Document

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
Form 10-Q

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended June 30, 2018
or
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from          to          

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ
The number of outstanding shares of the registrant’s Common Stock as of July 27, 2018 was 239,538,384.
 




QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2018

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 2018 including expenditures in support of advanced packaging and test equipment, (2) our ability to fund our operating activities and financial requirements for the next twelve months, (3) the effect of changes in revenue levels and capacity utilization on our gross margin, (4) the focus of our research and development activities, (5) the anticipated impact of the Tax Cuts and Jobs Act (the "Tax Act") on our taxes, (6) the grant and expiration of tax holidays in jurisdictions in which we operate and expectations regarding our effective tax rate and the availability of tax incentives, (7) the creation or release of valuation allowances related to taxes in the future, (8) our repurchase or repayment of outstanding debt or the conversion of debt in the future, (9) payment of dividends, (10) compliance with our covenants, (11) expected contributions to foreign pension plans, (12) liability for unrecognized tax benefits and the potential impact of our unrecognized tax benefits on our effective tax rate, (13) the effect of foreign currency exchange rate exposure on our financial results, (14) the volatility of the trading price of our common stock, (15) changes to our internal controls related to integration of acquired operations and implementation of an enterprise resource planning system, (16) our efforts to enlarge our customer base in certain geographic areas and markets, (17) demand for advanced packages in mobile devices and our technology leadership and potential growth in this market, (18) our expected forfeiture rate for our outstanding stock options and restricted shares, (19) our expected rate of return for pension plan assets, (20) redemption of our Senior Notes due 2021 and the associated interest savings and (21) 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 June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except per share data)
Net sales
$
1,065,684

 
$
1,008,385

 
$
2,091,003

 
$
1,907,669

Cost of sales
895,967

 
831,769

 
1,763,515

 
1,594,819

Gross profit
169,717

 
176,616

 
327,488

 
312,850

Selling, general and administrative
74,700

 
67,785

 
155,423

 
144,067

Research and development
41,076

 
44,281

 
82,005

 
85,849

Gain on sale of real estate

 
(108,109
)
 

 
(108,109
)
Total operating expenses
115,776

 
3,957

 
237,428

 
121,807

Operating income
53,941

 
172,659

 
90,060

 
191,043

Interest expense
21,127

 
22,158

 
41,138

 
43,412

Interest expense, related party

 
293

 

 
1,535

Other (income) expense, net
(11,001
)
 
(3,288
)
 
(7,569
)
 
7,893

Total other expense, net
10,126

 
19,163

 
33,569

 
52,840

Income before taxes
43,815

 
153,496

 
56,491

 
138,203

Income tax expense
10,631

 
33,466

 
13,112

 
32,141

Net income
33,184

 
120,030

 
43,379

 
106,062

Net income attributable to non-controlling interests
(593
)
 
(1,017
)
 
(1,244
)
 
(1,835
)
Net income attributable to Amkor
$
32,591

 
$
119,013

 
$
42,135

 
$
104,227

 
 
 
 
 
 
 
 
Net income attributable to Amkor per common share:
 
 
 
 
 

 
 

Basic
$
0.14

 
$
0.50

 
$
0.18

 
$
0.44

Diluted
$
0.14

 
$
0.50

 
$
0.18

 
$
0.44

 
 
 
 
 
 
 
 
Shares used in computing per common share amounts:
 
 
 
 
 

 
 
Basic
239,351

 
238,863

 
239,283

 
238,774

Diluted
239,804

 
239,679

 
239,805

 
239,601


The accompanying notes are an integral part of these statements.


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Table of Contents

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


 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income
$
33,184

 
$
120,030

 
$
43,379

 
$
106,062

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Adjustments to unrealized components of defined benefit pension plans
(42
)
 
18

 
(81
)
 
248

Foreign currency translation
(11,144
)
 
(833
)
 
3,947

 
12,753

Total other comprehensive income (loss)
(11,186
)
 
(815
)
 
3,866

 
13,001

Comprehensive income
21,998

 
119,215

 
47,245

 
119,063

Comprehensive income attributable to non-controlling interests
(593
)
 
(1,017
)
 
(1,244
)
 
(1,835
)
Comprehensive income attributable to Amkor
$
21,405

 
$
118,198

 
$
46,001

 
$
117,228


The accompanying notes are an integral part of these statements.


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Table of Contents

AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)


 
June 30,
2018
 
December 31,
2017
 
(In thousands, except per share data)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
380,262

 
$
596,364

Restricted cash
2,000

 
2,000

Accounts receivable, net of allowances
795,750

 
798,264

Inventories
243,019

 
213,649

Other current assets
37,148

 
33,727

Total current assets
1,458,179

 
1,644,004

Property, plant and equipment, net
2,754,960

 
2,695,065

Goodwill
25,472

 
25,036

Restricted cash
3,503

 
4,487

Other assets
139,567

 
139,796

Total assets
$
4,381,681

 
$
4,508,388

LIABILITIES AND EQUITY
Current liabilities:
 

 
 

Short-term borrowings and current portion of long-term debt
$
115,057

 
$
123,848

Trade accounts payable
553,475

 
569,085

Capital expenditures payable
238,772

 
294,258

Accrued expenses
254,348

 
330,868

Total current liabilities
1,161,652

 
1,318,059

Long-term debt
1,214,535

 
1,240,581

Pension and severance obligations
184,072

 
182,216

Other non-current liabilities
51,264

 
47,823

Total liabilities
2,611,523

 
2,788,679

Commitments and contingencies (Note 16)


 


Stockholders’ equity:
 

 
 

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

 

Common stock, $0.001 par value, 500,000 shares authorized; 285,322 and 285,129 shares issued; and 239,366 and 239,184 shares outstanding in 2018 and 2017, respectively
285

 
285

Additional paid-in capital
1,906,936

 
1,903,357

Retained earnings (accumulated deficit)
28,232

 
(13,903
)
Accumulated other comprehensive income (loss)
26,385

 
22,519

Treasury stock, at cost, 45,956 and 45,945 shares, in 2018 and 2017, respectively
(216,087
)
 
(215,982
)
Total Amkor stockholders’ equity
1,745,751

 
1,696,276

Non-controlling interests in subsidiaries
24,407

 
23,433

Total equity
1,770,158

 
1,719,709

Total liabilities and equity
$
4,381,681

 
$
4,508,388


The accompanying notes are an integral part of these statements.


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Table of Contents

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


 
For the Six Months Ended June 30,
 
2018
 
2017
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
43,379

 
$
106,062

Depreciation and amortization
285,515

 
287,068

Gain on sale of real estate

 
(108,109
)
Other operating activities and non-cash items
(3,239
)
 
(4,659
)
Changes in assets and liabilities
(119,276
)
 
(80,403
)
Net cash provided by operating activities
206,379

 
199,959

Cash flows from investing activities:
 

 
 

Payments for property, plant and equipment
(389,568
)
 
(271,651
)
Proceeds from sale of property, plant and equipment
603

 
130,962

Acquisition of business, net of cash acquired

 
(43,771
)
Other investing activities
2,647

 
(2,117
)
Net cash used in investing activities
(386,318
)
 
(186,577
)
Cash flows from financing activities:
 

 
 

Proceeds from revolving credit facilities

 
75,000

Proceeds from short-term debt
7,264

 
41,228

Payments of short-term debt
(31,546
)
 
(32,110
)
Proceeds from issuance of long-term debt
64,000

 
215,086

Payments of long-term debt
(77,015
)
 
(207,653
)
Payment of deferred consideration for purchase of facility

 
(3,890
)
Payments of capital lease obligations
(1,689
)
 
(2,665
)
Other financing activities
492

 
561

Net cash provided by (used in) financing activities
(38,494
)
 
85,557

Effect of exchange rate fluctuations on cash, cash equivalents and restricted cash
1,347

 
9,418

Net increase (decrease) in cash, cash equivalents and restricted cash
(217,086
)
 
108,357

Cash, cash equivalents and restricted cash, beginning of period
602,851

 
555,495

Cash, cash equivalents and restricted cash, end of period
$
385,765

 
$
663,852

Non-cash investing and financing activities:
 
 
 
Property, plant and equipment included in capital expenditures payable
$
239,460

 
$
233,084

Equipment acquired through capital lease
$
6,477

 
$
929


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 June 30, 2018, and for the three and six months ended June 30, 2018 and 2017, are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The December 31, 2017, 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, 2017, filed on Form 10-K with the SEC on February 23, 2018. The results of operations for the three and six months ended June 30, 2018, 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.

