10-Q


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
Form 10-Q

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended September 30, 2015
or
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from          to          

Commission File Number 000-29472
AMKOR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
 
 
 
23-1722724
(I.R.S. Employer
Identification Number)
2045 East Innovation Circle
Tempe, AZ 85284
(Address of principal executive offices and zip code)
(480) 821-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.  Yes þ  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ
The number of outstanding shares of the registrant’s Common Stock as of October 23, 2015 was 237,363,257.
 




QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2015

TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 

This report contains forward-looking statements within the meaning of the federal securities laws, including but not limited to statements regarding: (1) the amount, timing and focus of our expected capital investments in 2015 and 2016, including expenditures in support of customer demand in the mobile communications market and expenditures related to our new factory and research and development facility in Korea, (2) our ability to fund our operating activities for the next twelve months, (3) the relationship between our revenue levels and gross margin, (4) the focus of our research and development activities, (5) the expiration of tax holidays in jurisdictions in which we operate and expectations regarding our effective tax rate, (6) expectations regarding our deferred tax assets and the establishment or release of valuation allowances related to such tax assets in the future, (7) our repurchase or repayment of outstanding debt or the conversion of debt in the future, (8) payment of dividends to our stockholders and the tax impact of dividends from our foreign subsidiaries, (9) compliance with our covenants, (10) expected contributions to foreign pension plans, (11) liability for unrecognized tax benefits and the potential impact of our unrecognized tax benefits on our effective tax rate, (12) the effect of foreign currency exchange rate exposure on our financial results, (13) the volatility of the trading price of our common stock, (14) changes to benefit plans for our employees in Korea and related funding requirements, (15) the anticipated schedule for construction of our new factory and research and development facility in Korea, (16) our plan to increase our ownership of J-Devices and consolidation of J-Devices' results into our consolidated financial statements, (17) our efforts to enlarge our customer base in certain geographic areas and markets, (18) demand for advanced packages in mobile devices and our technology leadership and potential growth in this market (19) expectations regarding the mobile device market and the impact of current macroeconomic conditions on our revenue growth in the future and (20) other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intend” or the negative of these terms or other comparable terminology. Because such statements include risks and uncertainties, actual results may differ materially from those anticipated in such forward-looking statements as a result of various factors, including those set forth in the following report as well as in Part II, Item 1A of this Quarterly Report on Form 10-Q.


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Table of Contents

PART I. FINANCIAL INFORMATION


Item 1.        Financial Statements

AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share data)
Net sales
$
734,362

 
$
812,824

 
$
2,213,959

 
$
2,276,327

Cost of sales
607,762

 
659,607

 
1,837,314

 
1,843,576

Gross profit
126,600

 
153,217

 
376,645

 
432,751

Selling, general and administrative
54,232

 
61,600

 
173,609

 
191,698

Research and development
21,073

 
16,437

 
59,119

 
59,561

Total operating expenses
75,305

 
78,037

 
232,728

 
251,259

Operating income
51,295

 
75,180

 
143,917

 
181,492

Interest expense
17,695

 
23,780

 
64,317

 
70,039

Interest expense, related party
1,243

 
1,243

 
3,727

 
3,727

Other (income) expense, net
(11,576
)
 
(9,626
)
 
(4,784
)
 
(15,289
)
Total other expense, net
7,362

 
15,397

 
63,260

 
58,477

Income before taxes and equity in earnings of unconsolidated affiliate
43,933

 
59,783

 
80,657

 
123,015

Income tax expense
16,568

 
14,985

 
27,198

 
32,425

Income before equity in earnings of unconsolidated affiliate
27,365

 
44,798

 
53,459

 
90,590

Equity in earnings of J-Devices
1,656

 
3,372

 
15,460

 
29,169

Net income
29,021

 
48,170

 
68,919

 
119,759

Net income attributable to noncontrolling interests
(847
)
 
(1,073
)
 
(2,386
)
 
(2,508
)
Net income attributable to Amkor
$
28,174

 
$
47,097

 
$
66,533

 
$
117,251

Net income attributable to Amkor per common share:
 
 
 
 
 

 
 

Basic
$
0.12

 
$
0.20

 
$
0.28

 
$
0.51

Diluted
$
0.12

 
$
0.20

 
$
0.28

 
$
0.50

Shares used in computing per common share amounts:
 
 
 
 
 

 
 
Basic
236,888

 
236,337

 
236,813

 
228,733

Diluted
236,974

 
237,509

 
237,168

 
236,672


The accompanying notes are an integral part of these statements.


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


 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Net income
$
29,021

 
$
48,170

 
$
68,919

 
$
119,759

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Adjustments to unrealized components of defined benefit pension plans, net of tax
22

 
16

 
66

 
622

Foreign currency translation adjustment
10

 
(98
)
 
(102
)
 
(11,906
)
Equity interest in J-Devices' other comprehensive income (loss), net of tax
4,587

 
(9,645
)
 
537

 
(5,939
)
Total other comprehensive income (loss)
4,619

 
(9,727
)
 
501

 
(17,223
)
Comprehensive income
33,640

 
38,443

 
69,420

 
102,536

Comprehensive income attributable to noncontrolling interests
(847
)
 
(1,073
)
 
(2,386
)
 
(2,508
)
Comprehensive income attributable to Amkor
$
32,793

 
$
37,370

 
$
67,034

 
$
100,028


The accompanying notes are an integral part of these statements.


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Table of Contents

AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)


 
September 30,
2015
 
December 31,
2014
 
(In thousands, except per share data)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
430,444

 
$
449,946

Restricted cash
2,000

 
2,681

Accounts receivable, net of allowances
410,256

 
469,683

Inventories
208,213

 
223,379

Other current assets
53,858

 
52,259

Total current assets
1,104,771

 
1,197,948

Property, plant and equipment, net
2,284,901

 
2,206,476

Investments
146,639

 
117,733

Restricted cash
2,163

 
2,123

Other assets
109,014

 
111,125

Total assets
$
3,647,488

 
$
3,635,405

LIABILITIES AND EQUITY
Current liabilities:
 

 
 

Short-term borrowings and current portion of long-term debt
$

 
$
5,000

Trade accounts payable
279,260

 
309,025

Capital expenditures payable
221,281

 
127,568

Accrued expenses
251,650

 
258,997

Total current liabilities
752,191

 
700,590

Long-term debt
1,365,376

 
1,450,824

Long-term debt, related party
75,000

 
75,000

Pension and severance obligations
149,952

 
152,673

Other non-current liabilities
101,564

 
125,382

Total liabilities
2,444,083

 
2,504,469

Commitments and contingencies (Note 17)


 


Amkor stockholders’ equity:
 

 
 

Preferred stock, $0.001 par value, 10,000 shares authorized, designated Series A, none issued

 

Common stock, $0.001 par value, 500,000 shares authorized, 282,597 and 282,231 shares issued, and 236,906 and 236,627 shares outstanding, in 2015 and 2014, respectively
283

 
282

Additional paid-in capital
1,882,529

 
1,878,810

Accumulated deficit
(450,429
)
 
(516,962
)
Accumulated other comprehensive loss
(32,366
)
 
(32,867
)
Treasury stock, at cost, 45,691 and 45,604 shares in 2015 and 2014, respectively
(213,576
)
 
(213,028
)
Total Amkor stockholders’ equity
1,186,441

 
1,116,235

Noncontrolling interests in subsidiaries
16,964

 
14,701

Total equity
1,203,405

 
1,130,936

Total liabilities and equity
$
3,647,488

 
$
3,635,405


The accompanying notes are an integral part of these statements.



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


 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
68,919

 
$
119,759

Depreciation and amortization
371,968

 
340,089

Loss on debt retirement
2,530

 

Gain on sale of subsidiary to J-Devices

 
(9,155
)
Other operating activities and non-cash items
(14,752
)
 
(27,811
)
Changes in assets and liabilities
(5,299
)
 
(17,214
)
Net cash provided by operating activities
423,366

 
405,668

Cash flows from investing activities:
 

 
 

Payments for property, plant and equipment
(352,644
)
 
(442,308
)
Proceeds from sale of property, plant and equipment
5,212

 
2,170

Cash received (transferred) on sale of subsidiary to J-Devices, net
8,355

 
(15,774
)
Investment in J-Devices
(12,908
)
 

Purchase of short-term investment

 
(20,000
)
Proceeds from short-term investment

 
20,000

Other investing activities
(869
)
 
(389
)
Net cash used in investing activities
(352,854
)
 
(456,301
)
Cash flows from financing activities:
 

 
 

Borrowings under revolving credit facilities
180,000

 

Payments under revolving credit facilities
(100,000
)
 

Proceeds from issuance of long-term debt
360,000

 
80,000

Payments of long-term debt
(530,000
)
 
(140,000
)
Payment of deferred consideration for an acquisition

 
(18,763
)
Proceeds from the issuance of stock through share-based compensation plans
657

 
5,826

Payments of tax withholding for restricted shares
(548
)
 
(1,348
)
Payments of subsidiary dividends to noncontrolling interests
(123
)
 

Net cash used in financing activities
(90,014
)
 
(74,285
)
Effect of exchange rate fluctuations on cash and cash equivalents

 
68

Net decrease in cash and cash equivalents
(19,502
)
 
(124,850
)
Cash and cash equivalents, beginning of period
449,946

 
610,442

Cash and cash equivalents, end of period
$
430,444

 
$
485,592

Non cash investing and financing activities:
 
 
 
Property, plant and equipment included in capital expenditures payable
$
221,281

 
$
295,027

Common stock issuance for conversion and exchange in 2014 of 6.0% Convertible senior subordinated notes due April 2014

 
56,350


The accompanying notes are an integral part of these statements.


