audit Committee, Nominating and Governance Committee and Compensation Committee of our Board of Directors, our Code of Business Conduct, our Code of Ethics for Directors and other information and materials. The information on Amkor’s web site is not incorporated by reference into this report.

INDUSTRY BACKGROUND

Semiconductor devices are the essential building blocks used in most electronic products. As electronic and semiconductor devices have evolved, several important trends have emerged that have fueled the growth of the overall semiconductor industry, as well as the market for outsourced semiconductor packaging and test services. These trends include:
An increasing demand for mobile and internet-connected devices, including world-wide adoption of mobile “smart” phones and tablets that can access the web and provide multimedia capabilities. The demand for digital video content has driven a range of higher performance internet connected home and mobile consumer electronics products including the rapidly growing smartphone and tablet categories.
Increasing mobility and connectivity capabilities and growing digital content are driving demand for new broadband wired and wireless networking equipment.
The proliferation of semiconductor devices into well established end products such as automotive systems due to increased use of electronics for safety, navigation, fuel efficiency, emission reduction and entertainment systems.
An overall increase in the semiconductor content within electronic products in order to provide greater functionality and higher levels of 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. Historical trends indicate there has been a strong correlation between world-wide gross domestic product levels, consumer spending and semiconductor industry cycles.

Semiconductor companies outsource their packaging and test needs to contract service providers such as Amkor for the following reasons:

Contract service providers have developed expertise in advanced packaging and test technologies.

Semiconductor packaging and test technologies continue to become more sophisticated, complex and customized due to increasing demands for miniaturization, greater functionality and improved thermal and electrical performance. This trend has led many semiconductor companies and OEMs to view packaging and test as enabling technologies requiring sophisticated expertise and technological innovation. Many of these companies are also relying on contract service providers of packaging and test services as key sources for new package designs and advanced interconnect technologies, thereby enabling them to reduce their internal research and development costs.



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Contract service providers offer a cost effective solution in a highly cyclical, capital intensive industry.

The semiconductor industry is cyclical by nature and impacted by broad economic factors, such as changes in world-wide gross domestic product and consumer spending. Semiconductor packaging and test are complex processes requiring substantial investment in specialized equipment, factories and human resources. As a result of this cyclicality and the large investments required, manufacturing facilities must operate at consistently high levels of utilization to be cost effective. Shorter product life cycles, coupled with the need to update or replace packaging and test equipment to accommodate new package types, make it more difficult for integrated semiconductor companies to maintain cost effective utilization of their packaging and test assets throughout semiconductor industry cycles. Contract service providers of packaging and test services, on the other hand, can typically use their assets to support a broad range of customers, potentially generating more efficient use of their production assets and a more cost effective solution.

Contract service providers can facilitate a more efficient supply chain and help shorten time-to-market for new products.

We believe that semiconductor companies, together with their customers, are seeking to shorten the time-to-market for their new products, and that having an effective supply chain is a critical factor in facilitating timely and successful product introductions. Contract service providers of packaging and test services have the resources and expertise to timely develop their packaging and test capabilities and implement new packaging technology in volume. For this reason, semiconductor companies and OEMs are leveraging capabilities of contract service providers of packaging and test services to deliver their new products to market more quickly.

The availability of high quality packaging and test services from contract service providers allows semiconductor manufacturers to focus their resources on semiconductor design and wafer fabrication.

As semiconductor process technology migrates to larger wafers and smaller feature sizes, the cost of building a state-of-the-art wafer fabrication factory has risen significantly and can now be several billions of dollars. The high cost of investing in next generation silicon technology and equipment is causing many semiconductor companies to adopt or maintain a “fabless” or “fab-lite” strategy to reduce or eliminate their investment in wafer fabrication and associated packaging and test operations. As a result, these companies are increasing their reliance on outsourced providers of semiconductor manufacturing services, including packaging and test. “Fabless” semiconductor companies do not have factories and focus exclusively on the semiconductor design process and outsource virtually every step of the manufacturing process.

COMPETITIVE STRENGTHS AND STRATEGY

We believe we are well-positioned in the outsourced packaging and test services market. To build upon our industry position and to remain one of the preferred providers of semiconductor packaging and test services, we are pursuing the following strategies:

Leading Technology Innovator

We are a leader in developing advanced semiconductor packaging and test solutions. We have designed and developed several state-of-the-art package formats and technologies including our Package-on-Package (“PoP”) platform with Through Mold Via (“TMV”) technology, FusionQuad, flip chip ball grid array, multi-chip modules with a silicon interposer placed between the module chips and substrate, copper pillar bumping and fine pitch copper pillar flip chip packaging technologies. In addition, we believe that as semiconductor technology continues to achieve smaller device geometries with higher levels of speed and performance, packages will increasingly require flip chip and three dimensional or “3D” interconnect solutions that stack multiple chips in a single package. We have been investing in our technology leadership in electroplated wafer bumping, wafer-level processing and 3D packaging technologies. We have also been a leader in developing environmentally friendly integrated circuit packaging, which involves the elimination of lead and certain other materials.

In the area of 3D packaging, we have been a market and technology leader in both stacked die, such as stacked chip scale packages and FlipStack, and stacked package technologies such as PoP and TMV. The semiconductor industry is now in a period of 3D packaging development where Through Silicon Via (“TSV”) interconnect technology will be used to create 3D integrated circuits. We continue to invest in developing the key processes and package and test technologies required for our customers to deliver 3D solutions to market. We are a leader in wafer thinning, micro-bumping and TSV-based flip


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chip stacking technologies, and we are leveraging our technology development relationships with key customers in diverse applications to develop and deploy new 3D packaging and test solutions with high density TSV interconnections.

We provide a complete range of test engineering services from test program development to full product characterization for radio frequency mixed signal, logic and memory devices. We are a major provider of radio frequency test services and a leader in strip test, an innovative parallel test solution that offers customers lower cost, faster index time and improved yields.

We have approximately 400 employees engaged in research and development focusing on the design and development of new semiconductor packaging and test technologies.

Long-Standing Relationships and Collaboration with Prominent Semiconductor Companies

Our customers include most of the world’s largest semiconductor companies and over the last four decades, we have developed long-standing relationships with many of these companies. We believe that our production excellence has been a key factor in our success in attracting and retaining customers. We work with our customers and our suppliers to develop proprietary process technologies to enhance our existing capabilities, reduce time-to-market, increase quality and lower our costs.

We believe that our focus on research and product development will enable us to enter new markets early, capture market share and promote the adoption of our new package designs as industry standards. We collaborate with customers and leading OEMs to develop comprehensive packaging solutions that make it easier for next-generation semiconductors to be designed into next-generation end products. By collaborating with leading semiconductor companies and OEM electronic companies, we gain access to technology roadmaps for next generation semiconductor designs and obtain the opportunity to develop new packages that satisfy their future requirements.

Broad Offering of Semiconductor Package Design, Packaging and Test Services

Creating successful interconnect solutions for advanced semiconductor devices often poses unique thermal, electrical and mechanical design challenges, and we employ a large number of engineers to solve these challenges. We produce hundreds of package types which encompass more than 1,000 unique products, representing one of the broadest package offerings in the semiconductor industry. This wide variety of packaging offerings is necessary to meet the diverse needs of our customers for the optimal combination of performance, size and cost attributes. Our solutions enable our customers to focus on semiconductor design and wafer fabrication while utilizing Amkor as their turnkey design and manufacturing provider and, in many cases, their packaging technology innovator.

We also offer an extensive line of advanced probe and final test services for analog, digital, logic, mixed signal and radio frequency semiconductor devices. We believe that the breadth of our design, packaging and test services is important to customers seeking to limit the number of their suppliers.

Geographically Diversified Operational Base

We have a broad and geographically diversified operational footprint. Our operations comprise more than five million square feet of manufacturing space strategically located in five countries in many of the world’s important electronics manufacturing regions. We believe that our scale and scope allow us to provide cost effective solutions to our customers by:
Offering capacity to absorb large orders and accommodate quick turn-around times;
Obtaining favorable pricing on materials and equipment, where possible, by using our purchasing power and leading industry position;
Qualifying production of customer devices at multiple manufacturing sites to mitigate the risks of supply disruptions and
Providing capabilities and solutions for customer-specific requirements.


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Competitive Cost Structure and Disciplined Capital Investment

There has been a continuous push throughout the entire semiconductor supply chain for lower cost solutions, and a competitive cost structure and disciplined capital investment decisions are key factors for achieving profitability and generating cash flow. Some of our cost control efforts have included: (1) increasing strip densities to drive higher throughput; (2) migrating from capillary underfill to molded underfill; (3) developing thinner and shorter gold wire solutions; (4) migrating from gold wire to copper wire for certain wirebond packages; (5) reducing test cycle times and (6) increasing labor productivity.

We operate in a cyclical industry. During an industry downturn we seek to reduce our costs and drive greater factory and administrative efficiencies. Cost control efforts can include reducing labor costs by temporarily lowering compensation, reducing employee and contractor headcount, shortening work weeks and obtaining labor-related foreign government subsidies where available.

PACKAGING AND TEST SERVICES

The following table sets forth, for the periods indicated, the amount of packaging and test net sales and the percentage of such net sales:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
(In millions, except percentage of net sales)
Packaging services
$
2,439

 
88.4
%
 
$
2,493

 
89.8
%
 
$
2,650

 
90.2
%
Test services
321

 
11.6
%
 
283

 
10.2
%
 
289

 
9.8
%
Total net sales
$
2,760

 
100.0
%
 
$
2,776

 
100.0
%
 
$
2,939

 
100.0
%

Packaging Services

We offer a broad range of package formats and services to our customers. The differentiating characteristics of package formats can include: (1) size and thickness, (2) number of electrical connections, (3) thermal, mechanical and electrical characteristics, (4) number of chips incorporated, (5) types of interconnect technologies employed and (6) integration of active and passive components.

Interconnect Technologies

Wirebond and flip chip are the two interconnect technologies used to connect the die to the package carrier.

Wirebond Technology:  In packages that employ wirebond interconnect technology, the die is mounted face up on the substrate or leadframe and very fine gold or copper wires are attached from the perimeter of the die to the substrate or leadframe. Wirebonding is generally considered to be the most cost-effective and flexible interconnect technology and is used to assemble the majority of semiconductor packages.

Flip Chip Technology:  In packages that employ flip chip interconnect technology, the interconnection between the die and substrate or leadframe is made through a conductive “bump” that is placed directly on the die surface utilizing a process called wafer bumping. The bumped die is then “flipped over” and placed face down, with the bumps connecting directly to the substrate or leadframe. Flip chip packages provide a higher density interconnection capability than wirebond packages as flip chip technology uses the entire surface area of the die, and sometimes the perimeter as well, instead of just the perimeter used by wirebond packages. Flip chip technology also provides enhanced thermal and electrical performance, and enables smaller die and thinner, smaller form factors (or physical package dimensions).

Hybrid Technologies:  Certain 3D and system-in-package applications may contain both wirebond and flip chip interconnect technologies in a single package. These structures are commonly referred to as FlipStack and are supported in both chip scale and ball grid array package types.



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Package Carrier

Leadframe:  Leadframe packages utilize metal (typically copper) as the package carrier and typically place the electrical interconnect leads to the system board around the perimeter of the package. Leadframe packages are used in virtually every electronic device and remain the most practical and cost-effective solution for many low to medium pin count applications. Traditional leadframe packages are typically not cost or form factor effective for pin counts above 200. To address this limitation, Amkor developed FusionQuad, a leadframe package that integrates internal leads with perimeter leads to enable pin counts of up to 376.

Substrate:  Substrate packages utilize a laminate as the package carrier. Laminate substrates are composed of multiple layers of epoxy resin, woven glass fibers and metal conductors. These substrate packages have the electrical interconnects to the system board on the bottom of the package in the form of solder balls that are distributed across the bottom surface of the package (called a “ball grid array” format). The chip is attached to the substrate through either wirebond or flip chip technologies. Substrate packages were developed to facilitate the higher number of interconnections required by many advanced semiconductor devices.

Wafer-Level:  Wafer-level packages do not use a leadframe or substrate as the package carrier. The interconnect bumping process is carried out on the entire wafer for all chips on the wafer. The bumped wafer is subsequently singulated into individual chips (“diced”), and the wafer-level package is then attached directly to the system board.

Package Families

Chip Scale Packages: Chip scale packages are substrate-based packages where the package size is not much larger than the chip itself, and which have very small form factors and fine ball or pillar pitches ("pitch" is the distance between adjacent balls or pillars). The size advantage provided by chip scale packaging technologies has made this the package of choice for a wide variety of applications that require very small form factors such as wireless handsets and mobile consumer electronic devices. For example, we have developed a fine pitch copper pillar flip chip packaging solution which creates interconnections at finer pad pitches using fine pitch copper pillar bumping and a packaging process to reduce the number of substrate layers and facilitate very thin packages.

Advances in packaging technology now allow the placement of two or more chips on top of each other within a single package. This concept, known as 3D packaging, permits a higher level of semiconductor density and greater functionality. Some of our 3D chip scale packages include:
Stacked chip scale packages that contain two or more chips placed on top of each other and are ideal for chipset and memory applications and
PoP solutions using extremely thin chip scale packages that are stacked on top of each other, enabling the integration of logic and memory in a single small footprint package, as well as multiple memory applications.
Our chip scale package family also includes system-in-package modules which integrate two or more chips and passive device elements into a single package, thus enabling space and power efficiency, high performance and lower production costs.

Ball Grid Array Packages: Ball grid array packages are large form factor substrate-based packages which are used where processing power and speed are needed, and small form factors are not required. Ball grid array packages are used for networking, storage, gaming, computing and consumer applications.

Examples of ball grid array packages include:
Flip chip ball grid array packages that incorporate a face down bumped die onto a substrate using a ball grid array format and are increasingly being used with advanced silicon nodes that enable our customers to implement more powerful new applications and smaller devices and
Plastic ball grid array packages that use wirebond technology in applications requiring higher pin count than chip scale or leadframe packages, but typically have lower interconnect density than flip chip.



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Leadframe Packages: Leadframe packages place the electrical interconnects to the system board around the perimeter of the package. Wirebond or flip chip technology is used to interconnect the chip to the leadframe package carrier. Leadframe-based packages are the most widely used package family in the semiconductor industry.

