AMKR 9.30.12 10Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the Quarterly Period Ended September 30, 2012 |
or |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
Commission File Number 000-29472
AMKOR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
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| | | | |
Delaware (State of incorporation) | | | | 23-1722724 (I.R.S. Employer Identification Number) |
1900 South Price Road
Chandler, AZ 85286
(Address of principal executive offices and zip code)
(480) 821-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| | | |
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of outstanding shares of the registrant’s Common Stock as of October 26, 2012 was 152,744,347.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2012
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| (In thousands, except per share data) |
Net sales | $ | 695,353 |
| | $ | 740,007 |
| | $ | 2,036,890 |
| | $ | 2,092,590 |
|
Cost of sales | 578,566 |
| | 617,768 |
| | 1,725,802 |
| | 1,713,848 |
|
Gross profit | 116,787 |
| | 122,239 |
| | 311,088 |
| | 378,742 |
|
Operating expenses: | |
| | |
| | |
| | |
|
Selling, general and administrative | 49,297 |
| | 65,011 |
| | 160,041 |
| | 190,853 |
|
Research and development | 13,472 |
| | 13,233 |
| | 40,764 |
| | 37,921 |
|
Total operating expenses | 62,769 |
| | 78,244 |
| | 200,805 |
| | 228,774 |
|
Operating income | 54,018 |
| | 43,995 |
| | 110,283 |
| | 149,968 |
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Other expense (income): | |
| | |
| | |
| | |
|
Interest expense | 19,689 |
| | 17,594 |
| | 60,727 |
| | 55,992 |
|
Interest expense, related party | 3,493 |
| | 3,492 |
| | 10,477 |
| | 8,902 |
|
Interest income | (772 | ) | | (648 | ) | | (2,489 | ) | | (1,788 | ) |
Foreign currency loss (gain), net | 2,394 |
| | (3,005 | ) | | 4,461 |
| | 1,658 |
|
Loss on debt retirement, net | — |
| | — |
| | — |
| | 15,531 |
|
Equity in earnings of unconsolidated affiliate | (2,541 | ) | | (3,034 | ) | | (5,421 | ) | | (6,641 | ) |
Other income, net | (359 | ) | | (226 | ) | | (1,511 | ) | | (695 | ) |
Total other expense, net | 21,904 |
| | 14,173 |
| | 66,244 |
| | 72,959 |
|
Income before income taxes | 32,114 |
| | 29,822 |
| | 44,039 |
| | 77,009 |
|
Income tax expense | 9,538 |
| | 2,499 |
| | 9,009 |
| | 9,475 |
|
Net income | 22,576 |
| | 27,323 |
| | 35,030 |
| | 67,534 |
|
Net (income) loss attributable to noncontrolling interests | (259 | ) | | 44 |
| | (358 | ) | | (576 | ) |
Net income attributable to Amkor | $ | 22,317 |
| | $ | 27,367 |
| | $ | 34,672 |
| | $ | 66,958 |
|
Net income attributable to Amkor per common share: | |
| | |
| | |
| | |
|
Basic | $ | 0.14 |
| | $ | 0.14 |
| | $ | 0.21 |
| | $ | 0.34 |
|
Diluted | $ | 0.11 |
| | $ | 0.11 |
| | $ | 0.19 |
| | $ | 0.28 |
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Shares used in computing per common share amounts: | |
| | |
| | |
| | |
|
Basic | 154,365 |
| | 195,364 |
| | 162,699 |
| | 195,510 |
|
Diluted | 237,060 |
| | 278,068 |
| | 245,431 |
| | 278,529 |
|
The accompanying notes are an integral part of these statements.
AMKOR TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| (In thousands) |
Net income attributable to Amkor | $ | 22,317 |
| | $ | 27,367 |
| | $ | 34,672 |
| | $ | 66,958 |
|
Other comprehensive income, net of tax: | | | | | | | |
Adjustments to unrealized components of defined benefit pension plans, net of tax of ($15), $39, ($58) and $125 | 219 |
| | (1,045 | ) | | 1,602 |
| | (779 | ) |
Cumulative translation adjustment, net of tax of ($413), $0, ($84) and $0 | 1,214 |
| | 3,798 |
| | 104 |
| | 4,346 |
|
Total other comprehensive income | 1,433 |
| | 2,753 |
| | 1,706 |
| | 3,567 |
|
Comprehensive income attributable to Amkor | $ | 23,750 |
| | $ | 30,120 |
| | $ | 36,378 |
| | $ | 70,525 |
|
The accompanying notes are an integral part of these statements.