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Table of Contents

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



1.    Interim Financial Statements

Basis of Presentation. The Consolidated Financial Statements and related disclosures as of September 30, 2015, and for the three and nine months ended September 30, 2015 and 2014, are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The December 31, 2014, Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In our opinion, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the results for the interim periods. These financial statements should be read in conjunction with the financial statements included in our Annual Report for the year ended December 31, 2014, filed on Form 10-K with the SEC on February 19, 2015. The results of operations for the three and nine months ended September 30, 2015, are not necessarily indicative of the results to be expected for the full year. Unless the context otherwise requires, all references to “Amkor,” “we,” “us,” “our” or the “company” are to Amkor Technology, Inc. and our subsidiaries.

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

2.    New Accounting Standards

Recently Issued Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and changes in judgments. ASU 2014-09 permits the use of either full retrospective or modified retrospective methods of adoption. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date by one year to December 15, 2017, for interim and annual reporting periods beginning after that date. Early adoption is permitted, but not before the original effective date of December 15, 2016. We are currently evaluating the method of adoption and the impact that this guidance will have on our financial statements and disclosure.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update), which clarifies that companies may continue to present unamortized debt issuance costs associated with line of credit arrangements as an asset. ASU 2015-03 and ASU 2015-15 are effective for interim and annual reporting periods beginning after December 15, 2015, and require retrospective application. Early adoption is permitted. ASU 2015-03 and ASU 2015-15 are not expected to have a significant impact on our financial statements and disclosure.

In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a


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


software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer's accounting for service contracts. ASU No. 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. ASU 2015-05 is not expected to have a significant impact on our financial statements and disclosure.

In July 2015, the FASB issued ASU 2015-11, Inventory - Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 requires inventory to be subsequently measured using the lower of cost and net realizable value, thereby eliminating the market value approach. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 and is applied prospectively. Early adoption is permitted. We are currently evaluating the impact that this guidance will have on our financial statements and disclosure.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805) - Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are identified, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. ASU 2015-16 is effective for reporting periods beginning after December 15, 2015 and is applied prospectively. Early adoption is permitted. ASU 2015-16 may affect our financial statements to the extent we have business combinations in the future.

3.    Sale of Subsidiary to J-Devices

On June 30, 2014, we sold 100% of the shares of our wholly-owned subsidiary engaged in semiconductor packaging and test operations in Japan to J-Devices Corporation ("J-Devices"), our equity-method joint venture in Japan, for ¥1.1 billion. For additional information regarding our investment in J-Devices, we refer you to Note 12. We received ¥0.1 billion ($1.0 million) in cash from J-Devices at closing and received the remaining ¥1.0 billion ($8.4 million) on June 30, 2015. We recognized a net gain on the sale of $9.2 million in our consolidated financial statements in other (income) expense, net, which includes a gain of $12.6 million from the release of accumulated foreign currency translation adjustments associated with the entity (Note 8). J-Devices recognized a gain of $14.7 million on the transaction in its consolidated financial statements as the fair value of the net assets acquired exceeded the purchase price. The gain recognized by J-Devices increased our equity in earnings of J-Devices by $8.8 million. The combined net gain we recognized was $18.0 million.



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


4.    Share-Based Compensation Plans

For the three and nine months ended September 30, 2015, we recognized share-based compensation attributable to stock options and restricted shares of $0.8 million and $3.1 million, respectively. For the three and nine months ended September 30, 2014, we recognized share-based compensation attributable to stock options and restricted shares of $0.9 million and $2.8 million, respectively. For the three and nine months ended September 30, 2015 and 2014, we recognized these costs primarily in selling, general and administrative expenses. There were no corresponding deferred income tax benefits for stock options or restricted shares.

Stock Options

The following table summarizes our stock option activity for the nine months ended September 30, 2015:
 
Number of
Shares
(In thousands)
 
Weighted Average
Exercise Price
Per Share
 
Weighted Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
(In thousands)
Outstanding at December 31, 2014
3,822

 
$
6.25

 
 
 
 

Granted
315

 
7.12

 
 
 
 

Exercised
(141
)
 
4.70

 
 
 
 

Forfeited or expired
(207
)
 
5.20

 
 
 
 

Outstanding at September 30, 2015
3,789

 
$
6.44

 
6.12
 
$
206

Fully vested at September 30, 2015 and expected to vest thereafter
3,768

 
$
6.44

 
6.11
 
$
204

Exercisable at September 30, 2015
2,546

 
$
6.95

 
5.04
 
$
103


The following assumptions were used to calculate the weighted average fair values of the options granted:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Expected life (in years)
6.0

 
6.1

 
5.8

 
6.1

Risk-free interest rate
1.8
%
 
2.0
%
 
1.8
%
 
2.0
%
Volatility
44
%
 
56
%
 
45
%
 
57
%
Dividend yield

 

 

 

Weighted average grant date fair value per option granted
$
2.33

 
$
5.43

 
$
3.20

 
$
4.46

 
Total unrecognized compensation expense from stock options, net of a forfeiture estimate, was $3.1 million as of September 30, 2015, which is expected to be recognized over a weighted-average period of approximately 2.0 years beginning October 1, 2015.


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


Restricted Shares

The following table summarizes our restricted share activity for the nine months ended September 30, 2015:
 
Number of
Shares
(In thousands)
 
Weighted
Average
Grant-Date
Fair Value
(Per share)
Nonvested at December 31, 2014
660

 
$
4.58

Awards granted
49

 
7.30

Awards vested
(227
)
 
4.87

Awards forfeited
(25
)
 
4.47

Nonvested at September 30, 2015
457

 
$
4.73


Total unrecognized compensation cost from restricted shares, net of a forfeiture estimate, was $1.8 million as of September 30, 2015, which is expected to be recognized over a weighted average period of approximately 1.4 years beginning October 1, 2015.

5.    Other Income and Expense

Other income and expense consists of the following:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Interest income
$
(523
)
 
$
(920
)
 
$
(2,196
)
 
$
(2,462
)
Foreign currency gain, net
(8,499
)
 
(7,928
)
 
(9,751
)
 
(3,381
)
Loss on debt retirement

 

 
9,560

 
757

Gain on sale of subsidiary to J-Devices (Note 3)

 

 

 
(9,155
)
Other income, net
(2,554
)
 
(778
)
 
(2,397
)
 
(1,048
)
Total other (income) expense, net
$
(11,576
)
 
$
(9,626
)
 
$
(4,784
)
 
$
(15,289
)

6.    Income Taxes

Our income tax expense of $27.2 million for the nine months ended September 30, 2015 primarily reflects income taxes at certain of our foreign operations and foreign withholding taxes. Our income tax expense also reflects income taxed in foreign jurisdictions where we benefit from tax holidays.

We monitor on an ongoing basis our ability to utilize our deferred tax assets and whether there is a need for a related valuation allowance. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations. For most of our foreign deferred tax assets, we consider it more likely than not that we will have sufficient taxable income to allow us to realize these deferred tax assets. However, in the event taxable income falls short of current expectations, we may need to establish a valuation allowance against such deferred tax assets. We have valuation allowances on select deferred tax assets in certain foreign jurisdictions. We also maintain a valuation allowance on all of our U.S. net deferred tax assets, including our net operating loss carryforwards. Such valuation allowances are released as the related tax benefits are realized or when sufficient evidence exists to conclude that it is more likely than not that the deferred tax assets will be realized.