Effective January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), using the full retrospective transition method as discussed in Note 2. All amounts and disclosures set forth in this Form 10-Q reflect these changes.

On May 22, 2017, we completed the purchase of Nanium, S.A. ("Nanium"). Nanium's financial results have been included in our Consolidated Financial Statements from the date of acquisition (Note 4).

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

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

2.    New Accounting Standards

Recently Adopted Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which was subsequently amended and clarified. The standard 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. The standard permits the use of either full retrospective or modified retrospective methods of adoption.

Effective January 1, 2018, we adopted the requirements of Topic 606 using the full retrospective transition method. The new standard resulted in a change to the timing of revenue recognition, whereby revenue is recognized "over time" as services are performed rather than at a "point in time", generally upon shipment. The new standard also resulted in an increase in accounts receivables, net and a related decrease in inventories and deferred revenues. In accordance with Topic 606, we applied the following principles in connection with the adoption of the new standard:

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.


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Table of Contents

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


We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
We exclude sales, use, value-added and similar taxes from the transaction price, without performing a jurisdiction-by-jurisdiction assessment.

The adoption of the standard impacted our previously reported results as follows:

 
For the Three Months Ended June 30, 2017
 
As Previously Reported
 
New Accounting Pronouncement Adjustment
 
As Adjusted
 
(In thousands, except per share data)
Income Statement:
 
 
 
 
 
Net sales
$
989,447

 
$
18,938

 
$
1,008,385

Cost of sales
817,212

 
14,557

 
831,769

Gross profit
172,235

 
4,381

 
176,616

Income tax expense
32,573

 
893

 
33,466

Net income
116,459

 
3,571

 
120,030

Net income attributable to Amkor
115,507

 
3,506

 
119,013

Net income attributable to Amkor per common share - diluted
0.48

 
0.02

 
0.50


 
For the Six Months Ended June 30, 2017
 
As Previously Reported
 
New Accounting Pronouncement Adjustment
 
As Adjusted
 
(In thousands, except per share data)
Income Statement:
 
 
 
 
 
Net sales
$
1,903,047

 
$
4,622

 
$
1,907,669

Cost of sales
1,587,906

 
6,913

 
1,594,819

Gross profit
315,141

 
(2,291
)
 
312,850

Income tax expense
33,012

 
(871
)
 
32,141

Net income
107,315

 
(1,253
)
 
106,062

Net income attributable to Amkor
105,501

 
(1,274
)
 
104,227

Net income attributable to Amkor per common share - diluted
0.44

 

 
0.44




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Table of Contents

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


 
December 31, 2017
 
As Previously Reported
 
New Accounting Pronouncement Adjustment
 
As Adjusted
 
(In thousands)
Balance Sheet:
 
 
 
 
 
Accounts receivable, net
$
692,287

 
$
105,977

 
$
798,264

Inventories
326,492

 
(112,843
)
 
213,649

Other assets
146,051

 
(6,255
)
 
139,796

Accrued expenses
374,598

 
(43,730
)
 
330,868

Other non-current liabilities
46,144

 
1,679

 
47,823

Accumulated deficit (1)
(42,851
)
 
28,948

 
(13,903
)
(1)
The adjustment to accumulated deficit includes the 2017 and 2016 net income impact for the adoption of Topic 606 of $2.8 million and $11.3 million, respectively. The adjustment also includes the cumulative impact to our 2016 beginning accumulated deficit of $14.8 million.

The adoption of the standard had no impact on cash provided by or used in operating, investing, or financing activities on our consolidated cash flow statements.

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires that the service cost component of net periodic pension costs be presented in the same line item as other compensation costs and all other components of net periodic pension costs be presented in the statement of income as nonoperating expenses. ASU 2017-07 is effective for reporting periods beginning after December 15, 2017 and applied retrospectively. We adopted ASU 2017-07 on January 1, 2018 and estimated the impact on the prior comparative period information presented in the consolidated financial statements applying the principles permitted by the standard. For the three and six months ended June 30, 2017, the retrospective application resulted in a $(0.1) million and $0.2 million reclassification of pension costs from operating income to other (income) expense, net in the Consolidated Statements of Income for the respective periods. Refer to Note 14 for additional information.

Recently Issued Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which was subsequently amended and clarified. ASU 2016-02 requires a dual approach for lease accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases the lessee would recognize a straight-line lease expense. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018 and requires either a modified retrospective transition approach with application in all comparative periods presented, or an alternative transition method, which permits a company to use its effective date as the date of initial application without restating comparative period financial statements. Early adoption is permitted. We are currently evaluating the impact that this guidance may have on our financial statements and disclosure, and have not yet selected a transition method.

3.    Significant Accounting Policies

Our significant accounting policies are detailed in Note 1 to our Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017. Significant changes to our accounting policies as a result of adopting Topic 606 are discussed below:



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Table of Contents

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


Revenue Recognition. We recognize revenue, net of sales, use, value-added and other similar taxes, after the following:
A contract with a customer has been identified
All performance obligations within the customer contract have been identified
The transaction price attributable to the contract has been determined and allocated to each performance obligation, and
The performance obligations have been determined to be satisfied. Performance obligations are deemed to be satisfied when, or as, control of services has been transferred to the customer.

Our packaging and test services are our performance obligations to our customers. Our packaging services include wafer bump, probe and assembly. We provide packaging and test services to our customers either individually or as part of a combined offering. In a combined offering, we account for the individual services separately if they are determined to be distinct. We determine a service to be distinct if it is separately identifiable from other services in the combined offering and if a customer can benefit from the unique service on its own or with other resources that are readily available to the customer.
The consideration, including variable consideration, is allocated between the distinct services in a combined offering based upon the stand-alone selling prices of the individual services. Our services involve a high degree of specialization which are unique based on the design and purpose of the customer’s wafers. Accordingly, our negotiated pricing reflects the customized nature of our services and represents a customer-specific stand-alone selling price. We recognize revenue as services are rendered, which generally occurs over the course of two to three weeks. Services are generally billed at completion of each individual packaging or test service or in some instances at the completion of all services in a combined offering.
We recognize revenue over time as services are rendered because our services create or enhance the customer’s wafer. We utilize an input method (cost incurred plus estimated margin) to determine the amount of revenue to recognize for in-process, but incomplete customer orders at a reporting date. During the period of providing our services, we generally do not control or take ownership of customers' wafers, nor do we include the cost of the wafer in our cost calculations. We believe that a cost-based input method is the most appropriate manner to measure how we satisfy our performance obligations to customers because the effort and costs incurred to package and/or test customer wafers are not linear over the duration of these services.
Shipping and handling costs are accounted for as a cost to fulfill our performance obligations to customers. Accordingly, we record customer payments of shipping and handling costs as a component of net sales, and the costs incurred for shipping and handling are then charged to cost of sales.