Traditional leadframe-based packages support a wide variety of device types and applications. Two of our most popular traditional leadframe package types are small outline integrated circuit and quad flat package, commonly known as “dual” and “quad” products, respectively, based upon the number of sides from which the leads extend. The traditional leadframe package family has evolved from “through hole design,” where the leads are plugged into holes on the circuit board to “surface mount design,” where the leads are soldered to the surface of the circuit board. We offer a wide range of lead counts and body sizes to satisfy variations in the size of customers’ semiconductor devices.

Through a process of continuous engineering and customization, we have designed several advanced leadframe package types that are thinner and smaller than traditional leadframe packages, and which have the ability to accommodate more leads on the perimeter of the package. These advanced leadframe packages typically have superior thermal and electrical characteristics, which allow them to dissipate heat generated by high-powered semiconductor devices while providing enhanced electrical connectivity. We are developing increasingly smaller versions of these packages to keep pace with continually shrinking semiconductor device sizes and demand for miniaturization of portable electronic products. One of our more successful advanced leadframe package offerings is the MicroLeadFrame family of quad flat no lead packages.

Micro-electro-mechanical systems (MEMS) are miniaturized mechanical and electro-mechanical sensors that can sense or manipulate the physical world. Examples of MEMS devices include microphones, accelerometers and pressure sensors. MEMS are most typically created on silicon wafers but can also employ other substrate types as well. MEMS devices often require an extra fabrication process where the device wafer is bonded to a second wafer which effectively encapsulates the MEMS structure. This method leaves the device free to move within a vacuum or an inert gas atmosphere. However, applications such as microphones and pressure sensors require the MEMS structure to remain unencapsulated, requiring innovative cavity style packages. MEMS are an enabling technology rather than a semiconductor package platform, and they can be based on or use a leadframe package, a ball grid array package or a chip scale package.

Other Packaging Services

The category of "other packaging services" is primarily composed of wafer bumping services. Wafer bumping is a preliminary step in the manufacture of both flip chip and wafer-level packages. The wafer bumping process consists of preparing the wafer for bumping and forming or placing the bumps. Preparation may include cleaning, removing insulating oxides, and providing a pad metallurgy that will protect the interconnections while making good mechanical and electrical connection between the bump and the substrate.

Test Services

Amkor provides a complete range of semiconductor testing services including wafer testing or probe, various types of final testing, strip testing and complete end-of-line test services up to and including final shipping. We have testing operations in our facilities in China, Japan, Korea, the Philippines and Taiwan, and this geographical diversity enables fast feedback, streamlined logistics and shorter cycle times. We also offer many specialized logistical services including security certification and anti-counterfeit measures. Substantially all of our test business is derived from testing packages that we assemble.

We test a variety of device types across all of our package families including radio frequency, analog and mixed signal, digital, power management, memory and various combinations such as application-specific integrated circuits, multi chip modules, system-in-package, and stacked chips. Testing services vary depending upon the complexity of the device. Specialized solutions are required for packages that also process non-electric stimuli, including sensors, accelerometers, gyrometers and various types of micro-electro-mechanical devices.

Test Development Services

We offer a full range of test software, hardware, integration and product engineering services, and we support a range of business models and test capabilities. Some customers develop their test solutions and provide them to us, while other


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customers need our engineering resources. We support a variety of co-development and collaboration models. Our test development centers located in China, Korea, the Philippines and the U.S. are in close proximity to many of our customers' design centers.

Wafer Test Services

Wafer test, also referred to as wafer probe, is performed after wafer fabrication or wafer bumping to screen out defective devices prior to packaging. We offer a range of wafer test coverage that can be tailored based on the cost and complexity of the die, the package and the product. These services range from coarse level screening for major defects all the way up to probing at high digital speeds and can include full radio frequency transmit and receive and testing at multiple temperatures. Wafer testing can also involve a range of wafer mapping and inspection operations.

Final Test Services

After the packaging process, final test is performed to ensure that the packaged device meets the customer’s requirements. Final test spans a range of rigor and complexity depending on the device and end market application. More rigorous types of final test include testing multiple times under different electrical and temperature conditions and before and after device reliability stresses, such as burn-in. In addition to electrical testing, specialized solutions are required for packages that also process non-electric stimuli.

The electrical tests are a mix of functional, structural and system-level tests depending on the customer’s requirements and cost and reliability parameters. The electrical test equipment we use includes commercially available automated test equipment, customized and proprietary system level test equipment and innovative types of low cost test equipment developed by Amkor.



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Principal End Markets

The following table lists the major end markets that use our products. The table also lists some of our applications and our packages and test services used within these key end markets.
End Market
 
 
Applications
 
 
Amkor Packaging and
Test Services
 
 
 
 
 
 
 
Communications
 
 
Handsets (Cell Phones, Feature Phones, Smart Phones)
Tablets
Wireless LAN
Handheld Devices
 
 
Flip Chip Chip Scale Package
Flip Chip Stacked Chip Scale Package
Test Services
Fine Pitch Copper Pillar Flip Chip Chip Scale Package
Stacked Chip Scale Package
ChipArray Ball Grid Array
MicroLeadFrame
Wafer Bumping
Wafer Level Chip Scale Package
 
 
 
 
 
 
 
Consumer
 
 
Gaming
Television
Set Top Boxes
Portable Media
Digital Cameras
 
 
Flip Chip Ball Grid Array
Thin Quad Flat Pack
ChipArray Ball Grid Array
Test Services
MicroLeadFrame
Plastic Ball Grid Array
 
 
 
 
 
 
 
Computing
 
 
Desk Top Computer
Laptop Computer
Notebook Computer
Netbook Computer
Hard Disk Drive
Computer Server
Printers
Other Peripherals
 
 
Thin Quad Flat Pack
ChipArray Ball Grid Array
MicroLeadFrame
Plastic Ball Grid Array
Test Services
Flip Chip Ball Grid Array
Small Outline Integrated Circuit
 
 
 
 
 
 
 
Networking
 
 
Servers
Routers
Switches
 
 
Flip Chip Ball Grid Array
Plastic Ball Grid Array
Wafer Bumping
Thin Quad Flat Pack
Test Services
ChipArray Ball Grid Array
 
 
 
 
 
 
 
Other
 
 
Automotive
Industrial
 
 
Small Outline Integrated Circuit
Plastic Ball Grid Array
MicroLeadFrame
Thin Quad Flat Pack
Test Services
Quad Flat Pack

For packaging and test segment information, see Note 18 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

RELATIONSHIP WITH J-DEVICES CORPORATION

In 2009, Amkor and Toshiba invested in J-Devices (formerly Nakaya Microdevices Corporation) and formed a joint venture to provide semiconductor packaging and test services in Japan. Our original investment in J-Devices included a 30% equity interest and options to acquire additional equity interests, and in January 2013, we exercised our option to increase our ownership interest in J-Devices to 60%. The transaction is expected to close in April 2013, subject to regulatory approval.

As part of the original transaction with Toshiba in 2009, J-Devices acquired certain assets and business, including technology development, of Toshiba's LSI semiconductor packaging business. In December 2012, J-Devices acquired certain LSI


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packaging and test facilities and business of Fujitsu Semiconductor Limited. J-Devices is now the largest independent semiconductor packaging and test company in Japan, with six factories located in Japan.

In January 2013, J-Devices signed a Memorandum of Understanding with Renesas Electronics Corporation for the possible acquisition of the semiconductor back-end production business of three facilities operated by Renesas and its wholly owned subsidiary, Hokkai Electronics Co., Ltd. The transaction is subject to negotiation of definitive agreements, regulatory approvals and other customary closing conditions.

J-Devices is a separate business and is not integrated with our existing Japan-based businesses. The governance provisions applicable to J-Devices restrict our ability, even after obtaining majority ownership, to cause J-Devices to take certain actions without the consent of the other investors. Accordingly, we account for our investment in J-Devices using the equity method of accounting and will continue to account for J-Devices under the equity method of accounting after increasing our ownership interest as discussed above.

RESEARCH AND DEVELOPMENT

Our research efforts focus on developing new packaging solutions and test services, and improving the efficiency and capabilities of our existing production processes. We believe that technology development is one of the keys to success in the semiconductor packaging and test industry. By concentrating our research and development on our customers’ needs for innovative packages, increased performance and lower cost, we gain opportunities to enter markets early, capture market share and promote our new package offerings as industry standards. In addition, we leverage our research and development by licensing our leading edge technology, such as MicroLeadFrame, Fine Pitch Copper Pillar Flip Chip, TMV, Lead Free Bumping and FusionQuad.

Our areas for research and development include:
3D packaging;
Advanced flip chip packaging;
Advanced micro-electromechanical system packaging and testing;
Copper Pillar bumping and packaging;
Copper wire interconnects;
Engineering and characterization tools;
Laminate and leadframe packaging;
Manufacturing cost reductions;
Silicon Photonics;
Silver wirebond technology;
TMV technology;
TSV technology;
Wafer Level Fan Out technology and
Wafer level processing.
We have key development partners within our customer and supplier base. We work with our partners and allocate our resources to develop applications that have promising potential for a healthy return on investment.

As of December 31, 2012, we had approximately 400 employees engaged in research and development activities. In 2012, 2011 and 2010, we spent $54.1 million, $50.4 million and $47.5 million, respectively, on research and development.


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MARKETING AND SALES

Our marketing and sales offices are located throughout Asia, Europe and North America. Our support personnel manage and promote our packaging and test services and provide key customer and technical support.

To provide comprehensive sales and customer service, we typically assign our customers a direct support team consisting of an account manager, technical program manager, test program manager and both field and factory customer support representatives. We also support our largest multinational customers from multiple office locations to ensure that we are aligned with their global operational and business requirements.

Our direct support teams are further supported by an extended staff of product, process, quality and reliability engineers, as well as marketing and advertising specialists, information systems technicians and factory personnel. Together, these direct and extended support teams deliver an array of services to our customers. These services include:
Managing and coordinating ongoing manufacturing activity;
Providing information and expert advice on our portfolio of packaging and test services and related trends;
Managing the start-up of specific packaging and test programs;
Working to improve our customers’ time-to-market;
Providing a continuous flow of information to our customers regarding products and programs in process;
Partnering with customers on design solutions;
Researching and assisting in the resolution of technical and logistical issues;
Aligning our technologies and research and development activities with the needs of our customers and OEMs;
Providing guidance and solutions to customers in managing their supply chains;
Driving industry standards;
Providing design and simulation services to ensure package reliability and
Collaborating with our customers on continuous quality improvement initiatives.
Further, we implement direct electronic links with our customers to:
Achieve near real time and automated communications of order fulfillment information, such as inventory control, production schedules and engineering data, including production yields, device specifications and quality indices and
Connect our customers to our sales and marketing personnel world-wide and to our factories.
SEASONALITY

Our sales have generally been higher in the second half of the year than in the first half due to the effect of consumer buying patterns in the U.S., Europe and Asia. In addition, semiconductor companies generally reduce their production during the holidays at the end of December which results in a decrease in units for packaging and test services during the first quarter.



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CUSTOMERS

As of December 31, 2012, we had approximately 200 customers, including many of the largest semiconductor companies in the world. The table below lists our top 25 customers in 2012 based on net sales:

Altera Corporation
ON Semiconductor Corporation
Analog Devices, Inc. 
Panasonic Corporation
Atmel Corporation
Qualcomm Incorporated
Broadcom Corporation
Renesas Electronics Corporation
Entropic Communications, Inc. 
RF Micro Devices, Inc.
Freescale Semiconductor, Ltd.
Samsung Electronics Co., Ltd.
GLOBALFOUNDRIES Inc.
Sony Corporation
Infineon Technologies AG
STMicroelectronics N.V.
Intel Corporation
Taiwan Semiconductor Manufacturing Company Limited
International Business Machines Corporation (“IBM”)
Texas Instruments Incorporated
LSI Corporation
Toshiba Corporation
Maxim Integrated Products, Inc.
Xilinx, Inc.
Micron Technology, Inc.
 

Our top 25 customers accounted for 83.9% of our net sales in 2012, and our ten largest customers accounted for approximately 62.2%, 61.0% and 54.2% and of our net sales for the years ended December 31, 2012, 2011 and 2010, respectively. Qualcomm Incorporated accounted for more than 10% of our net sales in 2012. Qualcomm Incorporated and Texas Instruments Incorporated each accounted for more than 10% of our consolidated net sales in 2011. No customer accounted for more than 10% of our consolidated net sales in 2010.

For segment information, see Note 18 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

MATERIALS AND EQUIPMENT

Materials

Our materials are used primarily for packaging activities. Our packaging operations depend upon obtaining adequate supplies of materials on a timely basis. The principal materials used in our packaging process are leadframes, laminate substrates, gold and copper wire, mold compound, epoxy, tubes and trays. The silicon wafer is generally consigned from the customer. We do not take ownership of the customer consigned wafer, and title and risk of loss remains with the customer for these materials. Test materials constitute a very small portion of our total test cost. We purchase materials based on customer forecasts, and our customers are generally responsible for any unused materials which we purchased based on such forecasts.

We obtain the materials required for packaging services from various suppliers. We source most of our materials, including critical materials such as leadframes, laminate substrates and gold wire, from a limited group of suppliers. We work closely with our primary material suppliers to ensure that materials are available and delivered on time and, we also negotiate world-wide pricing agreements with our major suppliers to take advantage of the scale of our operations.

Equipment

Our ability to meet the changing demand from our customers for manufacturing capacity depends upon obtaining packaging and test equipment in a timely manner. We work closely with our main equipment suppliers to coordinate the ordering and delivery of equipment to meet our expected capacity needs.



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Packaging Equipment

The primary types of equipment used in providing our packaging services are wirebonders and die bonders. In addition, we maintain a variety of other packaging equipment, including mold, singulation, die attach, ball attach and wafer backgrind, along with numerous other types of manufacturing equipment. A substantial portion of our packaging equipment base can generally be used and adapted to support the manufacture of many of our packages through the use of relatively low cost tooling, although equipment used in advanced packaging can be more difficult to redeploy than equipment used in traditional wirebond packaging.

We also purchase wafer bumping equipment to facilitate our flip chip and wafer level packaging services. Wafer bump equipment includes sputter and spin coaters, electroplating equipment, reflow ovens and other types of equipment. This equipment tends to have longer lead times for order and installation than other packaging equipment and is sold in relatively larger increments of capacity.