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


Unrecognized tax benefits represent reserves for potential tax deficiencies or reductions in tax benefits that could result from federal, state or foreign tax audits. Our gross unrecognized tax benefits decreased from $12.7 million at December 31, 2014, to $10.4 million at September 30, 2015, primarily due to a change in filing position. At September 30, 2015, all of our unrecognized tax benefits would reduce our effective tax rate, if recognized. Our unrecognized tax benefits are subject to change as examinations of tax years are completed. Tax return examinations involve uncertainties, and there can be no assurances that the outcome of examinations will be favorable.

7.    Earnings Per Share

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

Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares include outstanding stock options, unvested restricted shares and convertible debt. The following table summarizes the computation of basic and diluted EPS:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands,
except per share data)
Net income attributable to Amkor
$
28,174

 
$
47,097

 
$
66,533

 
$
117,251

Income allocated to participating securities

 
(149
)
 
(102
)
 
(383
)
Net income available to Amkor common stockholders — basic
28,174

 
46,948

 
66,431

 
116,868

Adjustment for dilutive securities on net income:
 

 
 

 
 

 
 

Net income reallocated to participating securities

 

 

 
9

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

 

 

 
1,039

Net income attributable to Amkor — diluted
$
28,174

 
$
46,948

 
$
66,431

 
$
117,916

 
 
 
 
 
 
 
 
Weighted average shares outstanding — basic
236,888

 
236,337

 
236,813

 
228,733

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options and restricted share awards
86

 
1,172

 
355

 
841

6.0% convertible notes due 2014

 

 

 
7,098

Weighted average shares outstanding — diluted
236,974

 
237,509

 
237,168

 
236,672

Net income attributable to Amkor per common share:
 

 
 

 
 

 
 

Basic
$
0.12

 
$
0.20

 
$
0.28

 
$
0.51

Diluted
0.12

 
0.20

 
0.28

 
0.50


The following table summarizes the potential shares of common stock that were excluded from diluted EPS, because the effect of including these potential shares was antidilutive:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Stock options and restricted share awards
3,477

 
1,139

 
1,861

 
1,344




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


8.    Equity and Accumulated Other Comprehensive Income (Loss)

The following tables reflect the changes in equity attributable to both Amkor and the noncontrolling interests:
 
Attributable
to Amkor
 
Attributable to
Noncontrolling
Interests
 
Total
 
(In thousands)
Equity at December 31, 2014
$
1,116,235

 
$
14,701

 
$
1,130,936

Net income
66,533

 
2,386

 
68,919

Other comprehensive income
501

 

 
501

Issuance of stock through employee share-based compensation plans
657

 

 
657

Treasury stock acquired through surrender of shares for tax withholding
(548
)
 

 
(548
)
Share-based compensation
3,063

 

 
3,063

Subsidiary dividends paid to noncontrolling interests

 
(123
)
 
(123
)
Equity at September 30, 2015
$
1,186,441

 
$
16,964

 
$
1,203,405

 
Attributable
to Amkor
 
Attributable to
Noncontrolling
Interests
 
Total
 
(In thousands)
Equity at December 31, 2013
$
953,740

 
$
11,200

 
$
964,940

Net income
117,251

 
2,508

 
119,759

Other comprehensive loss
(17,223
)
 

 
(17,223
)
Issuance of stock through employee share-based compensation plans
5,826

 

 
5,826

Treasury stock acquired through surrender of shares for tax withholding
(1,348
)
 

 
(1,348
)
Share-based compensation
2,766

 

 
2,766

Conversion of debt to common stock
56,350

 

 
56,350

Equity at September 30, 2014
$
1,117,362

 
$
13,708

 
$
1,131,070


The following tables reflect the changes in accumulated other comprehensive income (loss), net of tax:
 
Defined Benefit Pension
 
Foreign Currency Translation
 
Equity Interest in J-Devices' Other Comprehensive Income (Loss)
 
Total
 
(In thousands)
Accumulated other comprehensive loss at
December 31, 2014
$
(2,525
)
 
$
(513
)
 
$
(29,829
)
 
$
(32,867
)
Other comprehensive (loss) income before reclassifications

 
(102
)
 
537

 
435

Amounts reclassified from accumulated other comprehensive loss
66

 

 

 
66

Other comprehensive income (loss)
66

 
(102
)
 
537

 
501

Accumulated other comprehensive loss at
September 30, 2015
$
(2,459
)
 
$
(615
)
 
$
(29,292
)
 
$
(32,366
)


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


 
Defined Benefit Pension
 
Foreign Currency Translation
 
Equity Interest in J-Devices' Other Comprehensive Income (Loss)
 
Total
 
(In thousands)
Accumulated other comprehensive (loss) income at
December 31, 2013
$
(1,013
)
 
$
11,451

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

 
681

 
(5,939
)
 
(5,258
)
Amounts reclassified from accumulated other comprehensive (loss) income
622

 
(12,587
)
 

 
(11,965
)
Other comprehensive income (loss)
622

 
(11,906
)
 
(5,939
)
 
(17,223
)
Accumulated other comprehensive loss at
September 30, 2014
$
(391
)
 
$
(455
)
 
$
(16,632
)
 
$
(17,478
)

Amounts reclassified out of accumulated other comprehensive (loss) income are included as a component of net periodic pension cost (Note 15) or other (income) expense, net as a result of the release of accumulated foreign currency translation adjustments associated with the sale of our subsidiary in Japan (Note 3).

9.    Factoring of Accounts Receivable

In certain foreign locations, we use non-recourse factoring arrangements with third party financial institutions to manage our working capital and cash flows. Under this program, we sell receivables to a financial institution for cash at a discount to the face amount. As part of the factoring arrangements, we perform certain collection and administrative functions for the receivables sold. For the three and nine months ended September 30, 2015, we sold accounts receivable totaling $82.4 million and $235.3 million, respectively, for a discount, plus fees, of $0.3 million and $1.1 million, respectively. For the three and nine months ended September 30, 2014, we sold accounts receivable totaling $102.0 million and $226.8 million, respectively, for a discount, plus fees, of $0.4 million and $1.0 million, respectively.

10.    Inventories

Inventories consist of the following:
 
September 30,
2015
 
December 31, 2014
 
(In thousands)
Raw materials and purchased components
$
150,736

 
$
161,942

Work-in-process
57,477

 
61,437

Total inventories
$
208,213

 
$
223,379




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


11.    Property, Plant and Equipment

Property, plant and equipment consist of the following:
 
September 30,
2015
 
December 31, 2014
 
(In thousands)
Land
$
207,985

 
$
207,985

Land use rights
26,845

 
26,845

Buildings and improvements
946,805

 
940,846

Machinery and equipment
4,072,733

 
3,953,891

Software and computer equipment
186,218

 
185,243

Furniture, fixtures and other equipment
17,020

 
15,347

Construction in progress
236,539

 
39,261

Total property, plant and equipment
5,694,145

 
5,369,418

Less accumulated depreciation and amortization
(3,409,244
)
 
(3,162,942
)
Total property, plant and equipment, net
$
2,284,901

 
$
2,206,476


Depreciation expense for the three and nine months ended September 30, 2015 was $122.8 million and $370.7 million, respectively. Depreciation expense for the three and nine months ended September 30, 2014 was $119.4 million and $339.2 million, respectively.

During 2013, we purchased land for a factory and research and development center in Korea ("K5") for $104.1 million. In 2014, we commenced construction activities and incurred costs of $29.8 million, including capitalized interest of $8.6 million, which is reflected in construction in progress. As of September 30, 2015, construction in progress reflects $205.8 million of costs, including capitalized interest of $15.4 million.

12.    Investments

Investments consist of the following:
 
September 30,
2015
 
December 31,
2014
 
Carrying
Value
(In thousands)
 
Ownership
Interest
 
Carrying
Value
(In thousands)
 
Ownership
Interest
Investment in unconsolidated affiliate
$
146,639

 
65.7
%
 
$
117,733

 
60.0
%

J-Devices Corporation

In October 2009, Amkor and Toshiba Corporation (“Toshiba”) invested in Nakaya Microdevices Corporation (“NMD”) and formed a joint venture to provide semiconductor packaging and test services in Japan. As a result of the transaction, NMD changed its name to J-Devices. We invested $16.7 million for our original 30% equity interest and options to acquire additional equity interests. We exercised our options and increased our ownership interest in J-Devices from 30% to 60% in April 2013, for an aggregate purchase price of $67.4 million, and from 60% to 65.7% in January 2015, for an aggregate purchase price of $12.9 million. J-Devices is now owned 65.7% by Amkor and 34.3% by the former shareholders of NMD.

The remaining option is exercisable beginning in the fourth quarter of 2015 and each year thereafter and permits us to increase our ownership interest in J-Devices up to 80% by purchasing shares owned by the other shareholders. If exercised in 2015, we would expect closing to occur by early 2016. After we own 80% or more shares, the original shareholders of NMD have a put option which allows them to sell their shares to us. The exercise price for all options is payable in cash


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


and is determined using a formula based on the net book value and a multiple of earnings before interest, taxes, depreciation and amortization of J-Devices.