Unbilled Receivables. Unbilled receivables are revenues that have been recognized for performance obligations that have been satisfied, or partially satisfied, in advance of billing the customer. Revenue may be recognized in advance of billing as our contracts provide us with an unconditional right to consideration for work that is performed. Total unbilled receivables as of June 30, 2018 and December 31, 2017 were $106.6 million and $101.9 million, respectively. These amounts are included in accounts receivable, net of allowances in our Consolidated Balance Sheets.

Inventories. Inventories consist of raw materials and purchased components, and are stated at the lower of cost and net realizable value. Cost is principally determined by standard cost or the weighted moving average method, both of which approximate actual cost. We review and set our standard costs as needed, but at a minimum on an annual basis. We reduce the carrying value of our inventories for the cost of inventory we estimate is excess and obsolete based on the age of our inventories. When a determination is made that the inventory will not be utilized in production or is not saleable, it is written-off.




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


4.    Acquisition

On May 22, 2017, we completed the purchase of 100% of the shares of Nanium, a provider of wafer-level fan-out semiconductor packaging solutions. We allocated the purchase price to the assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. We did not record goodwill as a result of the acquisition. 

5.    Net Sales by Product Group and End Market

The following table presents net sales by product group:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
 
(In thousands)
Advanced products (1)
$
496,241

 
$
445,100

 
$
971,993

 
$
820,967

Mainstream products (2)
569,443

 
563,285

 
1,119,010

 
1,086,702

Total net sales
$
1,065,684

 
$
1,008,385

 
$
2,091,003

 
$
1,907,669


(1)
Advanced products include flip chip and wafer-level processing and related test services
(2)
Mainstream products include wirebond packaging and related test services
The following table presents net sales by end market:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Communications (smartphones, tablets, handheld devices)
42
%
 
40
%
 
42
%
 
39
%
Automotive, industrial and other (driver assist, infotainment, safety, performance)
26
%
 
27
%
 
26
%
 
28
%
Computing (datacenter, infrastructure, PC/laptop, storage)
19
%
 
19
%
 
19
%
 
19
%
Consumer (set-top boxes, televisions, connected home, personal electronics, visual imaging)
13
%
 
14
%
 
13
%
 
14
%
Total net sales
100
%
 
100
%
 
100
%
 
100
%

6.    Other Income and Expense

Other income and expense consists of the following:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Interest income
$
(955
)
 
$
(955
)
 
$
(1,943
)
 
$
(1,466
)
Foreign currency (gain) loss, net
(7,110
)
 
(2,252
)
 
(2,397
)
 
9,132

Other
(2,936
)
 
(81
)
 
(3,229
)
 
227

Other (income) expense, net
$
(11,001
)
 
$
(3,288
)
 
$
(7,569
)
 
$
7,893




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


7.    Income Taxes

In December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. Accounting Standards Codification ("ASC") 740, Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017. Given the significance of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.

We have reported provisional amounts for the income tax effects of the Tax Act for which the accounting is incomplete, but a reasonable estimate could be determined in our financial statements for the year ended December 31, 2017. There were no specific impacts of the Tax Act that could not be reasonably estimated. Our estimate of the impact of the Tax Act may be adjusted throughout the allowable measurement period. We have not completed the accounting for any of the income tax effects of the Tax Act during the six months ended June 30, 2018 as we continue to collect additional information, prepare and analyze the information and evaluate any regulatory guidance or clarifications. We have not made adjustments to the provisional amounts reported for the year ended December 31, 2017, nor have we concluded on any accounting policy elections. Changes to our provisional estimates and further analysis could impact our judgments, elections and assertions.
 
Income tax expense of $13.1 million for the six months ended June 30, 2018 reflects income taxes of our various operations, including foreign withholding taxes and minimum taxes. Income tax expense also reflects income taxed in foreign jurisdictions where we benefit from tax holidays.

We monitor on an ongoing basis our ability to utilize our deferred tax assets and whether there is a need for a related valuation allowance. In evaluating our ability to recover our deferred tax assets in the jurisdictions from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations. Except for deferred tax assets in Portugal, we consider it more likely than not that we will have sufficient taxable income to allow us to realize most of our foreign deferred tax assets.

We maintain a valuation allowance on a portion of our U.S. net deferred tax assets, for net operating loss carryforwards not expected to be realized due to Global Intangible Low-Taxed Income ("GILTI") and foreign tax credit carryforwards expected to expire unused. Such valuation allowances are released as the related tax benefits are realized or when sufficient evidence exists to conclude that it is more likely than not that the deferred tax assets will be realized.

Unrecognized tax benefits represent reserves for potential tax deficiencies or reductions in tax benefits that could result from federal, state or foreign tax audits. Gross unrecognized tax benefits decreased from $27.2 million at December 31, 2017, to $24.8 million as of June 30, 2018. All of our unrecognized tax benefits would reduce our effective tax rate, if recognized. Our unrecognized tax benefits are subject to change for effective settlement of examinations, changes in the recognition threshold of tax positions, the expiration of statues of limitations and other factors. Tax return examinations involve uncertainties, and there can be no assurance that the outcome of examinations will be favorable.

8.    Earnings Per Share

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

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



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


The following table summarizes the computation of basic and diluted EPS:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands,
except per share data)
Net income attributable to Amkor common stockholders
$
32,591

 
$
119,013

 
$
42,135

 
$
104,227

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding — basic
239,351

 
238,863

 
239,283

 
238,774

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options and restricted share awards
453

 
816

 
522

 
827

Weighted-average number of common shares outstanding — diluted
239,804

 
239,679

 
239,805

 
239,601

Net income attributable to Amkor per common share:
 

 
 

 
 

 
 

Basic
$
0.14

 
$
0.50

 
$
0.18

 
$
0.44

Diluted
0.14

 
0.50

 
0.18

 
0.44


The following table summarizes the potential shares of common stock that were excluded from diluted EPS, because the effect of including these potential shares was anti-dilutive:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Stock options and restricted share awards
3,644

 
3,193

 
3,524

 
3,473


9.    Equity and Accumulated Other Comprehensive Income (Loss)

Changes in equity consist of the following:
 
Attributable
to Amkor
 
Attributable to
Non-controlling
Interests
 
Total
 
(In thousands)
Equity at December 31, 2017
$
1,696,276

 
$
23,433

 
$
1,719,709

Net income
42,135

 
1,244

 
43,379

Other comprehensive income (loss)
3,866

 

 
3,866

Issuance of stock through employee share-based compensation plans
1,023

 

 
1,023

Treasury stock acquired through surrender of shares for tax withholding
(105
)
 

 
(105
)
Share-based compensation
2,556

 

 
2,556

Subsidiary dividends paid to non-controlling interests

 
(270
)
 
(270
)
Equity at June 30, 2018
$
1,745,751

 
$
24,407

 
$
1,770,158



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


 
Attributable
to Amkor
 
Attributable to
Non-controlling
Interests
 
Total
 
(In thousands)
Equity at December 31, 2016
$
1,409,692

 
$
19,825

 
$
1,429,517

Net income
104,227

 
1,835

 
106,062

Other comprehensive income (loss)
13,001

 