AMKOR TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| (In thousands, except per share data) |
ASSETS |
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 549,085 |
| | $ | 434,631 |
|
Restricted cash | 2,680 |
| | 2,680 |
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Accounts receivable: | |
| | |
|
Trade, net of allowances | 359,318 |
| | 298,543 |
|
Other | 14,550 |
| | 27,197 |
|
Inventories | 218,343 |
| | 198,427 |
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Other current assets | 38,965 |
| | 35,352 |
|
Total current assets | 1,182,941 |
| | 996,830 |
|
Property, plant and equipment, net | 1,832,387 |
| | 1,656,214 |
|
Intangibles, net | 5,490 |
| | 8,382 |
|
Investments | 42,324 |
| | 36,707 |
|
Restricted cash | 2,264 |
| | 4,001 |
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Other assets | 78,151 |
| | 70,913 |
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Total assets | $ | 3,143,557 |
| | $ | 2,773,047 |
|
LIABILITIES AND EQUITY |
Current liabilities: | |
| | |
|
Short-term borrowings and current portion of long-term debt | $ | 40,475 |
| | $ | 59,395 |
|
Trade accounts payable | 500,170 |
| | 424,504 |
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Accrued expenses | 197,798 |
| | 158,287 |
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Total current liabilities | 738,443 |
| | 642,186 |
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Long-term debt | 1,361,665 |
| | 1,062,256 |
|
Long-term debt, related party | 225,000 |
| | 225,000 |
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Pension and severance obligations | 141,062 |
| | 129,096 |
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Other non-current liabilities | 17,561 |
| | 13,288 |
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Total liabilities | 2,483,731 |
| | 2,071,826 |
|
Commitments and contingencies (Note 16) |
|
| |
|
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Equity: | |
| | |
|
Amkor stockholders’ equity: | |
| | |
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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, 197,662 and 197,359 shares issued, and 152,365 and 168,628 shares outstanding, in 2012 and 2011, respectively | 198 |
| | 197 |
|
Additional paid-in capital | 1,613,471 |
| | 1,611,242 |
|
Accumulated deficit | (763,790 | ) | | (798,462 | ) |
Accumulated other comprehensive income | 12,555 |
| | 10,849 |
|
Treasury stock, at cost, 45,297 and 28,731 shares in 2012 and 2011, respectively | (210,921 | ) | | (130,560 | ) |
Total Amkor stockholders’ equity | 651,513 |
| | 693,266 |
|
Noncontrolling interests in subsidiaries | 8,313 |
| | 7,955 |
|
Total equity | 659,826 |
| | 701,221 |
|
Total liabilities and equity | $ | 3,143,557 |
| | $ | 2,773,047 |
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The accompanying notes are an integral part of these statements.
AMKOR TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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| | | | | | | |
| For the Nine Months Ended September 30, |
| 2012 | | 2011 |
| (In thousands) |
Cash flows from operating activities: | |
| | |
|
Net income | $ | 35,030 |
| | $ | 67,534 |
|
Depreciation and amortization | 272,891 |
| | 249,543 |
|
Loss on debt retirement, net | — |
| | 10,557 |
|
Other operating activities and non-cash items | (724 | ) | | 1,537 |
|
Changes in assets and liabilities | (22,761 | ) | | 46,621 |
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Net cash provided by operating activities | 284,436 |
| | 375,792 |
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Cash flows from investing activities: | |
| | |
|
Purchases of property, plant and equipment | (380,344 | ) | | (324,349 | ) |
Proceeds from the sale of property, plant and equipment | 3,759 |
| | 15,333 |
|
Financing lease payment from unconsolidated affiliate | 13,684 |
| | 7,741 |
|
Other investing activities | 1,451 |
| | (5,654 | ) |
Net cash used in investing activities | (361,450 | ) | | (306,929 | ) |
Cash flows from financing activities: | |
| | |
|
Borrowings under short-term debt | 30,000 |
| | 26,567 |
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Payments of short-term debt | (40,000 | ) | | (21,567 | ) |
Proceeds from issuance of long-term debt | 562,528 |
| | 348,236 |
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Proceeds from issuance of long-term debt, related party | — |
| | 75,000 |
|
Payments of long-term debt, net of certain redemption premiums and discounts | (272,976 | ) | | (373,655 | ) |
Payments for debt issuance costs | (6,007 | ) | | (5,875 | ) |
Payments for repurchase of common stock | (80,946 | ) | | (41,543 | ) |
Proceeds from the issuance of stock through share-based compensation plans | 181 |
| | 933 |
|
Payments of tax withholding for restricted shares | (546 | ) | | (793 | ) |
Net cash provided by financing activities | 192,234 |
| | 7,303 |
|
Effect of exchange rate fluctuations on cash and cash equivalents | (766 | ) | | 2,226 |
|
Net increase in cash and cash equivalents | 114,454 |
| | 78,392 |
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Cash and cash equivalents, beginning of period | 434,631 |
| | 404,998 |
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Cash and cash equivalents, end of period | $ | 549,085 |
| | $ | 483,390 |
|
Non cash investing and financing activities: | |
| | |
|
Common stock issuance for conversion of related party 6.25% convertible subordinated notes | $ | — |
| | $ | 100,000 |
|
The accompanying notes are an integral part of these statements.