The governance provisions currently applicable to J-Devices restrict our ability, even with our majority ownership, to cause J-Devices to take certain actions without the consent of the other investors. Accordingly, we account for our investment in J-Devices using the equity method of accounting. Under the equity method of accounting, we recognize our proportionate share of J-Devices' net income or loss, which is after J-Devices' income taxes in Japan, during each accounting period as a change in our investment in unconsolidated affiliate. J-Devices' financial information is converted to U.S. GAAP and translated into U.S. dollars using Japanese yen as the functional currency. In addition, we record equity method adjustments as a change in our investment. The equity method adjustments include the amortization of basis differences as a result of the cost of our investment differing from our proportionate share of J-Devices' equity.

On June 30, 2014, J-Devices purchased 100% of the shares of our wholly-owned subsidiary engaged in semiconductor packaging and test operations in Japan. For additional information regarding this transaction, we refer you to Note 3.

13.    Accrued Expenses

Accrued expenses consist of the following:
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Payroll and benefits
$
62,774

 
$
77,635

Deferred revenue and customer advances
50,747

 
56,829

Accrued settlement costs
32,432

 
32,414

Income taxes payable
29,274

 
31,580

Accrued interest
27,619

 
15,947

Accrued severance plan obligations
13,794

 
13,226

Other accrued expenses
35,010

 
31,366

Total accrued expenses
$
251,650

 
$
258,997




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Table of Contents

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


14.    Debt

Following is a summary of short-term borrowings and long-term debt:
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Debt of Amkor Technology, Inc.:
 

 
 

Senior secured credit facilities:
 

 
 

$200 million revolving credit facility, LIBOR plus 1.25%-1.75%, due December 2019 (1)
$
80,000

 
$

Senior notes:
 

 
 

7.375% Senior notes, due May 2018 (2)

 
345,000

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

 
400,000

6.375% Senior notes, due October 2022
525,000

 
525,000

Debt of subsidiaries:
 

 
 

Amkor Technology Korea, Inc. (10):
 
 
 
$41 million revolving credit facility, foreign currency funding-linked base rate plus 1.60%, due June 2016 (3)

 

Term loan, LIBOR plus 2.60%, due May 2018 (4)
100,000

 

Term loan, LIBOR plus 2.70%, due December 2019 (5)
70,000

 
70,000

Term loan, foreign currency funding-linked base rate plus 1.55%, due May 2020 (6)
150,000

 

Term loan, foreign currency funding-linked base rate plus 1.55%, due May 2020 (7)
80,000

 

Term Loan, fund floating rate plus 1.60%, due June 2020 (8)
30,000

 

Term loan, LIBOR plus 3.70%, due June 2016 (9)

 
70,000

Term loan, foreign currency funding-linked base rate plus 1.80%, due March 2017 (7)

 
80,000

Term loan, LIBOR plus 3.70%, due July 2017 (9)

 
30,000

Term loan, foreign currency funding-linked base rate plus 1.75%, due September 2017 (8)

 
5,000

 
1,435,000

 
1,525,000

Add: Unamortized premium
5,376

 
5,824

Less: Short-term borrowings and current portion of long-term debt

 
(5,000
)
Long-term debt (including related party)
$
1,440,376

 
$
1,525,824

(1)
Our $200.0 million senior secured revolving credit facility has a letter of credit sub-limit of $25.0 million. Interest is payable monthly in arrears, at LIBOR plus 1.25% to 1.75% (1.50% as of September 30, 2015). As of September 30, 2015, the borrowing base for our revolving credit facility is $198.7 million, which is adjusted based on the amount of our eligible accounts receivable. As of September 30, 2015, $118.3 million was available to be drawn.
(2)
In June 2015, we redeemed all $345.0 million aggregate principal amount of our outstanding 7.375% Senior Notes due 2018 ("Notes"). In accordance with the terms of the indenture governing the Notes, the redemption price was 101.844% of the principal amount of the Notes. We recorded a $6.4 million loss on extinguishment related to the premium paid on the call of the Notes and a $2.5 million charge for the write-off of the associated unamortized debt issuance costs. The redemption of the Notes was funded with cash on hand and borrowings under our credit facilities.


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


(3)
In June 2012, we entered into a $41.0 million revolving credit facility. Principal is payable at maturity. In February 2015, the facility was amended to lower the interest rate. Interest is due monthly in arrears, at a foreign currency funding-linked base rate plus 1.60%. As of September 30, 2015, $41.0 million was available to be drawn.
(4)
In May 2015, we entered into a term loan agreement pursuant to which we may borrow up to $120.0 million through May 2016 for working capital purposes. Principal is payable at maturity. Interest is payable quarterly in arrears, at LIBOR plus 2.60% (2.92% as of September 30, 2015). At September 30, 2015, $20.0 million was available to be borrowed.
(5)
In November 2012, we entered into a term loan agreement pursuant to which we could borrow up to $100.0 million through March 2014. Principal is payable upon maturity. In April 2015, the term loan was amended and now bears interest at LIBOR plus 2.70%, payable quarterly in arrears (2.98% as of September 30, 2015).
(6)
In May 2015, we entered into a term loan agreement pursuant to which we borrowed $150.0 million for the repayment of inter-company debt. Principal is payable in semiannual installments of $30.0 million beginning in May 2019, with the remaining balance due at maturity. Interest is due quarterly in arrears, at a foreign currency funding-linked base rate plus 1.55% (2.99% as of September 30, 2015).
(7)
In May 2015, we entered into a term loan agreement pursuant to which we borrowed $80.0 million, replacing the existing term loan due March 2017 with that bank. Principal is payable in semiannual installments of $10.0 million beginning in May 2019, with the remaining due at maturity. Interest is due quarterly in arrears, at a foreign currency funding-linked base rate plus 1.55% (2.99% as of September 30, 2015).
(8)
In May 2015, we entered into a term loan agreement pursuant to which we may borrow up to $150.0 million through November 2016 for capital expenditures and terminated the term loan due September 2017. Principal is payable at maturity. Interest is payable quarterly in arrears, at a fund floating rate plus 1.60% (2.23% as of September 30, 2015). At September 30, 2015, $120.0 million was available to be borrowed.
(9)
During the three months ended June 30, 2015, the outstanding balance was prepaid.
(10)
The loans in Korea are collateralized by substantially all the land, factories and equipment located at our facilities in Korea.
The debt of Amkor Technology, Inc. is structurally subordinated in right of payment to all existing and future debt and other liabilities of our subsidiaries. The agreements governing our indebtedness contain a number of affirmative and negative covenants which restrict our ability to pay dividends and could restrict our operations. We have never paid a dividend to our stockholders and we do not have any present plans for doing so. We were in compliance with all of our covenants at September 30, 2015.

Maturities
 
Total Debt
 
(In thousands)
Payments due for the year ending December 31,
 
2015
$

2016

2017

2018
100,000

2019
230,000

Thereafter
1,105,000

Total debt
$
1,435,000




- 16-


Table of Contents

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


15.    Severance and Pension Plans

Korean Severance Plan

Our subsidiary in Korea maintains an unfunded severance plan that covers certain employees that were employed prior to August 1, 2015. To the extent eligible employees are terminated, our subsidiary in Korea would be required to make lump-sum severance payments on behalf of these eligible employees for service provided prior to August 1, 2015. Factors used to determine severance benefits include employees' length of service, seniority and rate of pay. The employees' length of service and seniority are fixed as of August 1, 2015. The employees' rate of pay is adjusted to the rate of pay at the time of termination. Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date. Our contributions to the National Pension Plan of the Republic of Korea are deducted from accrued severance benefit liabilities. The provision recorded for severance benefits for the three and nine months ended September 30, 2015 was $5.9 million and $20.7 million, respectively. The provision recorded for severance benefits for the three and nine months ended September 30, 2014 was $5.8 million and $12.6 million, respectively. For service periods subsequent to August 1, 2015, employees participate in either a defined benefit pension plan or a defined contribution plan.

Foreign Defined Benefit Pension Plans

Our subsidiaries in Japan, Korea, Malaysia, the Philippines and Taiwan sponsor defined benefit pension plans. Charges to expense are based upon actuarial analyses. The components of net periodic pension cost for these defined benefit plans are as follows:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Service cost
$
4,177

 
$
1,101

 
$
6,605

 
$
3,974

Interest cost
725

 
748

 
2,251

 
2,321

Expected return on plan assets
(817
)
 
(782
)
 
(2,523
)
 
(2,329
)
Amortization of prior service cost
8

 
9

 
25

 
108

Recognized actuarial loss
23

 
17

 
69

 
125

Net periodic pension cost
$
4,116

 
$
1,093

 
$
6,427

 
$
4,199


As a result of the adoption of a defined benefit pension plan in Korea beginning on August 1, 2015, our net periodic pension cost has increased from the prior period.