 
13,001

Issuance of stock through employee share-based compensation plans
2,365

 

 
2,365

Treasury stock acquired through surrender of shares for tax withholding
(1,378
)
 

 
(1,378
)
Share-based compensation
2,516

 

 
2,516

Subsidiary dividends paid to non-controlling interests

 
(270
)
 
(270
)
Equity at June 30, 2017
$
1,530,423

 
$
21,390

 
$
1,551,813


Changes in accumulated other comprehensive income (loss), net of tax, consist of the following:
 
Defined Benefit Pension
 
Foreign Currency Translation
 
Total
 
(In thousands)
Accumulated other comprehensive income (loss) at December 31, 2017
$
6,303

 
$
16,216

 
$
22,519

Other comprehensive income (loss) before reclassifications

 
3,947

 
3,947

Amounts reclassified from accumulated other comprehensive income (loss)
(81
)
 

 
(81
)
Other comprehensive income (loss)
(81
)
 
3,947

 
3,866

Accumulated other comprehensive income (loss) at June 30, 2018
$
6,222

 
$
20,163

 
$
26,385

 
Defined Benefit Pension
 
Foreign Currency Translation
 
Total
 
(In thousands)
Accumulated other comprehensive income (loss) at December 31, 2016
$
1,138

 
$
5,124

 
$
6,262

Other comprehensive income (loss) before reclassifications

 
12,753

 
12,753

Amounts reclassified from accumulated other comprehensive income (loss)
248

 

 
248

Other comprehensive income (loss)
248

 
12,753

 
13,001

Accumulated other comprehensive income (loss) at June 30, 2017
$
1,386

 
$
17,877

 
$
19,263


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



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


10.    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 six months ended June 30, 2018, we sold accounts receivable totaling $203.1 million and $428.6 million, net of discounts and fees of $2.0 million and $3.8 million, respectively. For the three and six months ended June 30, 2017, we sold accounts receivable totaling $133.1 million and $265.2 million, net of discounts and fees of $0.8 million and $1.5 million, respectively.

11.    Property, Plant and Equipment

Property, plant and equipment consist of the following:
 
June 30,
2018
 
December 31, 2017
 
(In thousands)
Land
$
225,493

 
$
224,894

Land use rights
26,845

 
26,845

Buildings and improvements
1,496,683

 
1,384,846

Machinery and equipment
5,131,573

 
4,938,291

Software and computer equipment
206,219

 
200,500

Furniture, fixtures and other equipment
16,664

 
15,722

Construction in progress
57,334

 
104,910

Total property, plant and equipment
7,160,811

 
6,896,008

Accumulated depreciation and amortization
(4,405,851
)
 
(4,200,943
)
Total property, plant and equipment, net
$
2,754,960

 
$
2,695,065


The following table summarizes our depreciation expense:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Depreciation expense
$
142,497

 
$
144,839

 
$
284,502

 
$
286,295


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



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


12.    Accrued Expenses

Accrued expenses consist of the following:
 
June 30,
2018
 
December 31,
2017
 
(In thousands)
Payroll and benefits
$
113,990

 
$
134,785

Income taxes payable
23,658

 
56,664

Accrued settlement costs
19,212

 
37,783

Deferred revenue and customer advances
16,724

 
14,740

Accrued severance plan obligations
14,937

 
15,190

Accrued interest
11,728

 
11,873

Other accrued expenses
54,099

 
59,833

Total accrued expenses
$
254,348

 
$
330,868



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Table of Contents

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


13.    Debt

Following is a summary of short-term borrowings and long-term debt:
 
June 30,
2018
 
December 31,
2017
 
(In thousands)
Debt of Amkor Technology, Inc.:
 

 
 

Senior secured credit facilities:
 

 
 

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

 
$

Senior notes:
 

 
 

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

 
200,000

6.375% Senior notes, due October 2022
524,971

 
524,971

Debt of subsidiaries:
 

 
 

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

 
75,000

Term loan, LIBOR plus 2.70%, due December 2019

 
55,000

Term loan, foreign currency funding-linked base rate plus 1.32%, due May 2020
141,000

 
150,000

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

 
120,000

Term loan, fund floating rate plus 1.60%, due June 2020 (4)
150,000

 
86,000

J-Devices Corporation:
 
 
 
Short-term term loans, variable rate (5)
7,223

 
30,455

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

 
6,744

Term loan, fixed rate at 0.86%, due June 2022
36,114

 
39,933

Term loan, fixed rate at 0.60%, due July 2022
7,674

 
8,430

Other:
 
 
 
Revolving credit facility, TAIFX plus a bank-determined spread, due November 2020 (Taiwan) (6)
20,000

 
20,000

Term loan, LIBOR plus 1.80%, due December 2019 (China)
48,500

 
49,000

 
1,330,482

 
1,365,533

Less: Unamortized premium and deferred debt costs, net
(890
)
 
(1,104
)
Less: Short-term borrowings and current portion of long-term debt
(115,057
)
 
(123,848
)
Long-term debt
$
1,214,535

 
$
1,240,581


(1)
As of June 30, 2018, we had availability of $199.5 million under a senior secured revolving credit facility, after reduction of $0.5 million of outstanding standby letters of credit. In July 2018, this credit facility was terminated and replaced by a new facility entered into by Amkor Technology Singapore Holding Pte, Ltd. and guaranteed by Amkor Technology, Inc. This new credit facility has availability up to $250.0 million, a letter of credit sub-limit facility of $15.0 million and a termination date of July 2023. The availability for this revolving credit facility is limited to a percentage of the amount of eligible accounts receivable.
(2)
In July 2018, we issued a redemption notice for all $200 million of our 6.625% Senior Notes due 2021 ("Notes"). The note redemption is scheduled for completion in August 2018. In accordance with the terms of the indenture governing the Notes, the redemption price will be 100% of the principal amount of the Notes plus accrued and unpaid interest. The redemption of the Notes will be funded with proceeds from our ¥26.0 billion (approximately US$230 million) term loan agreement entered into in July 2018 by J-Devices Corporation and guaranteed by Amkor


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


Technology, Inc. The term loan bears interest at a fixed rate of 1.30% per annum. Principal and interest of the term loan are payable quarterly through the maturity in July 2023.
(3)
In June 2018, we extended our $75.0 million credit facility from June 2018 to September 2018. Principal is payable at maturity. Interest is due monthly in arrears, at a foreign currency funding-linked base rate plus 1.60% (4.66% as of June 30, 2018).
(4)
In May 2015, we entered into a term loan agreement pursuant to which we may borrow up to $150.0 million for capital expenditures. Principal is payable at maturity. Interest is payable quarterly in arrears, at a fund floating rate plus 1.60% (4.27% as of June 30, 2018). In the second quarter of 2018, we borrowed $64.0 million on this facility and repaid other Amkor Technology Korea, Inc. term loans with earlier maturity dates.
(5)
We entered into various short-term term loans which mature semiannually. Principal and interest is payable in monthly installments. Interest as of June 30, 2018 is at TIBOR plus 0.15%. As of June 30, 2018, $9.0 million was available to be drawn.
(6)
In November 2015, we entered into a $39.0 million revolving credit facility. Principal is payable at maturity. Interest is payable monthly, at TAIFX plus a bank determined spread (3.75% as of June 30, 2018). As of June 30, 2018, $19.0 million was available to be drawn.
Certain of our foreign debt is collateralized by the land, buildings and equipment in the respective locations. The carrying value of the collateral exceeds the carrying amount of the debt.
The debt of Amkor Technology, Inc. is structurally subordinated in right of payment to all existing and future debt and other liabilities of our subsidiaries. From time to time, Amkor Technology, Inc. also guarantees certain debt of our subsidiaries. The agreements governing our indebtedness contain affirmative and negative covenants which restrict our ability to pay dividends and could restrict our operations. We have never paid a dividend to our stockholders and we do not have any present plans for doing so. We were in compliance with all debt covenants at June 30, 2018.