Test Equipment

The primary equipment used in the testing process includes testers, handlers and probers. Handlers are used to transfer individual or small groups of packaged integrated circuits to a tester. Test equipment is generally a more capital intensive portion of the process and tends to have longer delivery lead times than most types of packaging equipment. We focus our capital additions on standardized tester platforms in order to maximize test equipment utilization where possible.

ENVIRONMENTAL MATTERS

The semiconductor packaging process uses chemicals, materials and gases and generates byproducts that are subject to extensive governmental regulations. For example, 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. The usage of lead (Pb) has decreased over the past few years, as we have ramped volume production of alternative lead (Pb)-free processes. Federal, state and local regulations in the U.S., as well as environmental regulations internationally, impose various controls on the storage, handling, discharge and disposal of chemicals and materials used in our manufacturing processes and in the factories we occupy.

We are engaged in a continuing program to assure compliance with federal, state and local environmental laws and regulations. We do not expect that capital expenditures or other costs attributable to compliance with environmental laws and regulations will have a material adverse effect on our business, liquidity, results of operations, financial condition or cash flows.

COMPETITION

The outsourced semiconductor packaging and test market is very competitive. We face substantial competition from established packaging and test service providers primarily located in Asia, including companies with significant manufacturing capacity, financial resources, research and development operations, marketing and other capabilities. These companies include:
Advanced Semiconductor Engineering, Inc.,
Siliconware Precision Industries Co., Ltd. and
STATS ChipPAC Ltd.


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Such companies also have developed relationships with most of the world’s largest semiconductor companies, including current or potential customers of Amkor. We also compete with the internal semiconductor packaging and test capabilities of many of our customers. Our integrated device manufacturer customers continually evaluate the attractiveness of outsourced services against their own in-house packaging and test services and at times may decide to shift some or all of their outsourced packaging and test services to internally sourced capacity. We also compete with companies (including semiconductor foundries) that provide wafer bumping and other advanced packaging solutions that compete with our packaging and test services. In addition, we compete with companies that offer only test services and not packaging.

The principal elements of competition in the semiconductor packaging and test services market include:
technical competence;
quality;
price;
breadth of packaging and test services offered, including turnkey services;
new package and test design, technology innovation and implementation;
cycle times;
customer service and
available capacity and ability to invest in capacity, geographic location and scale of manufacturing.
We believe that we generally compete favorably with respect to each of these elements.

INTELLECTUAL PROPERTY

We maintain an active program to protect and derive value from our investment in technology and the associated intellectual property rights. Intellectual property rights that apply to our various products and services include patents, copyrights, trade secrets and trademarks. We have filed and obtained a number of patents in the U.S. and abroad, and their durations vary depending on the jurisdiction in which each patent is filed. Although our patents are an important element of our intellectual property strategy as a whole, we are not materially dependent on any one patent or any one technology. We expect to continue to file patent applications when appropriate to protect our proprietary technologies, but we cannot assure you that we will receive patents from pending or future applications. In addition, any patents we obtain may be challenged, invalidated or circumvented and may not provide meaningful protection or other commercial advantage to us.

We also protect certain details about our processes, products and strategies as trade secrets by maintaining the confidentiality of the information we believe provides us with a competitive advantage. We have ongoing programs designed to maintain the confidentiality of such information. Further, to distinguish our products from our competitors’ products, we have obtained certain trademarks and service marks and may promote our particular brands through advertising and other marketing techniques.

EMPLOYEES

As of December 31, 2012, we had approximately 18,900 full-time employees. Of the total employee population, approximately 14,000 were engaged in manufacturing services, 2,900 were engaged in manufacturing support, 400 were engaged in research and development, 300 were engaged in marketing and sales and 1,300 were engaged in administration, business management and finance. We believe that our relations with our employees are good, and we have not experienced a work stoppage in any of our factories. Our employees in France, the Philippines, Taiwan and the U.S. are not represented by any union. Certain employees at our factories in China, Japan and Korea are members of a union, and we operate subject to collective bargaining agreements that we have entered into with the unions in Japan and Korea.



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Item 1A.
Risk Factors

The factors discussed below are cautionary statements that identify important factors and risks that could cause actual results to differ materially from those anticipated by the forward-looking statements contained in this report. For more information regarding the forward-looking statements contained in this report, see the introductory paragraph to Part II, Item 7 of this Annual Report on Form 10-K. 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 and Electronic Products Industries — We Operate in Volatile Industries and Industry Downturns and Declines in Global Economic and Financial Conditions Could Harm Our Performance.

Our business is impacted by market conditions in the semiconductor industry, which is cyclical by nature and impacted by broad economic factors, such as world-wide gross domestic product and consumer spending. The semiconductor industry has experienced significant and sometimes prolonged downturns in the past. For example, the 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. Although the world economy recovered somewhat in 2010, economic growth slowed in 2011 and 2012 in the U.S. and internationally. In view of this slow growth and the current economic uncertainty worldwide, consumer demand in the U.S. and globally may be adversely impacted which may harm the semiconductor industry and our business.

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 consumer electronic products, telecommunication devices or computing devices, could have a material adverse effect on our business and operating results. It is difficult to predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, which, in turn, makes it more challenging for us to forecast our operating results, make business decisions and identify risks that may affect our business, sources and uses of cash, financial condition and results of operations. Additionally, if industry conditions deteriorate, we could suffer significant losses, as we have in the past, which could materially impact our business, liquidity, results of operations, financial condition and cash flows.

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

Many factors, including the impact of adverse economic conditions, could have a material adverse effect on our net sales, gross profit, operating results and cash flows, or lead to significant variability of quarterly or annual operating results. Our profitability and ability to generate cash from operations is principally dependent upon demand for semiconductors, the utilization of our capacity, semiconductor package mix, the average selling price of our services, our ability to manage our capital expenditures in response to market conditions and our ability to control our costs including labor, material, overhead and financing costs. The downturn in demand for semiconductors in late 2008 and in 2009 resulted in significant declines in our operating results and cash flows as capacity utilization declined. Although the world economy recovered somewhat in 2010, the recent slow rate of economic growth in the U.S. and elsewhere and economic uncertainty worldwide, or the negative impact on economic growth resulting from the action or inaction of the U.S. government relating to federal income tax increases, the federal debt ceiling, the federal deficit and government spending restrictions, could adversely affect consumer demand in the U.S. and globally, which may negatively impact our operating results.

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:
fluctuation in demand for semiconductors and conditions in the semiconductor industry;
changes in our capacity utilization rates;


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changes in average selling prices;
changes in the mix of semiconductor packages;
evolving packaging and test technology;
absence of backlog and the short-term nature of our customers’ commitments and the impact of these factors on the timing and volume of orders relative to our production capacity;
changes in costs, availability and delivery times of raw materials and components;
changes in labor costs to perform our services;
wage and commodity price inflation, including precious metals;
the timing of expenditures in anticipation of future orders;
changes in effective tax rates;
the availability and cost of financing;
intellectual property transactions and disputes;
high leverage and restrictive covenants;
warranty and product liability claims and the impact of quality excursions and customer disputes and returns;
costs associated with litigation judgments, indemnification claims and settlements;
international events, political instability, civil disturbances or environmental or natural events, such as earthquakes, that impact our operations;
pandemic illnesses that may impact our labor force and our ability to travel;
difficulties integrating acquisitions and the failure of our joint ventures to operate in accordance with business plans;
our ability to attract and retain qualified employees to support our global operations;
loss of key personnel or the shortage of available skilled workers;
fluctuations in foreign exchange rates and the cost of materials used in our packaging services such as gold and copper;
delay, rescheduling and cancellation of large orders;
fluctuations in our manufacturing yields  and
dependence on key customers or concentration of customers in certain market segments, such as mobile communications.
It is often difficult to predict the impact of these factors upon our results for a particular period. The downturn in the global economy and the semiconductor industry increased the risks associated with the foregoing factors as customer forecasts became more volatile, and there was less visibility regarding future demand and significantly increased uncertainty regarding the economy, credit markets and consumer demand. Although the world economy recovered somewhat in 2010, the recent 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.


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High Fixed Costs — Due to Our High Percentage of Fixed Costs, We Will Be Unable to Maintain Our Gross Margin at Past Levels if We Are Unable to Achieve Relatively High Capacity Utilization Rates.

Our operations are characterized by relatively high fixed costs. Our profitability depends in part not only on pricing levels for our packaging and test services, but also on the efficient utilization of our human resources and packaging and test equipment. In particular, increases or decreases in our capacity utilization can significantly affect gross margins since the unit cost of packaging and test services generally decreases as fixed costs are allocated over a larger number of units. In periods of low demand, we experience relatively low capacity utilization in our operations, which leads to reduced margins during that period. For example, we experienced lower than optimum utilization in late 2008 and in 2009 due to a decline in world-wide demand for our packaging and test services which impacted our gross margin. 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 assets. 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. Although our capacity utilization at times has been strong, we cannot assure you that we will be able to achieve consistently high capacity utilization, and if we fail to do so, our gross margins may decrease. If our gross margins decrease, our business, liquidity, results of operations, financial condition and cash flows could be materially adversely affected.

In addition, our fixed operating costs have increased in recent years in part as a result of our efforts to expand our capacity through significant capital additions. Forecasted customer demand for which we have made capital investments may not materialize, especially if industry conditions deteriorate. As a result, our sales may not adequately cover our substantial fixed costs resulting in reduced profit levels or causing significant losses, both of which may adversely impact our 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 reduced visibility caused by economic uncertainty and fluctuations in global consumer demand make it particularly difficult to predict future results. To the extent we fail to meet or exceed our own guidance or the analyst projections for any reason, the trading prices of our securities may be adversely impacted. Moreover, even if we do meet or exceed that guidance or those projections, 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 — The Semiconductor Industry Places Downward Pressure on the Prices of Our Packaging and Test Services.

Prices for packaging and test services have generally declined over time. Historically, we have been able to partially offset the effect of price declines by successfully developing and marketing new packages with higher margins, by negotiating lower prices with our material vendors, recovering material cost increases from our customers and by driving engineering and technological changes in our packaging and test processes, which resulted in reduced manufacturing costs. We expect downward pressure on average selling prices for our packaging and test services to continue in the future. If we are unable to offset a decline in average selling prices by developing and marketing new packages with higher prices, reducing our purchasing costs, recovering more of our material cost increases from our customers and reducing our manufacturing costs, our business, liquidity, results of operations, financial condition and cash flows could be materially adversely affected.



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

Historically, we have been dependent on the trend in outsourcing of packaging and test services by integrated device manufacturers ("IDM"). Our IDM 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 may decide to shift some or all of their outsourced packaging and test services to internally sourced capacity.

The reasons IDMs may shift their internal capacity include:
their desire to realize higher utilization of their existing 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 could respond by shifting some or all outsourced packaging and test services to internally serviced capacity on a short term basis. Also, the IDMs could curtail or reverse the trend of outsourcing packaging and test services. If we experience a significant loss of IDM business, it could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows, especially during a prolonged industry downturn.

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

We have a significant amount of indebtedness. As of December 31, 2012, our total debt balance was $1,545.0 million and was classified as long-term. As of December 31, 2012, we had availability of $149.7 million under our $150.0 million first lien senior secured revolving credit facility. Additionally, our foreign subsidiaries had $80.0 million available to be drawn under revolving credit facilities and $100.0 million available to be borrowed under term loans maturing between June 2013 and December 2019, of which we borrowed an additional $23.0 million under our term loans in 2013. Despite current debt levels, the terms of the agreements governing our indebtedness allow us and our subsidiaries to incur more debt, subject to certain limitations. We may consider investments in joint ventures, acquisitions or increased capital additions, which may increase our indebtedness. For example, in light of possible investment opportunities, we are exploring additional lines of credit of approximately $300 million. 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;
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;
require us to dedicate a substantial portion of our cash flow from operations to service payments on our debt;
increase the volatility of the price of our common stock;
limit our flexibility to react to changes in our business and the industry in which we operate;


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place us at a competitive disadvantage to any of our competitors that have less debt and
limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds.
We May Have Difficulty Funding Liquidity Needs.

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

We operate in a capital intensive industry. Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures, which are generally made in advance of the related revenues and without any firm customer commitments. During 2012, we had capital additions of $533.2 million. In 2013, we expect to make capital additions of approximately $450 million and are also planning an additional $150 million of spending for the acquisition of land and construction related to our previously announced new factory and research and development center in Korea. In total, we expect to spend approximately $300 million over the next several years for the construction of the facility. Ultimately, the amount of our capital additions in 2013 and thereafter may vary materially and 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 have a significant level of debt, with $1,545.0 million outstanding at December 31, 2012, none of which is current. The terms of such debt require significant scheduled principal payments in the coming years, including none due in 2013, $250.0 million due in 2014, $100.0 million due in 2015, none due in 2016, $137.0 million due in 2017 and $1,058.0 million due thereafter. The interest payments required on our debt are also substantial. For example, in 2012, we paid $86.1 million of interest. The sources funding our operations, including making capital expenditures and servicing principal and interest obligations with respect to our debt, are cash flows from our operations, existing cash and cash equivalents, borrowings under available debt facilities, or proceeds from any additional debt or equity financing. As of December 31, 2012, we had cash and cash equivalents of $413.0 million and availability of $149.7 million under our $150.0 million senior secured revolving credit facility which matures in June 2017. Additionally, our foreign subsidiaries had $80.0 million available to be drawn under revolving credit facilities and $100.0 million available to be borrowed under term loans maturing between June 2013 and December 2019, of which we borrowed an additional $23.0 million under our term loans in 2013. In light of possible investment opportunities, we are exploring additional lines of credit of approximately $300 million.

The health of the worldwide banking system and financial markets affects the liquidity in the global economic environment. Volatility in fixed income, credit and equity markets could make it difficult for us to maintain our existing credit facilities or refinance our debt. 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 cyclical nature of the semiconductor industry and 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.

Our Ability To Draw On Our Current Loan Facilities May Be Adversely Affected by Conditions in the U.S. and International Capital Markets.

If financial institutions that have extended credit commitments to us are adversely affected by the conditions of the U.S. and international capital and credit markets, they may be unable to fund borrowings under their credit commitments to us. For example, we have a $150.0 million senior secured revolving credit facility with three banks in the U.S. If any of these banks are adversely affected by capital and credit market conditions and are unable to make loans to us when requested, there could be a corresponding adverse impact on our financial condition and our ability to borrow additional funds, if needed, for working capital, capital expenditures, acquisitions, research and development and other corporate purposes.



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Restrictive Covenants in the Indentures and Agreements Governing Our Current and Future Indebtedness Could Restrict Our Operating Flexibility.