We expect to make contributions of $9.0 million during the remainder of 2015. We closely monitor the funded status of the defined benefit pension plans with respect to legislative requirements. We intend to make at least the minimum contribution required by law each year.

Defined Contribution Plans

We sponsor defined contribution plans in Korea, Malaysia, Taiwan and the U.S. Total defined contribution expense was $1.8 million and $6.9 million for the three and nine months ended September 30, 2015, respectively, and $1.6 million and $5.4 million for the three and nine months ended September 30, 2014, respectively.

16.    Fair Value Measurements

The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows: Level 1, defined as quoted market prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than Level 1 that are observable,


- 17-


Table of Contents

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


either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities and Level 3, defined as unobservable inputs that are not corroborated by market data.

The fair values of cash, accounts receivable, trade accounts payable, capital expenditures payable, and certain other current assets and accrued expenses approximate carrying values because of their short-term nature. The carrying value of other non-current liabilities approximates fair value. Our assets and liabilities recorded at fair value on a recurring basis include cash equivalent money market funds and restricted cash money market funds. Cash equivalent money market funds and restricted cash money market funds are invested in U.S. money market funds and various U.S. and foreign bank operating and time deposit accounts, which are due on demand or carry a maturity date of less than three months when purchased. No restrictions have been imposed on us regarding withdrawal of balances with respect to our cash equivalents as a result of liquidity or other credit market issues affecting the money market funds we invest in or the counterparty financial institutions holding our deposits. Money market funds are valued using quoted market prices in active markets for identical assets.

Our recurring fair value measurements consist of the following:
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Cash equivalent money market funds (Level 1)
$
131,451

 
$
145,938

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

 
2,681


We also measure certain assets and liabilities, including property, plant and equipment and our investment in J-Devices, at fair value on a nonrecurring basis.

We measure the fair value of our debt for disclosure purposes. The following table presents the fair value of financial instruments that are not recorded at fair value on a recurring basis:
 
September 30, 2015
 
December 31, 2014
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
(In thousands)
Senior notes (Level 1)
$
872,202

 
$
930,376

 
$
1,268,619

 
$
1,275,824

Revolving credit facility and term loans (Level 2)
509,075

 
510,000

 
254,999

 
255,000

Total debt
$
1,381,277

 
$
1,440,376

 
$
1,523,618

 
$
1,530,824


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

17.    Commitments and Contingencies

We have a letter of credit sub-facility of $25.0 million under our $200.0 million senior secured revolving credit facility that matures in December 2019. As of September 30, 2015, we had $0.4 million of standby letters of credit outstanding. Such standby letters of credit are used in the ordinary course of our business and are collateralized by our cash balances.

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



- 18-


Table of Contents

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


Legal Proceedings

We are involved in claims and legal proceedings and may become involved in other legal matters arising in the ordinary course of our business. We evaluate these claims and legal matters on a case-by-case basis to make a determination as to the impact, if any, on our business, liquidity, results of operations, financial condition or cash flows. Although the outcome of these matters is uncertain, we believe that the ultimate outcome of these claims and proceedings, individually and in the aggregate, will not have a material adverse impact to us. Our evaluation of the potential impact of these claims and legal proceedings on our business, liquidity, results of operations, financial condition or cash flows could change in the future.

In accordance with the accounting guidance for loss contingencies, including legal proceedings, lawsuits, pending claims and other legal matters, we accrue for a loss contingency when we conclude that the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. We adjust our accruals from time to time as we receive additional information, but the loss we incur may be significantly greater than or less than the amount we have accrued. We disclose loss contingencies if we believe they are material and there is at least a reasonable possibility that a loss has been incurred. Attorney fees related to legal matters are expensed as incurred.



- 19-


Table of Contents


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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Amkor is one of the world’s leading providers of outsourced semiconductor packaging and test services. Our financial goals are sales growth and improved profitability, and we are focusing on the following strategies to achieve these goals: capitalizing on our investments in services for advanced technologies, improving utilization of existing assets and selectively growing our scale and scope through strategic investments.

We are an industry leader in developing and commercializing cost-effective advanced packaging and test technologies. These advanced technology solutions provide increased value to our customers while typically generating gross margins above our corporate average. This is particularly true in the mobile device market, where growth has outpaced the semiconductor industry rate. Advanced packages are now the preferred choice in both the high-end and the mid-range segments of the smartphone market, which together account for a high portion of mobile phone semiconductor value. The demand for advanced packages is also being driven by second-wave mobile device customers, who are transitioning out of wirebond into wafer-level and flip-chip packages. Our technology leadership and this technology transition create significant growth opportunities for us.

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

From time to time, we identify attractive opportunities to grow our customer base and expand the markets we serve. For example, in 2009 we invested in J-Devices Corporation, a joint venture to provide semiconductor packaging and test services in Japan. We increased our investment in J-Devices to 60% in 2013 and to 65.7% in 2015. In 2013, we acquired Toshiba’s power discrete semiconductor packaging and test factory in Malaysia. We believe that selective growth through joint ventures, acquisitions and other strategic investments can help diversify our revenue streams, improve our profits and continue our technological leadership.

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

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

During the second and third quarters, we experienced soft demand and general weakness in the mobile device market. We expect the mobile device market conditions to remain sluggish in the fourth quarter of 2015 as customers cautiously manage inventories in response to the generally soft end market demand for electronic devices.

Our net sales, gross profit, operating income, cash flows, liquidity and capital resources have historically fluctuated significantly from quarter to quarter as a result of many factors, including the seasonality of our business, the cyclical nature of the semiconductor industry and other factors discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q.



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

Financial Highlights

Our net sales decreased $78.5 million or 9.7% to $734.4 million for the three months ended September 30, 2015, from $812.8 million for the three months ended September 30, 2014. The decrease was primarily driven by soft demand and general weakness in the mobile communications, computing, consumer and networking markets.

Gross margin for the three months ended September 30, 2015, decreased to 17.2% from 18.8% for the three months ended September 30, 2014, primarily due to lower net sales, partially offset by favorable foreign currency exchange rate movements and lower costs for gold.

Our capital expenditures totaled $352.6 million for the nine months ended September 30, 2015, compared to $442.3 million for the nine months ended September 30, 2014. Our spending was primarily focused on investments in advanced packaging and test equipment and construction of our K5 facility in Korea.

Net cash provided by operating activities was $423.4 million for the nine months ended September 30, 2015, compared to $405.7 million for the nine months ended September 30, 2014. The increase is primarily due to cash generated by operating activities, partially offset by settlement payments for patent license litigation and cash paid for debt retirement.

Results of Operations

The following table sets forth certain operating data as a percentage of net sales for the periods indicated:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Materials
36.8
%
 
37.5
%
 
36.9
%
 
37.2
%
Labor
14.9
%
 
14.1
%
 
14.9
%
 
14.2
%
Other manufacturing costs
31.1
%
 
29.6
%
 
31.2
%
 
29.6
%
Gross margin
17.2
%
 
18.8
%
 
17.0
%
 
19.0
%
Operating income
7.0
%
 
9.2
%
 
6.5
%
 
8.0
%
Income before taxes and equity in earnings of unconsolidated affiliate
6.0
%
 
7.4
%
 
3.6
%
 
5.4
%
Net income attributable to Amkor
3.8
%
 
5.8
%
 
3.0
%
 
5.2
%

Net Sales
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(In thousands, except percentages)
Net sales
$
734,362

 
$
812,824

 
$
(78,462
)
 
(9.7
)%
 
$
2,213,959

 
$
2,276,327

 
$
(62,368
)
 
(2.7
)%

The decrease in net sales for the three months ended September 30, 2015, compared with the three months ended September 30, 2014, was primarily due to soft demand and general weakness in the mobile communications, computing, consumer and networking markets. We benefitted from growth in our SiP business, particularly for RF ("radio frequency") and front


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end applications for smartphones and tablets, which helped offset some of the weakness we experienced in the broader mobile communications market.

The decrease in net sales for the nine months ended September 30, 2015, compared with the nine months ended September 30, 2014, was primarily attributable to lower revenue due to the sale of our Japanese subsidiary in June 2014 and soft demand and general weakness in the computing and consumer end markets. Our mobile communications revenues increased modestly, driven by growth in our SiP and NAND memory businesses, and higher sales to customers in Greater China.