14.    Pension Plans

Foreign Defined Benefit Pension Plans

Our subsidiaries in Japan, Korea, Malaysia, the Philippines and Taiwan sponsor defined benefit pension plans. Charges to expense are based upon actuarial analyses. The components of net periodic pension cost for these defined benefit pension plans are as follows:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Service cost
$
8,299

 
$
8,430

 
$
16,715

 
$
16,770

Interest cost
1,226

 
1,013

 
2,469

 
2,020

Expected return on plan assets
(1,417
)
 
(1,133
)
 
(2,859
)
 
(2,261
)
Amortization of prior service cost

 

 

 
31

Recognized actuarial (gain) loss
(42
)
 
22

 
(77
)
 
44

Net periodic pension cost
$
8,066

 
$
8,332

 
$
16,248

 
$
16,604


The components of net periodic pension cost other than the service cost component are included in other (income) expense, net in our Consolidated Statements of Income.



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


Defined Contribution Pension Plans

We sponsor defined contribution pension plans in Korea, Malaysia, Taiwan and the U.S. The following table summarizes our defined contribution expense:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Defined contribution expense
$
3,017

 
$
2,581

 
$
7,013

 
$
5,779


15.    Fair Value Measurements

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

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

Recurring fair value measurements consist of the following:
 
June 30,
2018
 
December 31,
2017
 
(In thousands)
Cash equivalent money market funds (Level 1)
$
75,167

 
$
121,627

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

 
2,000


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



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


We measure the fair value of our debt for disclosure purposes. The following table presents the fair value of financial instruments that are not recorded at fair value on a recurring basis:
 
June 30, 2018
 
December 31, 2017
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
(In thousands)
Senior notes (Level 1)
$
736,693

 
$
724,081

 
$
745,943

 
$
723,867

Revolving credit facilities and term loans (Level 2)
603,645

 
605,511

 
639,689

 
640,562

Total debt
$
1,340,338

 
$
1,329,592

 
$
1,385,632

 
$
1,364,429


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

16.    Commitments and Contingencies

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

Legal Proceedings

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

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


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

Overview

Amkor is one of the world’s leading providers of outsourced semiconductor packaging and test services. Our financial goals are sales growth and improved profitability. To achieve these goals, we are focused on generating increased value from our investments in advanced technologies, improving utilization of existing assets and selectively growing our scale and scope through strategic investments.

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

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

From time to time, we identify attractive opportunities to grow our customer base and expand the markets we serve. For example, in May 2017 we acquired Nanium, which has strengthened our position in the market for wafer-level fan-out packaging. In December 2015, we completed the acquisition of J-Devices, the largest provider of outsourced semiconductor assembly and test services in Japan. J-Devices is primarily focused in the automotive, industrial and consumer end markets. We believe that selective growth through joint ventures, acquisitions and other strategic investments can help diversify our revenue streams, improve our profits, broaden our portfolio of services and continue our technological leadership.

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

As a supplier in the semiconductor industry, our business is cyclical and impacted by broad economic factors. Historically, there has been a strong correlation between world-wide gross domestic product levels, consumer spending and semiconductor industry cycles. The semiconductor industry has experienced significant and sometimes prolonged cyclical upturns and downturns in the past. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery.

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

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


- 20-

Table of Contents


business, our capital expenditure levels and our ability to repay debt out of our operating cash flows or proceeds from debt or equity financings.

Effective January 1, 2018, we adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), utilizing the full retrospective transition method. The prior periods presented here have been revised to reflect this change. For more information, see Note 2 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Financial Summary

Our net sales increased $57.3 million or 5.7% to $1,065.7 million for the three months ended June 30, 2018 from $1,008.4 million for the three months ended June 30, 2017. We benefitted from our strategic focus on balanced revenue growth across end markets and regions. The increase was primarily attributable to increased participation in the major smartphone ecosystems and gains in the computing and automotive markets.

Gross margin for the three months ended June 30, 2018 decreased to 15.9% from 17.5% for the three months ended June 30, 2017. The decline in gross margin was primarily attributable to changes in the mix of products sold with higher material content during the period. This was partially offset by benefits realized from our 2017 factory consolidation efforts in Japan and increased net sales.

Our capital expenditures are primarily for investments in advanced packaging and test equipment and totaled $389.6 million for the six months ended June 30, 2018, compared to $271.7 million for the six months ended June 30, 2017. The increase in spending is due to the growth in our business and expansion of our production facilities.

Net cash provided by operating activities was $206.4 million for the six months ended June 30, 2018, compared to $200.0 million for the six months ended June 30, 2017. This increase was primarily due to higher sales and gross profit, offset by changes in working capital.

In July 2018, we entered into a ¥26.0 billion term loan agreement and borrowed ¥26.0 billion (approximately US$230 million). We plan to use proceeds from the term loan to repay all of our $200 million outstanding 6.625% Senior Notes due 2021 ("Notes"). We issued a redemption notice for our 2021 Notes in July 2018 and the redemption is scheduled for completion in August 2018. This refinancing is expected to generate net annualized interest savings of approximately $11 million.

In July 2018, we also replaced our existing senior revolving credit facility. The terms of the new credit facility are substantially the same as the old facility, except that, among other things, the availability under the new credit facility has been increased from $200 million to $250 million and the termination date has been extended from December 2019 to July 2023.

Results of Operations

The following table sets forth certain operating data as a percentage of net sales for the periods indicated:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Materials
38.9
%
 
35.3
%
 
37.9
%
 
35.4
%
Labor
16.0
%
 
16.4
%
 
16.8
%
 
16.5
%
Other manufacturing costs
29.2
%
 
30.8
%
 
29.6
%
 
31.7
%
Gross margin
15.9
%
 
17.5
%
 
15.7
%
 
16.4
%
Operating income
5.1
%
 
17.1
%
 
4.3
%
 
10.0
%
Net income attributable to Amkor
3.1
%
 
11.8
%
 
2.0
%
 
5.5
%

Net Sales
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(In thousands, except percentages)
Net sales
$
1,065,684

 
$
1,008,385

 
$
57,299

 
5.7
%
 
$
2,091,003

 
$
1,907,669

 
$
183,334

 
9.6
%

The increase in net sales for the three and six months ended June 30, 2018, compared to the three and six months ended June 30, 2017, was attributable to increased participation in the major smartphone ecosystems and gains in the computing and automotive markets.



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Gross Margin
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(In thousands, except percentages)
Gross profit
$
169,717

 
$
176,616

 
$
(6,899
)
 
$
327,488

 
$
312,850

 
$
14,638

Gross margin
15.9
%
 
17.5
%
 
(1.6
)%
 
15.7
%
 
16.4
%
 
(0.7
)%

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

Gross margin decreased for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017 primarily due to changes in the mix of products sold with higher material content during the period. This was partially offset by benefits realized from our 2017 factory consolidation efforts in Japan and increased net sales.