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

The breach of any of these covenants by us or the failure by us to meet any of 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.

We sponsor an accrued severance plan for our Korean subsidiary, under which we have an accrued liability of $126.5 million as of December 31, 2012. Existing tax laws in Korea limit our ability to deduct severance expenses associated with the current plan. These limitations are designed to encourage companies to migrate to a defined contribution or defined benefit plan. If we adopt a new plan, we may fund a significant portion of the existing liability, which could have a material adverse effect on our liquidity, financial condition and cash flows. If we do not adopt a new plan, our ability to deduct accrued severance will continue to be limited, and as a result we will have to pay higher taxes, which could adversely affect our liquidity, financial condition and cash flows.

Under the existing Korean plan, to the extent eligible employees are terminated, our Korean subsidiary would be required to make lump-sum severance payments on behalf of these eligible employees based on their length of service, seniority and rate of pay at the time of termination. Since our severance plan obligation is significant, in the event of a significant layoff or other reduction in our labor force in Korea, payments under the plan could have a material adverse effect on our liquidity, financial condition and cash flows. See Note 13 to our Consolidated Financial Statements in Part II, Item 8 to this Annual Report on Form 10-K.

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

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

As previously reported, we are implementing a new enterprise resource planning (“ERP”) system in a multi-year program on a world-wide basis. We have recently implemented several significant ERP modules and expect to implement additional ERP modules in the future. The implementation of the ERP system represents a change in our internal control over financial reporting. Although we continue to monitor and assess our internal controls in the new ERP system environment as changes are made and new modules are implemented, and have taken additional steps to modify and enhance the design and effectiveness of our internal control over financial reporting, there is a risk that deficiencies may occur that could constitute significant deficiencies or in the aggregate a material weakness.



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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 impurities or 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.

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

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

Risks Associated With International Operations — We Depend on Our Factories and Operations in China, Japan, Korea, the Philippines and Taiwan. Many of Our Customers’ and Vendors’ Operations Are Also Located Outside of the U.S.

We provide packaging and test services through our factories and other operations located in China, Japan, Korea, the Philippines and Taiwan. Substantially all of our property, plant and equipment is located outside of the United States. Moreover, many of our customers’ and vendors’ operations are located outside the U.S.  The following are some of the risks we face in doing business internationally:
changes in consumer demand resulting from deteriorating conditions in local economies;
regulations imposed by foreign governments, including limitations or taxes imposed on the payment of dividends and other payments by non-U.S. subsidiaries;
fluctuations in currency exchange rates;
political, military, civil unrest and terrorist risks, particularly an increase in tensions between North Korea and South Korea;
disruptions or delays in shipments caused by customs brokers or government agencies;
changes in regulatory requirements, tariffs, customs, duties and other restrictive trade barriers or policies;
difficulties in staffing, retention and employee turnover and managing foreign operations, including foreign labor disruptions;


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difficulty in enforcing contractual rights and protecting our intellectual property rights and
potentially adverse tax consequences resulting from changes in tax laws in the foreign jurisdictions in which we operate.
Changes in the U.S. Tax Law Regarding Earnings of Our Subsidiaries Located Outside the U.S. Could Materially Affect Our Future Results.

There have been proposals to change U.S. tax laws that would significantly impact how U.S. corporations are taxed on foreign earnings. We earn a substantial portion of our income in foreign countries. Although we cannot predict whether or in what form any of these proposals might be enacted into law, if adopted they could have a material adverse impact on our liquidity, results of operations, financial condition and cash flows.

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. We have made and continue to make significant investments to implement and evolve our management information systems. In addition, we are implementing a new shop floor system in certain of our factories. We face risks in connection with current and future projects to install 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 system may exceed our plans and expectations and
disruptions resulting from the implementation of the system may impact our ability to process transactions and delay shipments to customers, impact our results of operations or financial condition or harm our control environment.
Our business could be materially and adversely affected if our management information systems are disrupted or if we are unable to 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;


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increasing complexity from combining recent acquisitions of an acquired business;
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, we have exercised our option to increase our ownership interest in J-Devices from 30% to 60%, which is expected to close in April 2013, subject to regulatory approval, and we have additional options to increase our ownership over time to as much as 80%. As a result, we anticipate that we will need to integrate the J-Devices operations with our existing operations. In addition, J-Devices will need to integrate with its operations the acquisitions it has recently completed or has pending. Furthermore, the governance provisions applicable to J-Devices restrict our ability to cause J-Devices to take certain actions without the consent of the other investors. As a result of the risks discussed above, the anticipated benefits of the increase in our investment in J-Devices 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.

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 electronic industry supply chain 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.

The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes new requirements regarding the supply of minerals originating from the conflict zones of the Democratic Republic of Congo and adjoining countries. Industry associations and some of our customers are also implementing 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 the new requirements and customer initiatives. These new requirements and customer initiatives could affect the sourcing and availability of metals 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 metals we use in our manufacturing process. If we are unable to certify that the metals we use in our packages


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are conflict-free, it could adversely affect our business as some customers may move their business to other suppliers. Our reputation could also be adversely affected.

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.

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

The loss of a significant customer, a reduction in orders 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. Although we have approximately 200 customers, we have derived and expect to continue to derive a large portion of our revenues from a small group of customers during any particular period due in part to the concentration of market share in the semiconductor industry. Our ten largest customers together accounted for approximately 62.2%, 61.0% and 54.2% of our net sales in the years ended December 31, 2012, 2011 and 2010, respectively. One customer accounted for more than 10% of our consolidated net sales in 2012. Two customers each accounted for more than 10% of our consolidated net sales in 2011, and no customer exceeded 10% of consolidated net sales in 2010.

The demand for our services from each customer is directly dependent upon that customer’s level of business activity, 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.

The loss of one or more of our significant customers, or reduced orders by any one of them, and our inability to replace these customers or make up for such orders could reduce our sales and profitability. For example, our facility in Iwate, Japan is primarily dedicated to a single customer, Toshiba. We have also invested in an unconsolidated affiliate, J-Devices, for which Toshiba is the primary customer. If we were to lose Toshiba as a customer or if it were to materially reduce its business with us, it could be difficult for us to find one or more new customers to utilize the capacity, which could have a material adverse effect on our operations and financial results. In 2012, one customer accounted for 21.3% of our consolidated net sales, representing approximately 20.0% of our packaging net sales and 31.9% of our test net sales. If we were to lose our largest customer, or if it significantly reduced its level of business with us, the loss could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows.

Capital Additions — We Make Substantial Capital Additions To Support the Demand Of Our Customers, Which May Adversely Affect Our Business If the Demand Of Our Customers Does Not Develop As We Expect or Is Adversely Affected.

We make significant capital additions in order to service the demand of our customers. For example, we expect that our 2013 capital additions will be approximately $450 million, in addition to $150 million of spending for the acquisition of


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land and construction relating to our new factory and research and development center in Korea. Additionally, over the next several years, we expect to spend a total of approximately $300 million for the construction of the facility. The amount of our capital additions depends on several factors, including the performance of our business, our assessment of future industry and customer demand, our capacity utilization levels and availability, our liquidity position and the availability of financing. Our ongoing capital addition requirements may strain our cash and short-term asset balances, and, in periods when we are expanding our capital base, we expect that depreciation expense and factory operating expenses associated with our capital additions to increase production capacity will put downward pressure on our gross margin, at least over the near term. From time to time, we also make significant capital additions 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 additions have increased as we transition to new 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 additions, 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 additions is often significant, and, as a result, we often need to commit to capital additions in advance of our receipt of firm orders or advance deposits based on our view of anticipated future demand with only very limited visibility. Although we seek to limit our exposure in this regard, in the past we have from time to time expended significant capital for additions for which the anticipated demand did not materialize for a variety of reasons, many of which were outside of our control. To the extent this occurs in the future, our business, liquidity, results of operations, financial condition and cash flows could be materially 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.

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

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

Litigation Incident to Our Business Could Adversely Affect Us.

We have been a party to various legal proceedings, including those described in Note 16 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, and may be a party to litigation in the future. If an unfavorable ruling or outcome were to occur in these legal proceedings or future litigation, there could be a material adverse impact on our business, liquidity, results of operations, financial condition, cash flows and the trading price of our securities.

For example, the final award pending in the arbitration with Tessera could be more than the amount accrued and we expect to record our estimate of interest accruing with the passage of time and may record additional charges as information develops


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or upon the issuance of the final award. Tessera publicly announced its intention to seek an amount in excess of $150 million. In addition, Tessera recently filed a complaint against Amkor in the U.S. District Court for the District of Delaware. There can be no assurance that the termination of the Tessera license agreement will not have a material impact on our ongoing business and customer relationships, including any supply arrangements with customers formerly benefiting from our rights under the terminated license agreement; that the U.S. District Court complaint filed by Tessera will not result in an unfavorable outcome for our company, including an injunction and significant damage award or that there will not be any further disputes with Tessera or others involving our company's technology or business.

We Could Suffer Adverse Tax and Other Financial Consequences if Taxing Authorities Do Not Agree with Our Interpretation of Applicable Tax Laws, Including Whether We Continue to Qualify for Our Tax Holidays.

Our corporate structure and operations are based, in part, on interpretations of various tax laws, including withholding tax, compliance with tax holiday requirements, application of changes in tax law to our operations and other relevant laws of applicable taxing jurisdictions. From time to time, the taxing authorities of the relevant jurisdictions may conduct examinations of our income tax returns and other regulatory filings. We cannot assure you that the taxing authorities will agree with our interpretations, 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 expenses will increase as income from those jurisdictions become subject to higher statutory income tax rates, thereby reducing our liquidity and cash flow.

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 design technologies and tools in order to respond to competitive industry conditions and customer requirements. Technological advances also typically lead to rapid and significant price erosion and may make our existing packages less competitive or our existing inventories obsolete. If we cannot achieve advances in 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.

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 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;


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cease to provide the services at issue;
pay substantial damages;
develop non-infringing technologies or
acquire licenses to such technology.
We may need to enforce our patents or other intellectual property rights, including our rights under patent and intellectual property licenses with third parties, or defend ourselves against claimed infringement of the rights of others through litigation, which could result in substantial cost and diversion of our resources. Furthermore, if we fail to obtain necessary licenses, our business could suffer. We have been involved in legal proceedings involving the acquisition and license of intellectual property rights, the enforcement of our existing intellectual property rights or the enforcement of the intellectual property rights of others, including the legal proceeding filed by and against Tessera, Inc. and the complaint filed and ongoing proceeding against Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc., or collectively “Carsem”, which are described in more detail in Note 16 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K on our results of operations, financial condition and cash flows could change in the future.

Packaging and Test — Packaging and Test Processes Are Complex and Our Production Yields and Customer Relationships May Suffer from Defects in the Services We Provide.

Semiconductor packaging and test services are complex processes that require significant technological and process expertise. 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 or change our processing steps. In addition, we must continue to expand our offering of packages to be competitive. Our production yields on new packages typically are significantly lower than our production yields on our more established packages.

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

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



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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.

The outsourced semiconductor packaging and test market is very competitive. We face substantial competition from established packaging and test service providers primarily located in Asia, including companies with significant processing capacity, financial resources, research and development operations, marketing and other capabilities. These companies also have established relationships with many large semiconductor companies that are our current or potential customers. We also face competition from the internal capabilities and capacity of many of our current and potential IDM customers. In addition, we compete with companies (including semiconductor foundries) that provide wafer bumping and other advanced packaging solutions that compete with our packaging and test services. For example, one of the major semiconductor foundries, which is substantially larger and has greater financial resources than we do, has expanded, and may continue to expand, its operations to include packaging and test services.

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

Environmental Regulations — Future Environmental Regulations Could Place Additional Burdens on Our Manufacturing Operations.

The semiconductor packaging process uses liquid chemicals, gases and materials. These processes generate by-products that are subject to extensive governmental regulations. For example, at our foreign facilities we produce liquid waste when semiconductor wafers are diced into chips with the aid of diamond saws, then cooled with running water. In addition, semiconductor packages have historically utilized metallic alloys containing lead (Pb) within the interconnect terminals typically referred to as leads, pins or balls. Federal, state and local laws and regulations in the U.S., as well as environmental laws and regulations in foreign jurisdictions, impose various controls on the storage, handling, discharge and disposal of chemicals used in our production processes and on the factories we occupy and are increasingly imposing restrictions on the materials contained in semiconductor products. We may become liable under environmental laws for the cost of cleanup of any disposal or release of hazardous materials arising out of our former or current operations, or otherwise as a result of the existence of hazardous materials on our properties. In such an event, we could be held liable for damages, including fines, penalties and the cost of investigations and remedial actions, and could also be subject to revocation of permits negatively affecting our operations.

Public attention has focused on the environmental impact of semiconductor operations and the risk to neighbors of chemical releases from such operations and to the materials contained in semiconductor products. For example, the European Union’s Restriction of Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive imposes strict restrictions on the use of lead and other hazardous substances in electrical and electronic equipment. In response to this directive, and similar laws and developing legislation in countries like China, Japan and Korea, we have implemented changes in a number of our manufacturing processes in an effort to achieve compliance across all of our package types. Complying with existing and possible future environmental laws and regulations, including laws and regulations relating to climate change, may impose upon us the need for additional capital equipment or other process requirements, restrict our ability to expand our operations, disrupt our operations, increase costs, subject us to liability or cause us to curtail our operations.

Our Business and Financial Condition Could be Adversely Affected by Natural Disasters.

We have significant packaging and test and other operations in locations which are subject to natural disasters such as earthquakes, tsunamis, typhoons, floods and other severe weather and geological events that could disrupt our operations. In addition, our suppliers and customers also have significant operations in such locations. A natural disaster that results in a prolonged disruption to our operations, or the operations of our customers or suppliers, could have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, Japan experienced a severe earthquake and tsunami in 2011 that resulted in significant disruption in the electronics industry supply chain and adversely affected Japan's economy and consumer spending. In addition, in October 2011, Thailand experienced substantial flooding which affected the facilities and operations of customers and suppliers in our industry. As a result, our business, financial


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condition, results of operations and cash flows could be adversely affected by events such as those in Japan, Thailand or future natural disasters of a similar nature.

Fire, Flood or Other Calamity — With Our Operations Conducted in a Limited Number of Facilities, a Fire, Flood or Other Calamity at one of Our Facilities Could Adversely Affect Us.