Gross Margin
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(In thousands, except percentages)
Gross profit
$
126,600

 
$
153,217

 
$
(26,617
)
 
$
376,645

 
$
432,751

 
$
(56,106
)
Gross margin
17.2
%
 
18.8
%
 
(1.6
)%
 
17.0
%
 
19.0
%
 
(2.0
)%

Our cost of sales consists principally of materials, labor, depreciation and manufacturing overhead. Since a substantial portion of the costs at our factories is fixed, there tends to be a direct relationship between our revenue levels and gross margin where relatively modest increases or decreases can have a significant effect.

Gross margin for the three and nine months ended September 30, 2015, decreased compared to the three and nine months ended September 30, 2014, due to lower net sales, partially offset by favorable foreign currency exchange rate movements and lower costs for gold, which is used in many of our wirebond products. Gross margin for the nine months ended September 30, 2015, also decreased due to increased depreciation expense from our continued investments in property, plant and equipment and higher employee compensation costs at our factories.

Selling, General and Administrative Expenses
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(In thousands, except percentages)
Selling, general and administrative
$
54,232

 
$
61,600

 
$
(7,368
)
 
(12.0
)%
 
$
173,609

 
$
191,698

 
$
(18,089
)
 
(9.4
)%

Selling, general and administrative expenses for the three and nine months ended September 30, 2015, decreased compared to the three and nine months ended September 30, 2014. The decrease was attributable to foreign currency exchange rate movements, lower professional fees and employee incentive compensation costs.

Research and Development
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(In thousands, except percentages)
Research and development
$
21,073

 
$
16,437

 
$
4,636

 
28.2
%
 
$
59,119

 
$
59,561

 
$
(442
)
 
(0.7
)%

Research and development activities are focused on developing new packaging and test services and improving the efficiency and capabilities of our existing production processes. The increase in research and development expenses for the three months ended September 30, 2015, was primarily attributable to expanded development activities related to advanced silicon node chipsets with strategic customers, additional depreciation resulting from continued investments and higher employee compensation expense. The decrease in research and development expenses for the nine months ended September 30, 2015, was driven by 20 nanometer chipset design wins that moved into production in the second half of 2014, partially offset by the factors mentioned above.


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Other Income and Expense
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(In thousands, except percentages)
Interest expense, including related party
$
18,938

 
$
25,023

 
$
(6,085
)
 
(24.3
)%
 
$
68,044

 
$
73,766

 
$
(5,722
)
 
(7.8
)%
Other (income) expense, net
(11,576
)
 
(9,626
)
 
(1,950
)
 
20.3
 %
 
(4,784
)
 
(15,289
)
 
10,505

 
(68.7
)%
Total other expense, net
$
7,362

 
$
15,397

 
$
(8,035
)
 
(52.2
)%
 
$
63,260

 
$
58,477

 
$
4,783

 
8.2
 %

Interest expense decreased for the three and nine months ended September 30, 2015, compared to the three and nine months ended September 30, 2014, due to lower interest rates on our outstanding debt.

For the nine months ended September 30, 2015, other (income) expense, net included a loss on debt retirement of $8.9 million relating to the early repayment of our 7.375% Senior Notes due May 2018. For the nine months ended September 30, 2014, other (income) expense, net included a $9.2 million gain on the sale of a subsidiary to J-Devices. In addition, other (income) expense, net increased due to foreign currency gains as a result of favorable exchange rate movements and the associated impact on our net monetary exposure at our foreign subsidiaries.

Income Tax Expense
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(In thousands, except percentages)
Income tax expense
$
16,568

 
$
14,985

 
$
1,583

 
10.6
%
 
$
27,198

 
$
32,425

 
$
(5,227
)
 
(16.1
)%

Generally, our effective tax rate is below the U.S. federal tax rate of 35% because the majority of our income is taxed in foreign jurisdictions where we benefit from tax holidays or tax rates lower than the U.S. statutory rate. Our income tax expense for the three and nine months ended September 30, 2015 and 2014 was primarily attributable to income tax on profits earned in certain foreign jurisdictions and foreign withholding taxes.

Our income tax expense reflects the applicable tax rates in effect in the various countries in which our income is earned and is subject to volatility depending on the relative jurisdictional mix of earnings. During 2015 and 2014, our subsidiaries in Korea, Malaysia, the Philippines and Taiwan operated under tax holidays which will continue to expire in whole or in part at various dates through 2022. We expect our effective tax rate to increase as the tax holidays expire as income earned in these jurisdictions will then be subject to higher statutory income tax rates.

Equity in Earnings of J-Devices
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(In thousands, except percentages)
Equity in earnings of J-Devices
$
1,656

 
$
3,372

 
$
(1,716
)
 
(50.9
)%
 
$
15,460

 
$
29,169

 
$
(13,709
)
 
(47.0
)%

In January 2015, we increased our ownership interest in J-Devices from 60% to 65.7%. In June 2014, J-Devices acquired our Japanese subsidiary, which resulted in $8.8 million of additional equity in earnings due to the gain on J-Devices' purchase. In addition, the decrease from the three months ended September 30, 2014 was primarily related to lower demand. For the nine month period, the decrease was principally due to a lower settlement of a take or pay arrangement under a manufacturing services agreement.


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Liquidity and Capital Resources

We assess our liquidity based on our current expectations regarding sales, operating expenses, capital spending and debt service and other liability 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 credit facilities, will be sufficient to fund our working capital, capital expenditure, debt service and other liability requirements for at least the next twelve months. Our liquidity is affected by, among other things, volatility in the global economy and credit markets, the performance of our business, our capital expenditure levels, other uses of our cash including any purchases of stock under our stock repurchase program, any acquisitions or investments in joint ventures and our ability to either repay debt out of operating cash flow or refinance it at or prior to maturity with the proceeds of debt or equity offerings. There can be no assurance that we will generate the necessary net income or operating cash flows, or be able to borrow sufficient funds, to meet the funding needs of our business beyond the next twelve months due to a variety of factors, including the cyclical nature of the semiconductor industry and other factors discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Our primary source of cash and the source of funds for our operations are cash flows from operations, current cash and cash equivalents, borrowings under available debt facilities and proceeds from any additional debt or equity financings. As of September 30, 2015, we had cash and cash equivalents of $430.4 million. Included in our cash balance as of September 30, 2015, is $277.9 million held offshore by our foreign subsidiaries. If we were to distribute this offshore cash to the U.S. as dividends from our foreign subsidiaries, we would incur foreign withholding taxes; however, we would not incur a significant amount of U.S. federal income taxes, due to the availability of tax loss carryovers and foreign tax credits.

As of September 30, 2015, we had availability of $118.3 million under our $200.0 million first lien senior secured revolving credit facility. Our foreign subsidiaries had $41.0 million available to be drawn under secured revolving credit facilities and $140.0 million available to be borrowed under secured term loan credit facilities for working capital purposes and capital expenditures.

As of September 30, 2015 we had $1,440.4 million of debt. Our scheduled principal repayments on debt include $100.0 million due in 2018, $230.0 million due in 2019 and $1,105.0 million due thereafter. We were in compliance with all of our debt covenants at September 30, 2015, and we expect to remain in compliance with these covenants for at least the next twelve months.

In certain foreign locations, we use non-recourse factoring arrangements with third party financial institutions to manage our working capital and cash flows. Under this program, we sell receivables to a financial institution for cash at a discount to the face amount. Available capacity under these programs is dependent on the level of our trade accounts receivable eligible to be sold, the financial institutions' willingness to purchase such receivables and the limits provided by the financial institutions. For the nine months ended September 30, 2015 and 2014, we sold accounts receivable totaling $235.3 million and $226.8 million, respectively, for a discount, plus fees, of $1.1 million and $1.0 million, respectively. At September 30, 2015 and December 31, 2014, there were outstanding receivables of $75.9 million and $102.7 million, respectively, which had been sold to financial institutions under these arrangements.
 
In order to reduce our debt and future cash interest payments, we may from time to time repurchase our outstanding notes for cash or exchange shares of our common stock for our outstanding notes. Any such transaction may be made in the open market, through privately negotiated transactions or otherwise and is subject to the terms of our indentures and other debt agreements, market conditions and other factors.

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

Our subsidiary in Korea maintains an unfunded severance plan that covers certain employees that were employed prior to August 1, 2015. As of September 30, 2015, the severance liability was $143.1 million. For service periods subsequent to August 1, 2015, employees participate in either a defined benefit pension plan or a defined contribution plan.



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In January 2015, we settled our patent license litigation with Tessera. Under the terms of the settlement, Amkor agreed to pay Tessera a total of $155.0 million in 16 equal quarterly recurring payments commencing in the first quarter of 2015 and continuing through the fourth quarter of 2018. As of September 30, 2015, we owe Tessera $125.9 million.