Selling, General and Administrative
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(In thousands, except percentages)
Selling, general and administrative
$
74,700

 
$
67,785

 
$
6,915

 
10.2
%
 
$
155,423

 
$
144,067

 
$
11,356

 
7.9
%

Selling, general and administrative expenses for the three and six months ended June 30, 2018 increased compared to the three and six months ended June 30, 2017 primarily due to net proceeds received from a one-time legal settlement received in 2017. Additionally, selling, general and administrative expenses increased for the six months ended June 30, 2018 due to increased employee compensation costs.

Research and Development
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(In thousands, except percentages)
Research and development
$
41,076

 
$
44,281

 
$
(3,205
)
 
(7.2
)%
 
$
82,005

 
$
85,849

 
$
(3,844
)
 
(4.5
)%

Research and development activities are focused on developing new packaging and test services and improving the efficiency and capabilities of our existing production processes. The costs related to our technology and product development projects are included in research and development expense until the project moves into production. Once production begins, the costs related to production become part of the cost of sales, including ongoing depreciation for the equipment previously held for research and development activities. Research and development expenses for the three and six months ended June 30, 2018 decreased compared to the three and six months ended June 30, 2017. We experienced reductions in costs for projects that moved into production, partially offset by development and other costs associated with our new K5 factory and research and development facility in Korea.


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Other Income and Expense
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(In thousands, except percentages)
Interest expense, including related party
$
21,127

 
$
22,451

 
$
(1,324
)
 
(5.9
)%
 
$
41,138

 
$
44,947

 
$
(3,809
)
 
(8.5
)%
Foreign currency (gain) loss, net
(7,110
)
 
(2,252
)
 
(4,858
)
 
>100%

 
(2,397
)
 
9,132

 
(11,529
)
 
>(100)%

Other (income) expense, net
(3,891
)
 
(1,036
)
 
(2,855
)
 
>100%

 
(5,172
)
 
(1,239
)
 
(3,933
)
 
>100%

Total other expense, net
$
10,126

 
$
19,163

 
$
(9,037
)
 
(47.2
)%
 
$
33,569

 
$
52,840

 
$
(19,271
)
 
(36.5
)%

Interest expense decreased for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017, primarily due to the redemption of $200 million of our 6.625% Senior Notes due 2021 in July 2017.

We recorded net foreign currency gains for the three and six months ended June 30, 2018, as compared with a foreign currency gain and a loss in the respective prior periods in 2017. These changes year over year were due to foreign currency exchange rate movements, mainly the Korean Won, and the associated impact on our net monetary exposure at our foreign subsidiaries.

Income Tax Expense
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
(In thousands)
Income tax expense
$
10,631

 
$
33,466

 
$
(22,835
)
 
$
13,112

 
$
32,141

 
$
(19,029
)

The majority of our income is earned and taxed in foreign jurisdictions in the Asia Pacific region with applicable tax rates similar to the U.S. federal and state combined tax rate of approximately 25%. Income tax expense, which includes foreign withholding taxes and minimum taxes, reflects the applicable tax rates in effect in the various countries where our income is earned and is subject to volatility depending on the relative mix of earnings in each location. The income tax expense for the three and six months ended June 30, 2017 includes the income tax on the gain on the sale of the land and buildings comprising our K1 factory in May 2017.

During the six months ended June 30, 2018 and 2017, our subsidiaries in Korea, Malaysia, the Philippines and Singapore operated under tax holidays. The tax holiday granted to certain operations in Taiwan and Malaysia expired as of December 31, 2017 and March 31, 2018, respectively. The tax holidays granted to certain operations in the Philippines expire in 2018. As these tax holidays expire, income earned in these jurisdictions will be subject to higher statutory income tax rates, which may cause our effective tax rate to increase.



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Liquidity and Capital Resources

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

Our primary source of cash and the source of funds for our operations are cash flows from operations, current cash and cash equivalents, borrowings under available credit facilities and proceeds from any additional debt or equity financings. As of June 30, 2018, we had cash and cash equivalents of $380.3 million. Included in our cash balance as of June 30, 2018, is $303.1 million held offshore by our foreign subsidiaries. We have the ability to access cash held offshore by our foreign subsidiaries primarily through the repayment of intercompany debt obligations. Due to the changes in the U.S. tax law under the Tax Act, distributions of cash to the U.S. as dividends will not be subject to U.S. federal income tax. If we were to distribute this offshore cash to the U.S. as dividends from our foreign subsidiaries, we may be subject to foreign withholding and state income taxes.

As of June 30, 2018, we had availability of $199.5 million under a first lien senior secured revolving credit facility, after reduction of $0.5 million of outstanding standby letters of credit. In July 2018, this credit facility was terminated and replaced by a new facility with availability up to $250.0 million. The availability for this revolving credit facility is limited to a percentage of the amount of eligible accounts receivable. We refer you to Note 13 to our Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q for additional information. Our foreign subsidiaries had $19.0 million available to be drawn under secured revolving credit facilities and $9.0 million available to be borrowed under secured term loan credit facilities for working capital purposes and capital expenditures.

As of June 30, 2018, we had $1,329.6 million of debt. Our scheduled principal repayments on debt include $88.1 million due over the remainder of 2018, $109.8 million due in 2019, $390.8 million due in 2020, $210.8 million due in 2021, and $530.8 million due in 2022. We were in compliance with all debt covenants at June 30, 2018, and we expect to remain in compliance with these covenants for at least the next twelve months.

In July 2018, we entered into a ¥26.0 billion term loan agreement and borrowed ¥26.0 billion (approximately US$230 million). We plan to use proceeds from the term loan to repay all of our $200 million outstanding 2021 Notes. We issued a redemption notice for our 2021 Notes in July 2018 and the redemption is scheduled for completion in August 2018. This refinancing is expected to generate net annualized interest savings of approximately $11 million. We refer you to Note 13 to our Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q for additional information.
In certain foreign locations, we use non-recourse factoring arrangements with third-party financial institutions to manage our working capital and cash flows. Under this program, we sell receivables to a financial institution for cash at a discount to the face amount. Available capacity under these programs is dependent on the level of our trade accounts receivable eligible to be sold, the financial institutions' willingness to purchase such receivables and the limits provided by the financial institutions. These factoring arrangements can be reduced or eliminated at any time due to market conditions and changes in the credit worthiness of customers. For the six months ended June 30, 2018 and 2017, we sold accounts receivable totaling $428.6 million and $265.2 million, net of discounts and fees of $3.8 million and $1.5 million, respectively.
 
In order to reduce our debt and future cash interest payments, we may from time to time repurchase or redeem 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.



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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 or borrowing availability. 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 June 30, 2018, the severance liability was $145.3 million. Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date. For service periods subsequent to August 1, 2015, employees participate in either a defined benefit pension plan or a defined contribution pension plan.

Under the terms of a January 2015 patent license litigation settlement, Amkor agreed to pay a total of $155.0 million in 16 equal quarterly recurring payments commencing in the first quarter of 2015 and continuing through the fourth quarter of 2018. As of June 30, 2018, we owe $19.4 million under the settlement.

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

Our Board of Directors previously authorized the repurchase of up to $300.0 million of our common stock, exclusive of any fees, commissions or other expenses. At June 30, 2018, approximately $91.6 million was available to repurchase common stock pursuant to the stock repurchase program. The purchase of stock may be made in the open market or through privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, the cash needs and investment opportunities for the business, the current market price of our stock, applicable legal requirements and other factors. We have not purchased any stock under the plan since 2012.