We conduct our packaging and test operations at a limited number of facilities. Significant damage or other impediments to any of these facilities, whether as a result of fire, flood, weather, the outbreak of infectious diseases (such as SARs or flu), civil strife, industrial strikes, breakdowns of equipment, difficulties or delays in obtaining materials and equipment, natural disasters, terrorist incidents, industrial accidents or other causes could temporarily disrupt or even shut down our operations, which would have a material adverse effect on our business, financial condition and results of operations. In the event of such a disruption or shutdown, we may be unable to reallocate production to other facilities in a timely or cost-effective manner (if at all) and we may not have sufficient capacity to service customer demands in our other facilities. For example, our operations in Asia are vulnerable to regional typhoons that can bring with them destructive winds and torrential rains, which could in turn cause plant closures and transportation interruptions. In addition, some of the processes that we utilize in our operations place us at risk of fire and other damage. For example, highly flammable gases are used in the preparation of wafers holding semiconductor devices for flip chip packaging. While we maintain insurance policies for various types of property, casualty and other risks, we do not carry insurance for all the above referred risks and with regard to the insurance we do maintain, we cannot assure you that it would be sufficient to cover all of our potential losses.

Continued Control By Existing Stockholders — Mr. James J. Kim and Members of His Family Can
Effectively Determine or Substantially Influence The Outcome of All Matters Requiring Stockholder Approval.

As of December 31, 2012, Mr. James J. Kim, our Executive Chairman of the Board of Directors, members of Mr. Kim’s immediate family and affiliates owned approximately 87.9 million shares, or approximately 57%, of our outstanding common stock. The Kim family also has options to acquire approximately 1.0 million shares and owns $150.0 million of our 6.0% Convertible Senior Subordinated Notes due 2014 (the “2014 Notes”) that are convertible into approximately 49.6 million shares of common stock (the “2014 Convert Shares”) at a conversion price of approximately $3.02 per share. If the options are exercised and the 2014 Notes are converted, the Kim family would own an aggregate of approximately 138.5 million shares, or approximately 68%, of our outstanding common stock.

The 2014 Convert Shares and the approximately 13.4 million shares issued upon conversion of the $100.0 million of our 6.25% Convertible Subordinated Notes due 2013 (the "2013 Convert Shares") are each subject to separate voting agreements. The agreements require the Kim family to vote these respective shares in a “neutral manner” on all matters submitted to our stockholders for a vote, so that such 2013 Convert Shares and 2014 Convert Shares are voted in the same proportion as all of the other outstanding securities (excluding the other shares owned by the Kim family) that are actually voted on a proposal submitted to Amkor’s stockholders for approval. The Kim family is not required to vote in a “neutral manner” any 2013 Convert Shares or 2014 Convert Shares that, when aggregated with all other voting shares held by the Kim family, represent 41.6% or less of the total then-outstanding voting shares of our common stock. The voting agreement for the 2013 Convert Shares terminates upon the earliest of (i) December 1, 2013, (ii) at such time as no principal amount of the 2013 Notes or any 2013 Convert Shares remain outstanding, (iii) a change of control transaction (as defined in the voting agreement) or (iv) the mutual agreement of the Kim family and Amkor. The voting agreement for the 2014 Convert Shares terminates upon the earliest of (i) such time as no principal amount of the 2014 Notes remains outstanding and the Kim family no longer beneficially own any of the 2014 Convert Shares, (ii) consummation of a change of control (as defined in the voting agreement) or (iii) the mutual agreement of the Kim family and Amkor.

Mr. James J. Kim and his family and affiliates, acting together, have the ability to effectively determine or substantially influence matters submitted for approval by our stockholders by voting their shares or otherwise acting by written consent, including the election of our Board of Directors. There is also the potential, through the election of members of our Board of Directors, that the Kim family could substantially influence matters decided upon by our Board of Directors. This concentration of ownership may also have the effect of impeding a merger, consolidation, takeover or other business consolidation involving us, or discouraging a potential acquirer from making a tender offer for our shares, and could also negatively affect our stock’s market price or decrease any premium over market price that an acquirer might otherwise pay.



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Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

We provide packaging, test and development services at various facilities throughout China, Japan, Korea, the Philippines, Taiwan and the U.S. The size, location and manufacturing services provided by each of our factories are set forth in the table below.
Location
 
Approximate
Factory Size
(Square Feet)
 
Services
Korea
 
 
 
 
Gwangju, Korea (1)
 
1,218,000

 
Packaging and test services; wafer bump services
Seoul, Korea (1)
 
698,000

 
Packaging services; package and process development
Pupyong, Korea (1)
 
404,000

 
Packaging and test services
Philippines
 
 
 
 
Muntinlupa, Philippines (2)
 
749,000

 
Packaging and test services; package and process development
Province of Laguna, Philippines (2)
 
625,000

 
Packaging and test services
China
 
 
 
 
Shanghai, China (3)
 
993,000

 
Packaging and test services; wafer bump services
Taiwan
 
 
 
 
Hsinchu, Taiwan (1)
 
496,000

 
Packaging and test services; wafer bump services
Lung Tan, Taiwan (1)
 
353,000

 
Packaging and test services; wafer bump services
Japan
 
 
 
 
Kitakami, Japan (4)
 
211,000

 
Packaging and test services
United States
 
 
 
 
Chandler, AZ (4)
 
6,000

 
Package and process development
(1)
Owned facility and land.
(2)
As a result of foreign ownership restrictions in the Philippines, the land associated with our Philippine factories is leased from realty companies in which we own a 40% interest. We own buildings comprising 1,223,000 square feet and lease the remaining 151,000 square feet from one of the aforementioned realty companies.
(3)
We own buildings comprising 993,000 square feet, of which approximately 738,000 square feet were facilitized as of December 31, 2012. All land is leased.
(4)
Leased facility.
We previously owned a 165,000 square foot facility in Singapore (the land was leased) that was sold in June 2011. See Note 19 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

We believe that our existing properties are in good condition and suitable for the conduct of our business and that the productive capacity of such properties is substantially being utilized or we have plans to utilize it.

Our principal executive office and operational headquarters is located in Chandler, Arizona. In addition to executive staff, the Chandler, Arizona campus houses sales and customer service for the southwest region, product management, finance, information systems, planning and marketing. Our marketing and sales office locations include sites in China, France, Japan, Korea, the Philippines, Singapore, Taiwan and the U.S. (Chandler, Arizona; Irvine, San Diego and Santa Clara, California; Boston, Massachusetts and Dallas, Texas).



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Table of Contents

New Factory and Research and Development Center In Korea

We plan to build a new factory and research and development center in Korea. This new factory and research and development center will focus on the design, development and full scale production of advanced and innovative semiconductor packaging and test services for the world's leading semiconductor and electronic manufacturing companies. We have entered into an agreement to acquire the site for the new facility consisting of approximately 46 acres. We expect to complete construction of the facility over the next several years. The agreement to purchase the land for the facility is subject to our compliance with various construction, investment, hiring, regulatory and other requirements. There can be no assurance that the new facility will proceed at all, or that the actual scope, costs, timeline or benefits of the project will be consistent with our current expectations.

Item 3.
Legal Proceedings

From time to time, we are involved in various disputes and litigation matters that arise in the ordinary course of our business. These include disputes and lawsuits related to intellectual property, acquisitions, licensing, contracts, tax, regulatory, employee relations and other matters. For a discussion of “Legal Proceedings,” see Note 16 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Item 4.
Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

LISTING ON THE NASDAQ GLOBAL SELECT MARKET

Our common stock is traded on the NASDAQ Global Select Market under the symbol “AMKR.” The following table sets forth, for the periods indicated, the high and low sale prices per share of our common stock as quoted on the NASDAQ Global Select Market.
 
 
High
 
 
 
Low
 
2012
 
 
 
 
 
 
 
First Quarter
 
$
6.78

 
 
 
$
4.46

 
Second Quarter
 
6.25

 
 
 
4.29

 
Third Quarter
 
5.58

 
 
 
4.36

 
Fourth Quarter
 
4.60

 
 
 
3.65

 
2011
 
 
 
 
 
 
 
First Quarter
 
$
8.49

 
 
 
$
6.30

 
Second Quarter
 
7.00

 
 
 
5.64

 
Third Quarter
 
6.59

 
 
 
3.81

 
Fourth Quarter
 
5.17

 
 
 
4.06

 

There were approximately 154 holders of record of our common stock as of January 25, 2013.

DIVIDEND POLICY

Since our public offering in 1998, we have never paid a dividend to our stockholders and we do not have any present plans for doing so. In addition, our secured bank debt agreements and the indentures governing our senior and senior subordinated notes limit our ability to pay dividends. Refer to the Liquidity and Capital Resources Section in Item 7 of this Annual Report on Form 10-K.


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Table of Contents

RECENT SALES OF UNREGISTERED SECURITIES

None.

EQUITY COMPENSATION PLANS

The information required by this item regarding equity compensation plans is set forth in Part III, Item 12 of this Annual Report on Form 10-K.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

The following table provides information regarding repurchases of our common stock during the three months ended December 31, 2012. See Note 14 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
Period
Total Number of Shares Purchased (a)
Average Price Paid Per Share ($)
Total Number of Shares Purchased as part of Publicly Announced Plans or Programs (b)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ($) (b)
 
 
 
 
 
October 1-October 31
2,362

$
4.44


$
91,586,032

November 1-November 30
11,167

4.03


91,586,032

December 1-December 31
1,716

4.32


91,586,032

Total
15,245

$
4.13


 

(a)
Represents shares of common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees.

(b)
Our Board of Directors previously authorized the repurchase of up to $300.0 million of our common stock, $150.0 million in August 2011 and $150.0 million in February 2012, exclusive of any fees, commissions or other expenses. During 2012, we purchased 16.5 million shares of common stock for an aggregate purchase price of $79.5 million, net of $0.3 million of commissions, for an average price of $4.83. At December 31, 2012, approximately $91.6 million was available to repurchase common stock pursuant to the stock repurchase program.


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Table of Contents

PERFORMANCE GRAPH(1)



(1)
The preceding Stock Performance Graph is not deemed filed with the Securities and Exchange Commission and shall not be incorporated by reference in any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.



34

Table of Contents

Item 6.
Selected Consolidated Financial Data

The following selected consolidated financial data as of December 31, 2012 and 2011, and for the years ended December 31, 2012, 2011 and 2010, have been derived from our audited Consolidated Financial Statements included in this Annual Report on Form 10-K. The following selected consolidated financial data as of December 31, 2010, 2009 and 2008, and for the years ended December 31, 2009 and 2008, have been derived from audited financial statements not included herein and, where applicable, such data was recast for the retrospective application of accounting guidance for noncontrolling interests in a consolidated subsidiary, which we became subject to beginning January 1, 2009. You should read the selected consolidated financial data in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements, both of which are included in this Annual Report on Form 10-K.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
 
For the Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(In thousands, except per share data)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
2,759,546

 
$
2,776,359

 
$
2,939,483

 
$
2,179,109

 
$
2,658,602

Cost of sales (a)
2,335,736

 
2,285,790

 
2,275,727

 
1,698,713

 
2,096,864

Gross profit
423,810

 
490,569

 
663,756

 
480,396

 
561,738

Operating expenses:
 
 
 
 
 
 
 
 
 
Selling, general and administrative
217,000

 
246,555

 
242,424

 
210,907

 
251,756

Research and development
54,118

 
50,386

 
47,534

 
44,453

 
56,227

Goodwill impairment (b)

 

 

 

 
671,117

Gain on sale of real estate and specialty test operations (c)

 
(42
)
 

 
(281
)
 
(9,856
)
Total operating expenses
271,118

 
296,899

 
289,958

 
255,079

 
969,244

Operating income (loss)
152,692

 
193,670

 
373,798

 
225,317

 
(407,506
)
Other expense (income):
 
 
 
 
 
 
 
 
 
Interest expense (a)
83,974

 
74,212

 
85,595

 
102,396

 
118,729

Interest expense, related party
13,969

 
12,394

 
15,250

 
13,000

 
6,250

Interest income
(3,160
)
 
(2,749
)
 
(2,950
)
 
(2,367
)
 
(8,749
)
Foreign currency loss (gain) (d)
4,185

 
2,178

 
13,756

 
3,339

 
(61,057
)
Loss (gain) on debt retirement, net (e)
1,199

 
15,531

 
18,042

 
(15,088
)
 
(35,987
)
Equity in earnings of unconsolidated affiliates (f)
(5,592
)
 
(7,085
)
 
(6,435
)
 
(2,373
)
 

Other income, net
(1,586
)
 
(1,030
)
 
(619
)
 
(113
)
 
(1,004
)
Total other expense, net
92,989

 
93,451

 
122,639

 
98,794

 
18,182

Income (loss) before income taxes
59,703

 
100,219

 
251,159

 
126,523

 
(425,688
)
Income tax expense (benefit) (g)
17,001

 
7,124

 
19,012

 
(29,760
)
 
31,788

Net income (loss)
42,702

 
93,095

 
232,147

 
156,283

 
(457,476
)
Net (income) loss attributable to noncontrolling interests
(884
)
 
(1,287
)
 
(176
)
 
(303
)
 
781

Net income (loss) attributable to Amkor
$
41,818

 
$
91,808

 
$
231,971

 
$
155,980

 
$
(456,695
)
Net income (loss) attributable to Amkor per common share:
 
 
 
 
 
 
 
 
 
Basic
$
0.26

 
0.48

 
1.26

 
0.85

 
(2.50
)
Diluted
$
0.24

 
0.39

 
0.91

 
0.67

 
(2.50
)
Shares used in computing per common share amounts:
 
 
 
 
 
 
 
 
 
Basic (h)
160,105

 
190,829

 
183,312

 
183,067

 
182,734

Diluted
243,004

 
273,686

 
282,602

 
263,379

 
182,734

Other Financial Data:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
$
370,479

 
$
335,644

 
$
323,608

 
$
305,510

 
$
309,920

Purchases of property, plant and equipment
533,512

 
466,694

 
445,669

 
173,496

 
386,239




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Table of Contents

 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(In thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
413,048

 
$
434,631

 
$
404,998

 
$
395,406

 
$
424,316

Working capital
438,781

 
354,644

 
289,859

 
327,088

 
306,174

Total assets
3,025,215

 
2,773,047

 
2,736,822

 
2,432,909

 
2,383,993

Total long-term debt
1,545,000

 
1,287,256

 
1,214,219

 
1,345,241

 
1,438,751

Total debt, including short-term borrowings and current portion of long-term debt
1,545,000