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

Our Board of Directors previously authorized the repurchase of up to $300.0 million of our common stock, exclusive of any fees, commissions or other expenses. At September 30, 2015, approximately $91.6 million was available to repurchase common stock pursuant to the stock repurchase program. The purchase of stock may be made in the open market or through privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, the cash needs and investment opportunities for the business, the current market price of our stock, applicable legal requirements and other factors. We have not purchased any stock under the plan since 2012.

Investments

We make significant capital expenditures in order to service the demand of our customers, which is primarily focused on investments in advanced packaging and test equipment. In September 2014, we started the construction of our new K5 facility in Korea. We plan to spend approximately $325 million for the construction of the facility in 2015 and 2016.

We expect that our 2015 capital expenditures will be approximately $525 million, approximately $150 million of which will be spent on K5. During the nine months ended September 30, 2015, our capital expenditures totaled $352.6 million, including $82.6 million for K5. Ultimately, the amount of our 2015 capital expenditures will depend on several factors including, among others, the timing and implementation of any capital projects under review, the performance of our business, economic and market conditions, the cash needs and investment opportunities for the business, the need for additional capacity to service anticipated customer demand and the availability of cash flows from operations or financing.

In January 2015, we exercised our option to increase our ownership interest of J-Devices from 60% to 65.7% for an aggregate purchase price of ¥1.5 billion ($12.9 million). We expect to exercise our option to further increase our ownership in J-Devices to 80% in the fourth quarter of 2015, subject to market and other conditions at the time of exercise. If we exercise our 80% option in 2015, we would expect closing to occur by early 2016, at which point certain governance restrictions of our shareholders' agreement will lapse, and we will begin consolidating the financial results of J-Devices. The exercise price for all options is payable in cash and is determined using a formula based upon the net book value and a multiple of earnings before interest, taxes, depreciation and amortization of J-Devices.

In addition, we are subject to risks associated with our capital expenditures, including those discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q under the caption "Capital Expenditures - We Make Substantial Investments in Equipment and Facilities To Support the Demand Of Our Customers, Which May Adversely Affect Our Business If the Demand Of Our Customers Does Not Develop As We Expect or Is Adversely Affected."



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Cash Flows

Net cash provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2015 and 2014, were as follows:
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
(In thousands)
Operating activities
$
423,366

 
$
405,668

Investing activities
(352,854
)
 
(456,301
)
Financing activities
(90,014
)
 
(74,285
)

Operating activities:   Our cash flows provided by operating activities for the nine months ended September 30, 2015, increased by $17.7 million compared to the nine months ended September 30, 2014, primarily due to cash generated by operating activities, partially offset by settlement payments for patent license litigation and cash paid for debt retirement.

Investing activities:   Our cash flows used in investing activities are principally for payments for property, plant and equipment. In addition, the net cash used in investing activities for the nine months ended September 30, 2015, included a payment for an incremental investment in J-Devices, partially offset by the receipt of the final payment for the sale of our subsidiary to J-Devices. The net cash used in investing activities for the nine months ended September 30, 2014, included cash transferred on the sale of our subsidiary to J-Devices, net of proceeds.

Financing activities:   The net cash used in financing activities for the nine months ended September 30, 2015, was primarily driven by the repayment of our 7.375% Senior Notes due 2018 and other debt, partially offset by new borrowings. The net cash used in financing activities for the nine months ended September 30, 2014, primarily resulted from our repayment of borrowings at our subsidiary in Korea and the final payment for the acquisition of the power discrete business in Malaysia.

We provide the following supplemental data to assist our investors and analysts in understanding our liquidity and capital resources. We define free cash flow as net cash provided by operating activities less payments for property, plant and equipment. Free cash flow is not defined by U.S. GAAP. We believe free cash flow to be relevant and useful information to our investors because it provides them with additional information in assessing our liquidity, capital resources and financial operating results. Our management uses free cash flow in evaluating our liquidity, our ability to service debt and our ability to fund capital expenditures. However, free cash flow has certain limitations, including that it does not represent the residual cash flow available for discretionary expenditures since other, non-discretionary expenditures, such as mandatory debt service, are not deducted from the measure. The amount of mandatory versus discretionary expenditures can vary significantly between periods. This measure should be considered in addition to, and not as a substitute for, or superior to, other measures of liquidity or financial performance prepared in accordance with U.S. GAAP, such as net cash provided by operating activities. Furthermore, our definition of free cash flow may not be comparable to similarly titled measures reported by other companies. We had free cash flow of $70.7 million for the nine months ended September 30, 2015, which increased from negative free cash flow of $36.6 million for the nine months ended September 30, 2014. The increase in free cash flow was primarily due to reduced capital expenditures in the current period.
 
For the Nine Months Ended
September 30,
 
2015
 
2014
 
(In thousands)
Net cash provided by operating activities
$
423,366

 
$
405,668

Payments for property, plant and equipment
(352,644
)
 
(442,308
)
Free cash flow
$
70,722

 
$
(36,640
)



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Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2015, 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
 
2015 -
Remaining
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
(In thousands)
Total debt
$
1,435,000

 
$

 
$

 
$

 
$
100,000

 
$
230,000

 
$
1,105,000

Scheduled interest payment obligations (1)
466,270

 
33,426

 
73,736

 
73,736

 
71,909

 
70,732

 
142,731

Purchase obligations (2)
197,132

 
155,155

 
30,057

 
2,283

 
4,658

 
886

 
4,093

Operating lease obligations
54,925

 
3,219

 
12,204

 
9,406

 
6,903

 
7,033

 
16,160

Severance obligations (3)
143,147

 
3,448

 
12,453

 
11,343

 
10,327

 
9,405

 
96,171

Settlement payments (4)
125,938

 
9,688

 
38,750

 
38,750

 
38,750

 

 

Total contractual obligations
$
2,422,412

 
$
204,936

 
$
167,200

 
$
135,518

 
$
232,547

 
$
318,056

 
$
1,364,155

(1)
Scheduled interest payment obligations were calculated using stated coupon rates for fixed rate debt and interest rates applicable at September 30, 2015, for variable rate debt.
(2)
Represents off-balance sheet purchase obligations for capital expenditures and long-term supply contracts outstanding at September 30, 2015, including $109.6 million for construction obligations for K5.
(3)
Represents estimated benefit payments for our Korean subsidiary severance plan.
(4)
Represents settlement payments for patent license litigation. At September 30, 2015, the total obligation is $125.9 million of which $32.4 million is a current liability, $81.5 million is a non-current liability and $12.0 million will be imputed into interest over time.
In addition to the obligations identified in the table above, other non-current liabilities recorded in our Consolidated Balance Sheets at September 30, 2015, include:
$20.6 million of net foreign pension plan obligations, for which the timing and actual amount of impact on our future cash flow is uncertain.
$7.0 million net liability associated with unrecognized tax benefits. Due to the uncertainty regarding the amount and the timing of any future cash outflows associated with our unrecognized tax benefits, we are unable to reasonably estimate the amount and period of ultimate settlement, if any, with the various taxing authorities.
Off-Balance Sheet Arrangements

As of September 30, 2015, we had no off-balance sheet guarantees or other off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Contingencies, Indemnifications and Guarantees

We refer you to Note 17 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of our contingencies related to litigation and other legal matters. The potential impact from legal proceedings on our business, liquidity, results of operations, financial position and cash flows could change in the future.

Critical Accounting Policies

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014. During the three months ended September 30, 2015, there have been no significant changes in our critical accounting policies as reported in our 2014 Annual Report on Form 10-K.



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New Accounting Pronouncements

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

Item 3.        Quantitative and Qualitative Disclosures about Market Risk

Market Risk Sensitivity

We are exposed to market risks, primarily related to foreign currency and interest rate fluctuations. In the normal course of business, we employ established policies and procedures to manage the exposure to fluctuations in foreign currency values and changes in interest rates. Our use of derivative instruments, including forward exchange contracts, has been historically insignificant; however, we continue to evaluate the use of hedging instruments to manage currency and other risks.

Foreign Currency Risk
 

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

We have foreign currency exchange rate risk associated with the remeasurement of monetary assets and liabilities on our Consolidated Balance Sheets that are denominated in currencies other than the functional currency. We performed a sensitivity analysis of our foreign currency exposure as of September 30, 2015, to assess the potential impact of fluctuations in exchange rates for all foreign denominated assets and liabilities. Assuming a 10% adverse movement for all currencies against the U.S. dollar as of September 30, 2015, our income before taxes and equity in earnings of unconsolidated affiliate would have been approximately $28 million lower, due to the remeasurement of monetary assets and liabilities. We have a significant net monetary liability at our subsidiary in Korea, principally driven by our Korean severance plan and construction costs for K5.