Investments

We make significant capital expenditures in order to service the demand of our customers, which are primarily focused on investments in advanced packaging and test equipment. We expect 2018 capital expenditures to be approximately $600 million. During the six months ended June 30, 2018, our capital expenditures totaled $389.6 million. Ultimately, the amount of our 2018 capital expenditures will depend on several factors including, among others, the timing and implementation of any capital projects under review, the performance of our business, economic and market conditions, the cash needs and investment opportunities for the business, the need for additional capacity to service anticipated customer demand and the availability of cash flows from operations or financing.

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

Cash Flows

Net cash provided by (used in) operating, investing and financing activities for the six months ended June 30, 2018 and 2017, was as follows:
 
For the Six Months Ended June 30,
 
2018
 
2017
 
(In thousands)
Operating activities
$
206,379

 
$
199,959

Investing activities
(386,318
)
 
(186,577
)
Financing activities
(38,494
)
 
85,557




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Operating activities:   Our cash flows provided by operating activities for the six months ended June 30, 2018, increased by $6.4 million compared to the six months ended June 30, 2017, primarily due to higher sales and gross profit, offset by changes in working capital.

Investing activities:   Our cash flows used in investing activities are principally for payments for property, plant and equipment, which increased compared to the six months ended June 30, 2017, primarily due to continued investment in our business and expansion of our production facilities. The net cash used in investing activities for the six months ended June 30, 2017, also included a payment for the acquisition of Nanium and receipt of the remaining proceeds for the sale of the K1 factory in Korea.

Financing activities:   The net cash used in financing activities for the six months ended June 30, 2018, was primarily due to repayments of debt in Japan. The net cash provided by financing activities for the six months ended June 30, 2017 was primarily due to the net borrowings in China and Japan.

We provide the following supplemental data to assist our investors and analysts in understanding our liquidity and capital resources. We define free cash flow as net cash provided by operating activities less payments for property, plant and equipment, plus proceeds from the sale of and insurance recovery for property, plant and equipment, if applicable. Free cash flow is not defined by U.S. GAAP. We believe free cash flow to be relevant and useful information to our investors because it provides them with additional information in assessing our liquidity, capital resources and financial operating results. Our management uses free cash flow in evaluating our liquidity, our ability to service debt and our ability to fund capital expenditures. However, free cash flow has certain limitations, including that it does not represent the residual cash flow available for discretionary expenditures since other, non-discretionary expenditures, such as mandatory debt service, are not deducted from the measure. The amount of mandatory versus discretionary expenditures can vary significantly between periods. This measure should be considered in addition to, and not as a substitute for, or superior to, other measures of liquidity or financial performance prepared in accordance with U.S. GAAP, such as net cash provided by operating activities. Furthermore, our definition of free cash flow may not be comparable to similarly titled measures reported by other companies.
 
For the Six Months Ended June 30,
 
2018
 
2017
 
(In thousands)
Net cash provided by operating activities
$
206,379

 
$
199,959

Payments for property, plant and equipment
(389,568
)
 
(271,651
)
Proceeds from sale of property, plant and equipment
603

 
130,962

Free cash flow
$
(182,586
)
 
$
59,270


Contractual Obligations

The following table summarizes our contractual obligations at June 30, 2018, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
 
 
 
Payments Due for Year Ending December 31,
 
Total
 
2018 - Remaining
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
(In thousands)
Total debt
$
1,330,482

 
$
88,140

 
$
109,834

 
$
390,834

 
$
210,834

 
$
530,840

 
$

Scheduled interest payment obligations (1)
227,947

 
34,479

 
66,282

 
53,501

 
40,199

 
33,486

 

Purchase obligations (2)
116,962

 
109,873

 
1,842

 
1,334

 
1,049

 
1,049

 
1,815

Operating lease obligations
104,695

 
14,022

 
25,309

 
16,067

 
11,487

 
8,548

 
29,262

Severance obligations (3)
145,285

 
7,469

 
13,351

 
12,029

 
10,864

 
9,793

 
91,779

Settlement payments (4)
19,375

 
19,375

 

 

 

 

 

Total contractual obligations
$
1,944,746

 
$
273,358

 
$
216,618

 
$
473,765

 
$
274,433

 
$
583,716

 
$
122,856



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(1)
Represents interest payment obligations calculated using stated coupon rates for fixed rate debt and interest rates applicable at June 30, 2018, for variable rate debt.
(2)
Represents off-balance sheet purchase obligations for capital expenditures and long-term supply contracts outstanding at June 30, 2018.
(3)
Represents estimated benefit payments for our Korean subsidiary severance plan.
(4)
Represents settlement payments for patent license litigation. At June 30, 2018, the total obligation is $19.4 million of which $19.2 million is a current liability and $0.2 million will be imputed into interest over time.
In addition to the obligations identified in the table above, other non-current liabilities recorded in our Consolidated Balance Sheet at June 30, 2018, include:
$53.5 million of net foreign pension plan obligations, for which the timing and actual amount of impact on our future cash flow is uncertain.
$29.3 million net liability associated with unrecognized tax benefits. Due to the uncertainty regarding the amount and the timing of any future cash outflows associated with our unrecognized tax benefits, we are unable to reasonably estimate the amount and period of ultimate settlement, if any, with the various taxing authorities.
Off-Balance Sheet Arrangements

As of June 30, 2018, 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 16 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of our contingencies related to litigation and other legal matters.

Critical Accounting Policies

For a description of our critical accounting policies and estimates affecting revenue recognition, see Note 3 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017. With the exception of the changes to our revenue recognition policies referenced above, there have been no significant changes in our critical accounting policies as reported in our 2017 Annual Report on Form 10-K during the three months ended June 30, 2018.

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.



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Foreign Currency Risk
 

The U.S. dollar is our reporting and functional currency and the functional currency for our subsidiaries, except for J-Devices, where the Japanese Yen is the functional currency. In order to reduce our exposure to foreign currency gains and losses, we generally use natural hedging techniques to reduce foreign currency rate risk. Subsequent to the quarter end, we have entered into foreign exchange forward contracts to further reduce our exposure, which are not designated as hedges for accounting purposes and are settled monthly.

We have foreign currency exchange rate risk associated with the remeasurement of monetary assets and liabilities on our Consolidated Balance Sheets that are denominated in currencies other than the functional currency. We performed a sensitivity analysis of our foreign currency exposure as of June 30, 2018, to assess the potential impact of fluctuations in exchange rates for all foreign denominated assets and liabilities. Assuming that all foreign currencies appreciated 10% against the U.S. dollar, our income before taxes for the six months ended June 30, 2018 would have been approximately $17 million lower, due to the remeasurement of monetary assets and liabilities. We have a significant net monetary liability at our subsidiary in Korea, principally related to our Korean severance plan.

In addition, we have foreign currency exchange rate exposure on our results of operations. For the six months ended June 30, 2018, approximately 77% of our net sales were denominated in U.S. dollars. Our remaining net sales were principally denominated in Japanese Yen for local country sales. For the six months ended June 30, 2018, approximately 49% of our cost of sales and operating expenses were denominated in U.S. dollars and were largely for raw materials and depreciation. The remaining portion of our cost of sales and operating expenses was principally denominated in the Asian currencies where our production facilities are located and largely consisted of labor. To the extent that the U.S. dollar weakens against these Asian-based currencies, similar foreign currency denominated income and expenses in the future will result in higher sales, higher cost of sales and operating expenses, with cost of sales and operating expenses having the greater impact on our financial results. Similarly, our sales, cost of sales and operating expenses will decrease if the U.S. dollar strengthens against these foreign currencies. We performed a sensitivity analysis of our foreign currency exposure as of June 30, 2018, to assess the potential impact of fluctuations in exchange rates for all foreign denominated sales and operating expenses. Assuming that all foreign currencies appreciated 10% against the U.S. dollar, our operating income for the six months ended June 30, 2018 would have been approximately $59 million lower.