 
1,346,651

 
1,364,300

 
1,434,185

 
1,493,360

Additional paid-in capital
1,614,143

 
1,611,242

 
1,504,927

 
1,500,246

 
1,496,976

Accumulated deficit
(756,644
)
 
(798,462
)
 
(890,270
)
 
(1,122,241
)
 
(1,278,221
)
Total Amkor stockholders’ equity
657,955

 
693,266

 
630,013

 
383,209

 
237,139

_______________________________________
(a)
During 2012, we recorded a charge of $50.0 million to cost of sales and $6.0 million to interest expense relating to our pending patent license arbitration. During 2008, we recorded a charge of $61.4 million to cost of sales and $3.3 million to interest expense related to a prior patent license dispute, of which $49.0 million related to royalties for periods prior to 2008.
(b)
At December 31, 2008, we recorded a non-cash charge of $671.1 million to write off our remaining goodwill.
(c)
During 2011, we sold real property in Singapore used for operations that were exited as of December 31, 2010. The gain on the sale of the real property was less than $0.1 million. During 2009, we sold land and dormitory buildings in Korea and recorded a gain of $0.3 million. During 2008, we sold land and a warehouse in Korea and recorded a gain of $9.9 million.
(d)
We recognize foreign currency losses (gains) due to the remeasurement of certain of our foreign currency denominated monetary assets and liabilities. During 2008, the net foreign currency gain of $61.1 million is primarily attributable to the significant depreciation of the Korean won and the impact on the remeasurement of our Korean severance obligation.
(e)
During 2012, we recorded a net loss of $1.2 million related to the repayment of subsidiary debt with the proceeds from the issuance of $300.0 million of our 6.375% Senior Notes due 2022. During 2011, we recorded a net loss of $15.5 million related to the tender and call of our 9.25% Senior Notes due 2016 and the write-off of the associated unamortized deferred debt issuance costs. During 2010, we recorded a net loss of $18.0 million related to several debt transactions. These transactions included recording a net loss of $17.7 million related to the tender offer to purchase $125.7 million principal amount of our 9.25% Senior Notes due 2016 and the repurchase of an aggregate $411.8 million principal amount of our 7.125% Senior Notes due in 2011 and our 7.75% Senior Notes due in 2013. During 2009, we recorded a net gain of $15.1 million related to the repurchase of an aggregate $289.3 million principal amount of our 7.125% Senior Notes and 2.5% Convertible Senior Subordinated Notes due in 2011 and our 7.75% Senior Notes due in 2013. During 2008, we recorded a gain of $36.0 million related to the repurchase of an aggregate $118.3 million principal amount of our 7.125% senior notes and 2.5% convertible senior subordinated notes due 2011.
(f)
During 2009, we made a 30% equity investment in J-Devices, which was accounted for using the equity method.
(g)
Generally, our effective tax rate is substantially below the U.S. federal tax rate of 35% because we have experienced taxable losses in the U.S. and our income is taxed in foreign jurisdictions where we benefit from tax holidays or tax rates lower than the U.S. statutory rate. In 2009, a $25.6 million benefit for the release of a valuation allowance in Korea was included in the income tax benefit. In 2008, the $671.1 million goodwill impairment charge did not have a significant income tax benefit. Also, the 2008 income tax provision included a charge of $8.3 million for the establishment of a valuation allowance in Japan.
(h)
In 2012, we repurchased 16.5 million shares under the Stock Repurchase Program. In 2011, we repurchased 28.6 million shares under the Stock Repurchase Program. In addition, the entire $100.0 million aggregate principal amount of the December 2013 Notes was converted into 13.4 million shares of common stock.


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Table of Contents

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements within the meaning of the federal securities laws, including but not limited to statements regarding: (1) the amount, timing and focus of our expected capital investments, including expenditures in 2013 and beyond for a new facility in Korea (2) our ability to fund our operating activities for the next twelve months, (3) the effect of capacity utilization rates on our gross margin, (4) the expiration of tax holidays in jurisdictions in which we operate and expectations regarding our effective tax rate, (5) the release of valuation allowances related to taxes in the future, (6) the expected use of future cash flows, if any, for the expansion of our business, capital expenditures, the repayment of debt and for other corporate purposes, (7) funding for any payments due in conjunction with our litigation with Tessera, (8) our repurchase or repayment of outstanding debt or the conversion of debt in the future, (9) payment of dividends, (10) compliance with our covenants, (11) expected contributions to foreign pension plans, (12) liability for unrecognized tax benefits, (13) the effect of foreign currency exchange rate exposure on our financial results, (14) the volatility of the trading price of our common stock, (15) changes to our internal controls related to implementation of our enterprise resource planning (“ERP”) system and other systems and (16) other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intend” or the negative of these terms or other comparable terminology. Because such statements include risks and uncertainties, actual results may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the following discussion as well as in Part I, Item 1A of this Annual Report on Form 10-K. The following discussion provides information and analysis of our results of operations for the three years ended December 31, 2012 and our liquidity and capital resources. You should read the following discussion in conjunction with Part II, Item 8 in this Annual Report on Form 10-K as well as other reports we file with the Securities and Exchange Commission (“SEC”).

Overview

Amkor is one of the world’s leading providers of outsourced semiconductor packaging and test services. Packaging and test are integral steps in the process of manufacturing semiconductor devices. The semiconductor manufacturing process begins with the fabrication of individual transistors, or multiple transistors and other electronic elements combined into an integrated circuit (generally known as a “chip” or “die”), onto semiconductor material such as a silicon wafer. Each chip on the wafer is probe tested. The good chips are identified and the wafer is then separated into individual die. Each good die is then assembled into a package that typically encapsulates the die for protection and creates the electrical connections used to connect the package to a printed circuit board, module or other part of the electronic device. In some packages, chips are attached to a substrate or leadframe carrier through wirebonding or flip chip interconnects and then encased in a protective material. Or, for a wafer-level package, the electrical interconnections are created directly on the surface of the die (while the wafer is still intact) so that the chip may be attached directly to other parts of an electronic device without a substrate or leadframe. The packages are then tested using sophisticated equipment to ensure that each packaged chip meets its design and performance specifications. The test services we offer include probe testing and final testing.

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

Our customers include, among others: Altera Corporation; Analog Devices, Inc.; Broadcom Corporation; Intel Corporation; LSI Corporation; Qualcomm Incorporated; Sony Corporation; STMicroelectronics N.V.; Texas Instruments Incorporated and Toshiba Corporation. The outsourced semiconductor packaging and test market is very competitive. We also compete with the internal semiconductor packaging and test capabilities of many of our customers.

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



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Table of Contents

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 1, Item 1A of this Annual Report on Form 10-K.

Our net sales decreased $16.8 million or 0.6% to $2,759.5 million in 2012 from $2,776.4 million in 2011. The decrease was driven by a decline of $54.7 million or 2.2% in packaging net sales partially offset by an increase in test net sales of $38.0 million or 13.4%. The decrease in packaging net sales was primarily the result of weakness in the consumer, networking and auto and industrial end markets, partially offset by strength in the communications end market for smartphones and tablets. The increase in test net sales was primarily driven by strength in the communications end market for smartphones and tablets.

Gross margin for 2012 decreased to 15.4% from 17.7% in 2011. The decrease in gross margin was primarily due to weakness in demand for some of our wirebond packaging services and the corresponding lower level of utilization of these manufacturing assets, the estimated $50.0 million loss contingency charge resulting from our pending patent license arbitration with Tessera and lower net sales due to insourcing by some of our integrated device manufacturer ("IDM") customers. The loss contingency charge reduced our gross margin by two percentage points. The decreases were partially offset by increased net sales of flip chip and wafer level packages, as well as increased test net sales supporting mobile communications.

We operate in a capital intensive industry and have a significant level of debt. Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures, which are generally made in advance of the related revenues and without any firm customer commitments. We fund our operations, including capital expenditures and debt service requirements, with cash flows from operations, existing cash and cash equivalents, borrowings under available credit facilities, and proceeds from any additional financing. Maintaining an appropriate level of liquidity is important to our business and depends on, among other things, the performance of our business, our capital expenditure levels and our ability to repay debt out of our operating cash flows or proceeds from debt or equity financings.

In 2012, our capital additions totaled $533.2 million or 19.3% of net sales compared to $453.0 million or 16.3% of net sales in 2011. Our 2012 capital additions were driven by investments in advanced test platforms and packaging equipment supporting the communications end market, as well as research and development projects. In 2012, 42.2% of our capital additions were made in packaging, 39.9% for test and 17.9% for research and development and infrastructure projects. In 2011, 60.9% of our capital additions were made in packaging, 22.5% for test and 16.6% for research and development and infrastructure projects.

Net cash provided by operating activities was $389.1 million for the year ended December 31, 2012, compared to $516.8 million for the year ended December 31, 2011. We experienced negative free cash flow of $144.4 million for the year ended December 31, 2012, compared to free cash flow of $50.1 million in the prior year. Our negative free cash flow was primarily driven by capital purchases to support customer demand for packaging and test services related to mobile communications and an increase in accounts receivable. We define free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. Free cash flow is not defined by U.S generally accepted accounting principles (“U.S. GAAP”), and a reconciliation of free cash flow to net cash provided by operating activities is set forth under the caption “Cash Flows” below.




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Table of Contents

Results of Operations

The following table sets forth certain operating data as a percentage of net sales for the periods indicated:
 
Year Ended December 31,
 
2012
 
2011
 
2010
Net sales
100.0
%
 
100.0
%
 
100.0
%
Gross margin
15.4
%
 
17.7
%
 
22.6
%
Depreciation and amortization
13.4
%
 
12.1
%
 
11.0
%
Operating income
5.5
%
 
7.0
%
 
12.7
%
Income before income taxes
2.2
%
 
3.6
%
 
8.5
%
Net income attributable to Amkor
1.5
%
 
3.3
%
 
7.9
%

Net Sales
 
 
 
 
 
 
 
Change
 
2012
 
2011
 
2010
 
2012 over 2011
 
2011 over 2010
 
(In thousands, except percentages)
Net sales
$
2,759,546

 
$
2,776,359

 
$
2,939,483

 
$
(16,813
)
 
(0.6
)%
 
$
(163,124
)
 
(5.5
)%
Packaging net sales
2,438,572

 
2,493,283

 
2,650,257

 
(54,711
)
 
(2.2
)%
 
(156,974
)
 
(5.9
)%
Test net sales
320,974

 
282,942

 
288,871

 
38,032

 
13.4
 %
 
(5,929
)
 
(2.1
)%

Net Sales.  Net sales in 2012 decreased compared to 2011 due to lower net sales of our packaging services. The decrease in packaging net sales was partially offset by an increase in test net sales.

Net sales in 2011 decreased compared to 2010 primarily as a result of lower net sales of our packaging and test services. Net sales for the year ended December 31, 2011, were also negatively impacted by the supply chain disruptions in Japan caused by the March 2011 earthquake and tsunami.

Packaging Net Sales. Packaging net sales in 2012 decreased compared to 2011. The decrease in packaging net sales was the result of weakness in the consumer, networking and auto and industrial end markets. In particular, packaging net sales related to home electronics and gaming were lower than historical levels due to insourcing by some of our IDM customers and lower demand for our wirebond packaging services. These decreases were partially offset by strength in the communications end market for smartphones and tablets. Packaging unit volume increased 0.4 billion units in 2012 to 8.5 billion units, compared to 8.1 billion units in 2011, primarily due to increases in wafer level and flip chip chip scale packaging services, partially offset by decreases in wirebond array and leadframe packaging services.

Packaging net sales in 2011 decreased compared to 2010. The decrease in packaging net sales was primarily driven by weakness in sales of our ball grid array and leadframe packaging solutions partially offset by strong sales of our chip scale packaging solutions supporting mobile communications products. Packaging unit volume decreased 1.7 billion units in 2011 to 8.1 billion units, compared to 9.8 billion units in 2010, primarily attributable to decreased demand for our leadframe packaging solutions.

Test Net Sales.  Test net sales in 2012 increased compared to 2011 due to strong demand for mobile communications products, such as smartphones and tablets. Test net sales in 2011 decreased compared to 2010 primarily as a result of decreased demand from the computing and consumer end markets partially offset by increased test services for mobile communications products.



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Table of Contents

Cost of Sales
 
 
 
 
 
 
 
Change
 
2012
 
2011
 
2010
 
2012 over 2011
 
2011 over 2010
 
(In thousands, except percentages)
Cost of sales
$
2,335,736

 
$
2,285,790

 
$
2,275,727

 
$
49,946

 
2.2
%
 
$
10,063

 
0.4
%

Our cost of sales consists principally of materials, labor, depreciation and manufacturing overhead. Since a substantial portion of the costs at our factories is fixed, relatively modest increases or decreases in capacity utilization rates can have a significant effect on our gross margin.

Material costs as a percentage of net sales decreased to 43.2% in 2012 from 44.1% in 2011 as a result of higher test net sales, which consume few materials, and a shift to a mix of packaging services with a lower material content as a percentage of net sales. Material costs in absolute dollars primarily decreased in 2012 due to the net sales mix described above and lower net sales. Material costs as a percentage of net sales increased to 44.1% in 2011 from 42.6% in 2010 primarily due to the increased cost of gold that is used in most of our wirebond packaging solutions. Material costs in absolute dollars decreased in 2011 as a result of the decline in net sales.

As a percentage of net sales, labor costs decreased to 14.3% in 2012 from 14.6% in 2011. The decrease in labor costs as a percentage of net sales and in absolute dollars was primarily driven by labor cost savings from restructuring activities at our manufacturing operations in Japan in early 2012 and the Philippines in 2011. As a percentage of net sales, labor costs increased to 14.6% in 2011 from 12.7% in 2010. The increase in labor costs as a percentage of net sales was primarily the result of lower levels of utilization driven by decreased customer demand and the corresponding decrease in net sales. As substantially all of our manufacturing workforce is paid in Asian currencies, labor costs were also negatively impacted by the appreciation of certain Asian based currencies against the U.S. dollar in 2011 compared to 2010. In addition, labor wage rates increased in 2011 and the year also includes a $7.7 million charge for workforce reduction programs at our Philippine manufacturing operations compared to a $3.7 million workforce reduction charge in 2010.