In addition, we have foreign currency exchange rate exposure on our results of operations. For the nine months ended September 30, 2015, approximately 97% of our net sales were denominated in U.S. dollars. Our remaining net sales were principally denominated in Korean won for local country sales. For the nine months ended September 30, 2015, approximately 64% of our cost of sales and operating expenses were denominated in U.S. dollars and were largely for raw materials and depreciation. The remaining portion of our cost of sales and operating expenses was principally denominated in the Asian currencies where our production facilities are located and largely consisted of labor and utilities. To the extent that the U.S. dollar weakens against these Asian-based currencies, similar foreign currency denominated transactions in the future will result in higher sales, higher cost of sales and operating expenses, with cost of sales and operating expenses having the greater impact on our financial results. Similarly, our sales, cost of sales and operating expenses will decrease if the U.S. dollar strengthens against these foreign currencies. We performed a sensitivity analysis of our foreign currency exposure as of September 30, 2015, to assess the potential impact of fluctuations in exchange rates for all foreign denominated sales and expenses. Assuming a 10% adverse movement in the U.S. dollar compared to all of these Asian-based currencies, our operating income for the nine months ended September 30, 2015 would have been approximately $74 million lower due to this exposure.

There are inherent limitations in the sensitivity analysis presented, primarily due to the assumption that foreign exchange rate movements across multiple jurisdictions are similar and would be linear and instantaneous. As a result, the analysis is unable to reflect the potential effects of more complex market or other changes that could arise which may positively or negatively affect our results of operations.

Our consolidated financial statements are impacted by changes in exchange rates at entities where the local currency is the functional currency. The effect of foreign exchange rate translation for these entities for the nine months ended September 30, 2015 and 2014, was a net foreign translation gain of $0.3 million and $0.7 million, respectively, and was recognized as an adjustment to equity through other comprehensive income.


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Interest Rate Risk

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

The table below presents the interest rates, maturities and fair value of our fixed and variable rate debt as of September 30, 2015:
 
2015 -
Remaining
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
Fair Value
 
($ in thousands)
Long term debt:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed rate debt
$

 
$

 
$

 
$

 
$

 
$
925,000

 
$
925,000

 
$
872,202

Average interest rate
%
 
%
 
%
 
%
 
%
 
6.5
%
 
6.5
%
 
 
Variable rate debt
$

 
$

 
$

 
$
100,000

 
$
230,000

 
$
180,000

 
$
510,000

 
$
509,075

Average interest rate
%
 
%
 
%
 
2.9
%
 
2.5
%
 
2.9
%
 
2.7
%
 
 
Total debt
$

 
$

 
$

 
$
100,000

 
$
230,000

 
$
1,105,000

 
$
1,435,000

 
$
1,381,277


For information regarding the fair value of our long-term debt, see Note 16 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 4.        Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2015, and concluded those disclosure controls and procedures were effective as of that date.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II. OTHER INFORMATION

Item 1.        Legal Proceedings

Information about legal proceedings is set forth in Note 17 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2014.



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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 Table of Contents of this Quarterly Report on Form 10-Q. You should carefully consider the risks and uncertainties described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing Amkor. Additional risks and uncertainties not presently known to us may also impair our business operations. The occurrence of any of the following risks could affect our business, liquidity, results of operations, financial condition or cash flows.

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

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

Since our business is, and will continue to be, dependent on the requirements of semiconductor companies for outsourced packaging and test services, any downturn in the semiconductor industry or any other industry that uses a significant number of semiconductor devices, such as telecommunications, consumer electronics, or computing, could have a material adverse effect on our business and operating results. During downturns we have experienced, among other things, reduced demand, excess capacity and reduced sales. For example, in the second and third quarters of 2015, we experienced soft demand and general weakness in the mobile device market. We expect the mobile device market conditions to remain sluggish in the fourth quarter of 2015 as customers cautiously manage inventories in response to the generally soft end market demand for electronic devices. Macroeconomic uncertainties and a cautious business climate are also expected to constrain the seasonal revenue growth we would normally see in our business. It is difficult to predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, which, in turn, makes it more challenging for us to forecast our operating results, make business decisions and identify risks that may affect our business, sources and uses of cash, financial condition and results of operations. Additionally, if industry conditions deteriorate, we could suffer significant losses, as we have in the past, which could materially impact our business, liquidity, results of operations, financial condition and cash flows.

Also, the action or inaction of the U.S. government relating to federal income tax increases for individuals or corporations, the federal debt ceiling, the federal deficit and government spending restrictions or shutdowns, may adversely affect consumer demand and economic growth in the U.S. and globally, which may harm the semiconductor industry and our business.

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

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

Our net sales, gross profit, operating income and cash flows have historically fluctuated significantly from quarter to quarter as a result of many of the following factors, over which we have little or no control and which we expect to continue to impact our business:
fluctuation in demand for semiconductors and conditions in the semiconductor industry generally, as well as by specific customers, such as inventory reductions by our customers impacting demand in key markets;
changes in our capacity and capacity utilization rates;


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changes in average selling prices which can occur quickly due to the absence of long term agreements on price;
changes in the mix of the semiconductor packaging and test services that we sell;
the development, transition and ramp to high volume manufacture of more advanced silicon nodes and evolving wafer, packaging and test technologies, may cause production delays, lower manufacturing yields and supply constraints for new wafers and other materials;
absence of backlog, the short-term nature of our customers’ commitments, double bookings by customers and deterioration in customer forecasts and the impact of these factors, including the possible delay, rescheduling and cancellation of large orders, or the timing and volume of orders relative to our production capacity;
changes in costs, quality, availability and delivery times of raw materials, components and equipment;
changes in labor costs to perform our services;
wage inflation and fluctuations in commodity prices, including gold, copper and other precious metals;
the timing of expenditures in anticipation of future orders;
changes in effective tax rates;
the availability and cost of financing;
intellectual property transactions and disputes;
high leverage and restrictive covenants;
warranty and product liability claims and the impact of quality excursions and customer disputes and returns;
costs associated with legal claims, indemnification obligations, judgments and settlements;
international events, 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;
costs of acquisitions and divestitures, difficulties integrating acquisitions, the failure of our joint ventures to operate in accordance with business plans and fluctuations in the results of investments accounted for using the equity method;
our ability to attract and retain qualified personnel to support our global operations;
fluctuations in foreign exchange rates;
fluctuations in our manufacturing yields;
our ability to penetrate various market segments, such as power discrete and the mid-tier and entry-level segments of the mobile device market;
dependence on key customers or concentration of customers in certain end markets, such as mobile communications and
restructuring charges, asset write-offs and impairments.

It is often difficult to predict the impact of these factors upon our results for a particular period. The downturn in the global economy and the semiconductor industry in 2009 increased the risks associated with the foregoing factors as customer forecasts became more volatile, and there was less visibility regarding future demand and significantly increased uncertainty regarding the economy, credit markets and consumer demand. The slow rate of economic growth in the U.S. and elsewhere and economic uncertainty worldwide could continue to cause volatility in customer forecasts and reduce our visibility regarding future demand in the semiconductor industry. These factors may have a material and adverse effect on our


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business, liquidity, results of operations, financial condition and cash flows or lead to significant variability of quarterly or annual operating results. In addition, these factors may adversely affect our credit ratings which could make it more difficult and expensive for us to raise capital and could adversely affect the price of our securities.

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

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

High Fixed Costs - Due to Our High Percentage of Fixed Costs, We Will Be Unable to Maintain 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. Increases or decreases in our capacity utilization can significantly affect gross margins. In periods of low demand, we experience relatively low capacity utilization in our operations, which leads to reduced margins during that period. Transitions between different packaging technologies, such as the transition from gold wirebond to flip chip and copper wirebond packages, can also impact our capacity utilization if we do not efficiently redeploy our equipment for other packaging and test opportunities. For example, in 2011 the migration of some customer demand from wirebond to flip chip packages resulted in under-utilized wirebond assets which negatively impacted our capacity utilization and gross margin. We cannot assure you that we will be able to achieve consistently high capacity utilization, and if we fail to do so, our gross margins 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 expenditures. Forecasted customer demand for which we have made capital investments may not materialize, especially if industry conditions deteriorate. As a result, our sales may not adequately cover fixed costs resulting in reduced profit levels or causing significant losses, both of which may adversely impact our business, liquidity, results of operations, financial condition and cash flows.

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

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



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

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

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

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

In a downturn in the semiconductor industry, IDMs 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 outsou