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

Our Consolidated Financial Statements are impacted by changes in exchange rates at the entity where the local currency is the functional currency. The effect of foreign exchange rate translation for these entities was a gain of $3.9 million and $12.8 million for the six months ended June 30, 2018 and 2017, respectively, and was recognized as an adjustment to equity through other comprehensive income (loss).

Interest Rate Risk

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



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The table below presents the interest rates, maturities and fair value of our fixed and variable rate debt as of June 30, 2018:
 
2018 - Remaining
 
2019
 
2020
 
2021
 
2022
 
Total
 
Fair Value
 
($ in thousands)
Debt
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed rate debt
$
5,417

 
$
10,834

 
$
130,834

 
$
210,834

 
$
530,840

 
$
888,759

 
$
898,496

Average interest rate
0.8
%
 
0.8
%
 
3.5
%
 
6.3
%
 
6.3
%
 
5.8
%
 
 
Variable rate debt
$
82,723

 
$
99,000

 
$
260,000

 
$

 
$

 
$
441,723

 
$
441,842

Average interest rate
4.3
%
 
4.5
%
 
4.4
%
 
%
 
%
 
4.4
%
 
 
Total debt
$
88,140

 
$
109,834

 
$
390,834

 
$
210,834

 
$
530,840

 
$
1,330,482

 
$
1,340,338


For information regarding the fair value of our long-term debt, see Note 15 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 June 30, 2018, and concluded those disclosure controls and procedures were effective as of that date.

Changes in Internal Control Over Financial Reporting

As previously reported, we are implementing an enterprise resource planning system in a multi-year program in certain of our factories. There have been no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

Item 1.        Legal Proceedings

Information about legal proceedings is set forth in Note 16 and Note 17 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2017, respectively.

Item 1A.     Risk Factors

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

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

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

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

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

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

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


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



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It is often difficult to predict the impact of these factors upon our results for a particular period. These factors may have a material and adverse effect on our business, liquidity, results of operations, financial condition and cash flows or lead to significant variability of quarterly or annual operating results. In addition, these factors may adversely affect our credit ratings which could make it more difficult and expensive for us to raise capital and could adversely affect the price of our securities.

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

We provide packaging and test services through our factories and other operations located in China, Japan, Korea, Malaysia, the Philippines, Portugal, Singapore and Taiwan. Substantially all of our property, plant and equipment is located outside of the United States. Moreover, many of our customers and the vendors in our supply chain are located outside the U.S.  The following are some of the risks we face in doing business internationally:
changes in consumer demand resulting from deteriorating conditions in local economies;
laws, rules, regulations and policies imposed by U.S. or foreign governments, such as tariffs, customs, duties and other restrictive trade barriers, national security, data privacy and cybersecurity, antitrust and competition, tax, currency and banking, labor, environmental, health and safety, and in particular the recent increase in tariffs, customs, duties and other restrictive trade barriers considered or adopted by U.S. and foreign governments;
laws, rules, regulations and policies within China and other countries that may favor domestic companies over non-domestic companies, including customer- or government-supported efforts to promote the development and growth of local competitors;
the payment of dividends and other payments by non-U.S. subsidiaries may be subject to prohibitions, limitations or taxes in local jurisdictions;
fluctuations in currency exchange rates, particularly the dollar/yen exchange rate for J-Devices;
political and social conditions, and the potential for civil unrest, terrorism or other hostilities;
disruptions or delays in shipments caused by customs brokers or government agencies;
difficulties in attracting and retaining qualified personnel and managing foreign operations, including foreign labor disruptions;
difficulty in enforcing contractual rights and protecting our intellectual property rights;
potentially adverse tax consequences resulting from tax laws in the U.S. and in foreign jurisdictions in which we operate and
local business and cultural factors that differ from our normal standards and practices, including business practices that we are prohibited from engaging in by the Foreign Corrupt Practices Act and other anti-corruption laws and regulations.
In particular, we have significant facilities and other investments in South Korea, and there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and long-range missile programs as well as its military actions in the region. Furthermore, there has been a history of conflict and a recent rise in tensions within and among other countries in the region.



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

The outsourced semiconductor packaging and test market is very competitive. We face substantial competition from established and emerging packaging and test service providers primarily located in Asia, including companies with significantly greater processing capacity, financial resources, local presence, research and development operations, marketing, technology and other capabilities. We also may face increased competition from domestic companies located in the People's Republic of China, or the PRC, where there are government-supported efforts to promote the development and growth of the local semiconductor industry. For example, STATS ChipPAC was acquired in 2015 by Jiangsu Electronics Technology Co., Ltd., a local PRC company. We may be at a disadvantage in attempting to compete with entities associated with such government-supported initiatives based on their lower cost of capital, access to government resources and incentives, preferential sourcing practices, stronger local relationships or otherwise. Our competitors may also have established relationships, or enter into new strategic relationships, with one or more of the large semiconductor companies that are our current or potential customers, or key suppliers to these customers. Consolidation among our competitors could also strengthen their competitive position. For example, Advanced Semiconductor Engineering, Inc. and Siliconware Precision Industries Co., Ltd. became sister companies under a new joint holding company in April 2018.

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

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

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

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

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

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


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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. Further, the preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions about such things as revenue, costs and expenses, which may turn out to be incorrect or change. To the extent we fail to meet or exceed our own guidance or the analyst projections for any reason, the trading prices of our securities may be adversely impacted. Moreover, even if we do meet or exceed that guidance or those projections, if analysts and investors do not react favorably, or if analysts were to discontinue providing coverage of our company, the trading prices of our securities may be adversely impacted.

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

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

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

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

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

In a downturn in the semiconductor industry, IDMs and foundries could respond by shifting some or all outsourced packaging and test services to internally serviced capacity on a short-term basis. Also, the IDMs and foundries could curtail or reverse


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the trend of outsourcing packaging and test services. If we experience a significant loss of IDM or foundry business, it could have a material adverse effect on our business, liquidity, results of operations, financial condition and cash flows, especially during a prolonged industry downturn.

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

We have a significant amount of indebtedness, and the terms of the agreements governing our indebtedness allow us and our subsidiaries to incur more debt, subject to certain limitations. As of June 30, 2018, our total debt balance was $1,329.6 million, of which $115.1 million was classified as a current liability and $554.5 million was collateralized indebtedness at our subsidiaries. We may consider investments in joint ventures, increased capital expenditures or acquisitions which may increase our indebtedness. If new debt is added to our consolidated debt level, the related risks that we face could intensify.

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

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

We operate in a capital-intensive industry. We had capital expenditures of $389.6 million during the six months ended June 30, 2018. Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures and other investments, which are generally made in advance of the related revenues and without firm customer commitments. Ultimately the actual amount of our capital expenditures for 2018 and thereafter may vary materially and will depend on several factors. These factors include, among others, the amount, timing and implementation of our capital projects, including those under review and those not yet planned, the performance of our business, economic and market conditions, the cash needs and investment opportunities for the business, the need for additional capacity and facilities and the availability of cash flows from operations or financing.



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

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

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

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

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

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