Other manufacturing costs as a percentage of net sales increased to 27.1% in 2012 from 23.6% in 2011. The increase as a percentage of sales and in absolute dollars was primarily attributable to the estimated $50.0 million loss contingency charge resulting from our pending patent license arbitration with Tessera and increased depreciation expense from our continued investment in property, plant and equipment. Other manufacturing costs as a percentage of net sales increased to 23.6% in 2011 from 22.1% in 2010. Other manufacturing costs in 2011 increased as a percentage of net sales primarily as a result of lower levels of utilization driven by decreased customer demand and the corresponding decrease in net sales. The increase in other manufacturing costs in absolute dollars in 2011 was primarily attributable to the appreciation of certain Asian based currencies against the U.S. dollar and increased depreciation from our continued investments in property, plant and equipment. These costs were partially offset by overhead cost savings from the closure of our Singapore manufacturing operations.

Gross Profit
 
 
 
 
 
 
 
Change
 
2012
 
2011
 
2010
 
2012 over 2011
 
2011 over 2010
 
(In thousands, except percentages)
Gross profit
$
423,810

 
$
490,569

 
$
663,756

 
$
(66,759
)
 
$
(173,187
)
Gross margin
15.4
%
 
17.7
%
 
22.6
%
 
(2.3
)%
 
(4.9
)%

Gross profit and gross margin in 2012 decreased compared to 2011. The decrease in gross profit and gross margin was primarily due to weakness in demand for some of our wirebond packaging services and the corresponding lower level of utilization of these manufacturing assets, the estimated $50.0 million loss contingency charge resulting from our pending patent license arbitration with Tessera and lower net sales due to insourcing by some of our IDM customers. These decreases were partially offset by increased net sales of flip chip and wafer level packages as well as increased test net sales supporting mobile communications.



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Gross profit and gross margin in 2011 decreased compared to 2010. The decrease was primarily due to weakness in demand for some of our packaging solutions and the corresponding lower level of utilization of our manufacturing assets. The market migration from wirebond to flip chip products created underutilized wirebond capacity faster than we were able to redeploy these assets, which was one of the primary contributors to our 2011 decrease in utilization. Gross margin was also negatively impacted by the appreciation of certain Asian based currencies against the U.S. dollar, the increased cost of gold that is used in most of our wirebond packages, increased depreciation expense as a result of our continued investment in property, plant and equipment and charges for workforce reduction programs at our Philippine manufacturing operations.

 
 
 
 
 
 
 
Change
 
2012
 
2011
 
2010
 
2012 over 2011
 
2011 over 2010
 
(In thousands, except percentages)
Packaging gross profit
$
334,968

 
$
425,878

 
$
584,190

 
$
(90,910
)
 
$
(158,312
)
Packaging gross margin
13.7
%
 
17.1
%
 
22.0
%
 
(3.4
)%
 
(4.9
)%

Packaging Gross Profit.  Gross profit and gross margin for packaging net sales in 2012 decreased compared to 2011. The decreases in gross profit and gross margin were primarily due to weakness in demand for some of our wirebond packaging services and the corresponding lower level of utilization of these manufacturing assets, the Tessera loss contingency charge discussed above, which relates entirely to the packaging segment, and lower net sales due to insourcing by some of our IDM customers. These decreases were partially offset by increased net sales of flip chip and wafer level packages supporting mobile communications.

Gross profit and gross margin for packaging sales in 2011 decreased compared to 2010. The decrease in gross profit and gross margin was attributable to weakness in demand for some of our packaging solutions and the corresponding lower level of utilization of our manufacturing assets. The market migration of wirebond to flip chip products created underutilized wirebond capacity faster than we were able to redeploy these assets, which was one of the primary contributors to our 2011 decrease in utilization. Gross margin was also negatively impacted by the appreciation of certain Asian based currencies against the U.S. dollar, the increased cost of gold that is used in most of our wirebond packages, increased depreciation expense as a result of our continued investment in property, plant and equipment and charges for workforce reduction programs at our Philippine manufacturing operations.

 
 
 
 
 
 
 
Change
 
2012
 
2011
 
2010
 
2012 over 2011
 
2011 over 2010
 
(In thousands, except percentages)
Test gross profit
$
88,842

 
$
65,719

 
$
79,621

 
$
23,123

 
$
(13,902
)
Test gross margin
27.7
%
 
23.2
%
 
27.6
%
 
4.5
%
 
(4.4
)%

Test Gross Profit.  Gross profit and gross margin for test sales in 2012 increased compared to 2011. The increases in gross profit and gross margin were mainly attributable to higher utilization of our test assets and higher test net sales. Costs of sales for test services are primarily fixed in nature and have relatively low material content. Accordingly, increases in net sales or utilization generally result in increased gross profit and gross margin due to the high degree of operating leverage for these services. Gross profit and gross margin for test sales in 2011 decreased compared to 2010. The decrease in gross profit and gross margin was primarily driven by lower utilization of our test assets as well as higher labor costs and increased depreciation expense as a result of our continued investment in property, plant and equipment.

Selling, General and Administrative Expenses
 
 
 
 
 
 
 
Change
 
2012
 
2011
 
2010
 
2012 over 2011
 
2011 over 2010
 
(In thousands, except percentages)
Selling, general and administrative
$
217,000

 
$
246,513

 
$
242,424

 
$
(29,513
)
 
(12.0
)%
 
$
4,089

 
1.7
%



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Selling, general and administrative expenses decreased in 2012 compared to 2011. The decrease was primarily the result of reduced employee compensation expense and lower professional fees, partially offset by charges from our restructuring activities in 2012. Selling, general and administrative expenses in 2011 increased compared to 2010. The increase was mainly attributable to increased professional fees and, to a lesser extent, higher employee compensation and benefits primarily due to merit increases and share-based compensation. These increases were offset by lower contracted services in 2011 for the continued implementation of our global enterprise resource planning information system.

Research and Development
 
 
 
 
 
 
 
Change
 
2012
 
2011
 
2010
 
2012 over 2011
 
2011 over 2010
 
(In thousands, except percentages)
Research and development
$
54,118

 
$
50,386

 
$
47,534

 
$
3,732

 
7.4
%
 
$
2,852

 
6.0
%

Research and development activities are focused on developing new packaging interconnect and test services and improving the efficiency and capabilities of our existing production processes. Areas of focus include 3D packaging, including silicon interposers and Through Silicon Via technologies, fine pitch copper pillar packaging and wafer level processing.

Research and development expenses in 2012 increased compared to 2011 in both absolute dollars and as a percentage of net sales. Research and development expenses represented 2.0% of net sales in 2012 compared to 1.8% of net sales in 2011. The increase in research and development expenses was driven by increased depreciation from capital additions as a result of our continued investment in research and development initiatives. Research and development expenses in 2011 increased compared to 2010. The increase in research and development expenses was primarily attributable to increased employee salary expenses. As a percentage of net sales, research and development expenses increased to 1.8% in 2011 compared to 1.6% in 2010 due to lower net sales and the increased research and development expenses.

Other Expense, Net
 
 
 
 
 
 
 
Change
 
2012
 
2011
 
2010
 
2012 over 2011
 
2011 over 2010
 
(In thousands, except percentages)
Interest expense, net
$
94,783

 
$
83,857

 
$
97,895

 
$
10,926

 
13.0
 %
 
$
(14,038
)
 
(14.3
)%
Foreign currency loss
4,185

 
2,178

 
13,756

 
2,007

 
92.1
 %
 
(11,578
)
 
(84.2
)%
Loss on debt retirement, net
1,199

 
15,531

 
18,042

 
(14,332
)
 
(92.3
)%
 
(2,511
)
 
(13.9
)%
Equity in earnings of unconsolidated affiliate
(5,592
)
 
(7,085
)
 
(6,435
)
 
1,493

 
(21.1
)%
 
(650
)
 
10.1
 %
Other income, net
(1,586
)
 
(1,030
)
 
(619
)
 
(556
)
 
54.0
 %
 
(411
)
 
66.4
 %
Total other expense, net
$
92,989

 
$
93,451

 
$
122,639

 
$
(462
)
 
(0.5
)%
 
$
(29,188
)
 
(23.8
)%

Interest expense in 2012 increased compared to 2011 due to $6.0 million of estimated interest related to our pending patent license arbitration with Tessera and higher levels of debt. Interest expense in 2011 decreased compared to 2010 primarily due to debt refinanced at lower interest rates and the conversion of our 6.25% Convertible Notes due 2013 into common stock. In 2012, we incurred a $1.2 million loss on debt retirement associated with the prepayment of certain subsidiary term loans due in 2014 and 2016. In 2011, we recorded a $15.5 million loss on debt retirement due to the refinancing of our 2.5% Convertible Senior Subordinated Notes due May 2011 and the full redemption of our 9.25% Senior Notes due 2016. In 2010, we recorded $18.0 million of debt retirement costs as a result of the redemption of the 7.125% Senior Notes due 2011 and the 7.75% Senior Notes due 2013.



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Table of Contents

Income Tax Expense
 
 
 
 
 
 
 
Change
 
2012
 
2011
 
2010
 
2012 over 2011
 
2011 over 2010
 
(In thousands, except percentages)
Income tax expense
$
17,001

 
$
7,124

 
$
19,012

 
$
9,877

 
138.6
%
 
$
(11,888
)
 
(62.5
)%

Generally, our effective tax rate is substantially below the U.S. federal tax rate of 35% because we have experienced tax losses in the U.S. and much of our income is taxed in foreign jurisdictions where we benefit from tax holidays or tax rates lower than the U.S. statutory rate. Income tax expense in 2012 and 2011 is attributable to income tax on profits earned in certain foreign jurisdictions, foreign withholding taxes, minimum taxes, and deferred taxes on undistributed earnings from our investment in J-Devices. The increase in income tax expense in 2012 compared to 2011 is attributable to the increase in income tax rates in jurisdictions where tax holidays have partially expired, taxation in a jurisdiction that previously benefited from a net operating loss carryforward and taxation of foreign currency gains in connection with debt denominated in US dollars in a foreign jurisdiction. Income tax expense in 2010 is attributable to income tax on profits earned in certain of our taxable foreign jurisdictions, $5.4 million of net additions to estimates of our uncertain tax positions, foreign withholding taxes and minimum taxes partially offset by a $3.0 million income tax benefit from the release of a valuation allowance related to certain deferred tax assets in Taiwan.

During 2012, our subsidiaries in China, Korea, the Philippines and Taiwan operated under tax holidays which will continue to expire in whole or in part at various dates through 2017. We expect our effective tax rate to increase as the tax holidays expire, as income earned in these jurisdictions will be subject to higher statutory income tax rates. In connection with our land purchase in Korea in February 2013, we intend to increase our capital in Korea within three years by at least $100 million through foreign investment pursuant to the Foreign Investment Promotion Act, thereby, availing ourselves of certain additional tax incentives. See Note 4 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion of income tax holidays.

At December 31, 2012, we had U.S. net operating loss carryforwards totaling $363.9 million which expire at various times through 2031. Additionally, at December 31, 2012, we had $56.4 million of non-U.S. net operating loss carryforwards, which will expire at various times through 2022. We maintain a valuation allowance on all of our U.S. net deferred tax assets, including our net operating loss carryforwards, and on deferred tax assets in certain foreign jurisdictions. We will release such valuation allowances as the related tax benefits are realized on our tax returns or when sufficient net positive evidence exists to conclude that it is more likely than not that the deferred tax assets will be realized. As the trend of taxable operating results in one of our foreign jurisdictions has been improving over the past year, we believe a reasonable possibility exists that, within the next year, sufficient positive evidence may become available to reach a conclusion to release up to $12.1 million of the valuation allowance maintained in this jurisdiction as of December 31, 2012.



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Table of Contents

Quarterly Results

The following table sets forth our unaudited consolidated financial data for the last eight quarters ended December 31, 2012. Our results of operations have varied and may continue to vary from quarter to quarter and are not necessarily indicative of the results of any future period.

We believe that we have included all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of our selected quarterly data. You should read our selected quarterly data in conjunction with our Consolidated Financial Statements and the related notes, included in Part II, Item 8 of this Annual Report on Form 10-K.

Our net sales, gross profit and operating income are generally lower in the first quarter of the year as compared to the fourth quarter of the preceding year primarily due to the effect of consumer buying patterns in the U.S., Europe and Asia. Semiconductor companies generally reduce their production during the holidays at the end of December which results in a reduction in demand for packaging and test services during the first two weeks of January.

We recorded a charge of $30.0 million to cost of sales and $4.0 million to interest expense during the three months ended June 30, 2012, and an additional charge of $20.0 million to cost of sales and $2.0 million to interest expense during the three months ended December 31, 2012, related to our pending patent license arbitration.

The calculation of basic and diluted per share amounts for each quarter is based on the weighted average shares outstanding for that period; consequently, the sum of the quarters may not necessarily be equal to the full year basic and diluted net income per share.
 
For the Quarter Ended
 
Dec. 31,
2012
 
Sept. 30,
2012
 
June 30,
2012
 
Mar. 31,
2012
 
Dec. 31,
2011
 
Sept. 30,
2011
 
June 30,
2011
 
Mar. 31,
2011
 
 
 
 
 
(In thousands, except per share data)
 
 
 
 
Net sales
$
722,656

 
$
695,353

 
$
686,527

 
$
655,010

 
$
683,769

 
$
740,007

 
$
687,633

 
$
664,950

Cost of sales
609,934

 
578,566

 
597,207

 
550,029

 
571,942

 
617,768

 
557,816

 
538,264

Gross profit
112,722

 
116,787

 
89,320

 
104,981

 
111,827

 
122,239

 
129,817

 
126,686

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
56,959

 
49,297

 
53,489

 
57,255

 
55,660

 
65,011

 
61,284

 
64,558

Research and development
13,354

 
13,472

 
13,867

 
13,425

 
12,465

 
13,233

 
12,559

 
12,129

Total operating expenses
70,313

 
62,769

 
67,356

 
70,680

 
68,125

 
78,244

 
73,843

 
76,687

Operating income
42,409

 
54,018

 
21,964

 
34,301

 
43,702

 
43,995

 
55,974

 
49,999

Other expense, net
26,745

 
21,904

 
24,983

 
19,357

 
20,492

 
14,173

 
37,935

 
20,851

Income before income taxes
15,664

 
32,114

 
(3,019
)
 
14,944

 
23,210

 
29,822

 
18,039

 
29,148

Income tax expense (benefit)
7,992

 
9,538

 
(3,891
)
 
3,362

 
(2,351
)
 
2,499

 
3,594

 
3,382

Net income
7,672

 
22,576

 
872

 
11,582

 
25,561

 
27,323

 
14,445

 
25,766

Net (income) loss attributable to noncontrolling interests
(526
)
 
(259
)
 
(291
)
 
192

 
(711
)
 
44

 
43

 
(663
)
Net income attributable to Amkor
$
7,146

 
$
22,317

 
$
581

 
$
11,774

 
$
24,850

 
$
27,367

 
$
14,488

 
$
25,103

Net income attributable to Amkor per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.05

 
$
0.14

 
$

 
$
0.07

 
$
0.14

 
$
0.14

 
$
0.07

 
$
0.13

Diluted
0.05

 
0.11

 

 
0.06

 
0.11

 
0.11

 
0.07

 
0.10


Liquidity and Capital Resources

We assess our liquidity based on our current expectations regarding sales, operating expenses, capital spending and debt service requirements. Based on this assessment, we believe that our cash flow from operating activities, together with existing cash and cash equivalents and availability under our debt facilities, will be sufficient to fund our working capital, capital expenditure and debt service requirements for at least the next twelve months. Thereafter, our liquidity will continue to be affected by, among other things, volatility in the global economy and credit markets, the performance of our business, our capital expenditure levels, other uses of our cash including the final amount of payments due in our disputes with Tessera, any purchases of stock under our stock repurchase program, any investments in joint ventures or acquisitions and our ability to either repay debt out of operating cash flows or proceeds from debt or equity financings. In light of possible investment


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Table of Contents

opportunities, we are exploring additional lines of credit of approximately $300 million. 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 I, Item 1A of this Annual Report on Form 10-K.

Our primary source of cash and the source of funds for our operations are cash flows from our operations, existing cash and cash equivalents, borrowings under available debt facilities and proceeds from any additional debt or equity financings. As of December 31, 2012, we had cash and cash equivalents of $413.0 million and availability of $149.7 million under our $150.0 million first lien senior secured revolving credit facility. Additionally, our foreign subsidiaries had $80.0 million available to be drawn under revolving credit facilities and $100.0 million available to be borrowed under term loans. In 2013, we borrowed an additional $23.0 million under our term loans. Net cash provided by operating activities was $389.1 million for the year ended December 31, 2012 compared to $516.8 million for the year ended December 31, 2011. We expect cash flows to be used in the operation and expansion of our business, making capital expenditures, paying principal and interest on our debt and for other corporate purposes.

We have a significant amount of indebtedness. Total debt at December 31, 2012 was $1,545.0 million. Our indebtedness requires us to dedicate a substantial portion of our cash flow from operations to pay our debt and interest. We refer you to “Contractual Obligations” below for a summary of principal and interest payments.

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

We sponsor an accrued severance plan for our Korean subsidiary which, under existing tax laws in Korea, limits our ability to deduct related severance expenses accrued under that plan. The purpose of these limitations is to encourage companies to migrate to a defined contribution or defined benefit plan. If we retain our existing severance plan, the deduction for severance expenses will be primarily limited to severance payments made to retired employees, which results in a larger current income tax liability in Korea. If we decide to adopt a new plan, we may fund a significant portion of the existing liability, which would provide a current tax deduction upon funding. Our Korean severance liability was $126.5 million as of December 31, 2012.

Included in our cash balance as of December 31, 2012, is $224.1 million held offshore by our foreign subsidiaries. If we were to distribute this offshore cash to the U.S. as repatriated earnings of our foreign subsidiaries, we would incur up to $6.0 million of 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.

Our Board of Directors authorized the repurchase of up to $300.0 million of our common stock, exclusive of any fees, commissions or other expenses. We did not purchase any stock under the plan for the three months ended December 31, 2012. Through December 31, 2012, we had repurchased 45.0 million shares for $208.4 million, net of $0.9 million of commissions, leaving a balance of $91.6 million available at December 31, 2012 for stock repurchases under this program. The purchase of stock may be made in the open market or through privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, the cash needs and investment opportunities for the business, price, applicable legal requirements and other factors. Our stock repurchase program may be suspended or discontinued at any time.
  
We have a 30% equity interest and options to acquire additional equity interests in J-Devices, a joint venture among Amkor, Toshiba and the original shareholders of J-Devices, which provides semiconductor packaging and test services in Japan. The options are exercisable at our discretion and permit us to increase our ownership interest in J-Devices. In January 2013, we exercised our option to increase our ownership interest in J-Devices from 30% to 60% for an aggregate purchase price of ¥6.7 billion (approximately $75 million). The transaction is expected to close in April 2013, subject to regulatory approval. Future options permit us to increase our ownership up to 66% in 2014 by purchasing shares owned by one of the other shareholders and up to 80% in 2015 by purchasing shares owned by the other shareholders. In 2014 and beyond, Toshiba has the option, at its discretion, to sell shares it owns to us if we have exercised any of our options. After we own 80% or more shares, the original shareholders of J-Devices have a put option which allows them to sell their shares to us. The exercise price for all options is payable in cash and is to be determined using a formula based primarily upon the net book


45

Table of Contents

value and a multiple of earnings before interest, taxes, depreciation and amortization of J-Devices. The governance provisions applicable to J-Devices restrict our ability, even after obtaining majority ownership, to cause J-Devices to take certain actions without the consent of the other investors. Accordingly, we account for our investment in J-Devices using the equity method of accounting. See Note 10 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. Increasing our investment in J-Devices has risks, including those discussed in Part I, Item 1A of this Annual Report on Form 10-K under the caption "Difficulties Consolidating and Integrating Our Operations — We Face Challenges as We Integrate Diverse Operations."

We refer you to Note 16 to our Consolidated Financial Statements in Part I, Item 1 of this Annual Report for a discussion of the pending arbitration relating to Amkor's license agreement with Tessera. We expect to use cash on hand, proceeds from borrowings under our existing lines of credit or other sources to make any payments due in connection with our litigation with Tessera.

In January 2013, we sold office space and land located in Chandler, Arizona for $24.0 million.

In February 2013, we entered into an agreement for the purchase of land for a new factory and research and development center in Korea. We paid ₩10.9 billion (approximately $10 million) at signing, with two remaining payments of ₩43.4 billion (approximately $40 million) and ₩54.2 billion (approximately $50 million) due in August 2013 and November 2013, respectively. We expect to spend approximately $300 million over the next several years for the construction of the facility.

In order to reduce leverage and future cash interest payments, we may from time to time repurchase our outstanding notes for cash or exchange shares of our common stock for our outstanding notes. Any such transactions may be made in the open market, through privately negotiated transactions, pursuant to the terms of the notes or otherwise and would be subject to the terms of the indentures and other debt agreements, market conditions, and other factors.

In September 2012, we issued $300.0 million of 6.375% Senior Notes due October 2022 (the “2022 Notes”) and used the net proceeds to repay $224.9 million of subsidiary debt.

Certain debt agreements have restrictions on dividend payments and the repurchase of stock and subordinated securities, including our convertible notes. These restrictions are determined by calculations based upon cumulative net income. We have never paid a dividend to our stockholders and we do not have any present plans for doing so. Amkor Technology, Inc. also guarantees certain debt of our subsidiaries.

We were in compliance with all debt covenants at December 31, 2012 and expect to remain in compliance with these covenants for at least the next twelve months. Additional information about our debt is available in Note 12 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Capital Additions

We make significant capital additions in order to service the demand of our customers. Our capital additions increased as we transitioned to new packaging and test technologies. In 2012, our capital additions totaled $533.2 million or approximately 19.3% of net sales. Of this total, approximately 42.2% of our capital additions were made in packaging, 39.9% in test and 17.9% for research and development and infrastructure projects. Our spending was focused primarily on investments in advanced test platforms and packaging equipment supporting the communications end market, as well as research and development projects.

We expect that our 2013 capital additions will be approximately $450 million, in addition to $150 million of spending for the acquisition of land and construction relating to our new factory and research and development center in Korea. Our expected capital additions for 2013 primarily support customer demand for packaging and test services related to mobile communications. Ultimately, the amount of our 2013 capital additions 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.



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Table of Contents

In February 2013, we entered into an agreement for the purchase of land for a factory and research and development center in Korea. The land purchase price is ₩108.5 billion (approximately $100 million), payable in installments over the next ten months. We expect to spend $150 million in 2013 for the acquisition of the land and construction relating to the Korean facility using cash on hand or borrowings. Over the next several years, we expect to spend a total of approximately $300 million for the construction of the facility. The agreement to purchase the land for the facility is subject to our compliance with various construction, investment, hiring, regulatory and other requirements. There can be no assurance that the new facility project will proceed at all, or that the actual scope, costs, timeline or benefits of the project will be consistent with our current expectations.

In addition, we are subject to risks associated with our capital additions, including those discussed in Part I, Item 1A of this Annual Report on Form 10-K under the caption "Capital Additions — We Make Substantial Capital Additions To Support the Demand Of Our Customers, Which May Adversely Affect Our Business If the Demand Of Our Customers Does Not Develop As We Expect or Is Adversely Affected." The following table reconciles our activity related to property, plant and equipment additions as presented on the Consolidated Balance Sheets to purchases of property, plant and equipment as presented on the Consolidated Statements of Cash Flows:
 
For the Year Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Property, plant and equipment additions
$
533,177

 
$
452,989

 
$
504,463

Net change in related accounts payable and deposits
335

 
13,705

 
(58,794
)
Purchases of property, plant and equipment
$
533,512

 
$
466,694

 
$
445,669


Cash Flows

Net cash provided by operating activities was $389.1 million for the year ended December 31, 2012 compared to $516.8 million for the year ended December 31, 2011. We experienced negative free cash flow of $144.4 million for the year ended December 31, 2012, which was primarily driven by capital purchases to support customer demand for packaging and test services related to mobile communications and an increase in accounts receivable. Our free cash flow for the year ended December 31, 2011, was primarily driven by a decrease in accounts receivable, partially offset by a decrease in gross profit. Free cash flow is not a U.S. GAAP measure. See below for a further discussion of free cash flow and a reconciliation to U.S. GAAP.

Net cash provided by (used in) operating, investing and financing activities for each of the three years ended December 31, 2012 was as follows:
 
For the Year Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Operating activities
$
389,063

 
$
516,832

 
$
542,595

Investing activities
(520,121
)
 
(430,534
)
 
(444,921
)
Financing activities
110,032

 
(58,877
)
 
(89,857
)

Operating activities:  Our net cash provided by operating activities in 2012 decreased by $127.8 million compared to 2011. Operating income for the year ended December 31, 2012 adjusted for depreciation and amortization, other operating activities and non-cash items decreased $3.4 million from 2011. The decrease was primarily driven by the 2012 estimated $50.0 million loss contingency charge resulting from our pending patent license arbitration with Tessera, partially offset by lower selling, general and administrative expenses recognized in 2012. Interest expense, net, for the year ended December 31, 2012, increased by $10.9 million as compared with the year ended December 31, 2011, as a result of the interest related to our arbitration with Tessera and higher levels of long-term debt. Operating cash flows in 2012 and 2011 were reduced by $0.5 million and $5.0 million, respectively, for fees in connection with debt repurchases.

Changes in assets and liabilities decreased operating cash flows during 2012 by $28.8 million principally due to an increase in accounts receivable and inventories, offset by increases in accrued expenses. Accrued expenses increased primarily due


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to the accrual for estimated royalties and interest relating to our arbitration with Tessera. During 2011, changes in assets and liabilities increased operating cash flows by $76.4 million, principally due to a decrease in accounts receivable.

Investing activities:  Our net cash used in investing activities in 2012 increased by $89.6 million. This increase was primarily due to a $66.8 million increase in purchases of property, plant and equipment from $466.7 million in 2011 to $533.5 million in 2012, partially offset by a decrease in proceeds from property, plant and equipment from the 2011 sale of our Singapore facility for $13.3 million.

Financing activities:  Our net cash provided by financing activities in 2012 was $110.0 million. The net cash provided by financing activities during 2012 included borrowings of $667.5 million offset by $470.1 million of foreign debt repayments, the repurchase of $80.9 million of common stock under our authorized stock repurchase program and payment of $6.0 million in debt issuance costs associated with the the issuance of our 6.375% Senior Notes due in 2022 and the amendment and restatement of our first lien senior secured revolving credit facility. Cash used in financing activities during 2011 consisted principally of borrowings of $489.1 million offset by $413.8 million of debt repayments, the repurchase of $128.4 million of common stock under our stock repurchase program and payment of $5.9 million in debt issuance costs associated with the issuance of our 6.625% Senior Notes due in 2021.

We provide the following supplemental data to assist our investors and analysts in understanding our liquidity and capital resources. We define free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. Free cash flow is not defined by U.S. GAAP. We believe free cash flow to be relevant and useful information to our investors because it provides them with additional information in assessing our liquidity, capital resources and financial operating results. Our management uses free cash flow in evaluating our liquidity, our ability to service debt and our ability to fund capital additions. However, free cash flow has certain limitations, including that it does not represent the residual cash flow available for discretionary expenditures since other, non-discretionary expenditures, such as mandatory debt service, are not deducted from the measure. The amount of mandatory versus discretionary expenditures can vary significantly between periods. This measure should be considered in addition to, and not as a substitute for, or superior to, other measures of liquidity or financial performance prepared in accordance with U.S. GAAP, such as net cash provided by operating activities. Furthermore, our definition of free cash flow may not be comparable to similarly titled measures reported by other companies.
 
For the Year Ended December 31,
 
2012
 
2011
 
2010
 
(In thousands)
Net cash provided by operating activities
$
389,063

 
$
516,832

 
$
542,595

Less purchases of property, plant and equipment
533,512

 
466,694

 
445,669

Free cash flow
$
(144,449
)
 
$
50,138

 
$
96,926




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Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2012, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
 
 
 
Payments Due for Year Ending December 31,
 
Total
 
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
 
(In thousands)
Total debt
$
1,545,000

 
$

 
$
250,000

 
$
100,000

 
$

 
$
137,000

 
$
1,058,000

Scheduled interest payment obligations (1)
618,182

 
96,638

 
89,138

 
78,350

 
77,428

 
74,509

 
202,119

Purchase obligations (2)
118,341

 
118,341

 

 

 

 

 

Operating lease obligations
29,036

 
11,671

 
7,926

 
5,517

 
953

 
860

 
2,109

Severance obligations (3)
126,513

 
9,516