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Financial Statements
Basis of Presentation. The Consolidated Financial Statements and related disclosures as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011, are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The December 31, 2011, 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, 2011, filed on Form 10-K with the SEC on February 23, 2012. The results of operations for the three and nine months ended September 30, 2012, are not necessarily indicative of the results to be expected for the full year. Unless the context otherwise requires, all references to “Amkor,” “we,” “us,” “our” or the “company” are to Amkor Technology, Inc. and our subsidiaries.
Use of Estimates. The Consolidated Financial Statements have been prepared in conformity with U.S. GAAP, using management’s best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.
2. New Accounting Standards
Recently Adopted Standards
In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04, Fair Value Measurement (Topic 820). This ASU updates certain requirements for measuring fair value and disclosure regarding fair value measurement. This ASU is effective for reporting periods beginning after December 15, 2011. Our adoption of ASU 2011-04 on January 1, 2012, impacted our financial statement disclosure (Note 15).
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220). This ASU eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This ASU is effective for reporting periods beginning after December 15, 2011. Full retrospective application is required. Our adoption of ASU 2011-05 on January 1, 2012, impacted our financial statement presentation and disclosure (Consolidated Statements of Comprehensive Income and Note 6).
3. Share-Based Compensation Plans
The following table presents share-based compensation expense attributable to stock options and restricted shares.
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| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| (In thousands) |
Stock options | $ | 251 |
| | $ | 497 |
| | $ | 908 |
| | $ | 1,550 |
|
Restricted shares | 360 |
| | 532 |
| | 1,140 |
| | 2,497 |
|
Total share-based compensation expense | $ | 611 |
| | $ | 1,029 |
| | $ | 2,048 |
| | $ | 4,047 |
|
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
The following table presents share-based compensation expense as included in the Consolidated Statements of Income:
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| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| (In thousands) |
Cost of sales | $ | — |
| | $ | 7 |
| | $ | 7 |
| | $ | 13 |
|
Selling, general and administrative | 532 |
| | 890 |
| | 1,776 |
| | 3,510 |
|
Research and development | 79 |
| | 132 |
| | 265 |
| | 524 |
|
Total share-based compensation expense | $ | 611 |
| | $ | 1,029 |
| | $ | 2,048 |
| | $ | 4,047 |
|
There is no corresponding deferred income tax benefit.
Stock Options
The following table summarizes our stock option activity for the nine months ended September 30, 2012:
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| | | | | | | | | | | | | |
| Number of Shares (In thousands) | | Weighted Average Exercise Price Per Share | | Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (In thousands) |
Outstanding at December 31, 2011 | 6,052 |
| | $ | 9.97 |
| | |
| | |
|
Granted | 100 |
| | 4.58 |
| | |
| | |
|
Exercised | (50 | ) | | 3.63 |
| | |
| | |
|
Forfeited or expired | (1,127 | ) | | 11.75 |
| | |
| | |
|
Outstanding at September 30, 2012 | 4,975 |
| | $ | 9.53 |
| | 2.80 |
| | $ | 71 |
|
Fully vested and expected to vest at September 30, 2012 | 4,957 |
| | $ | 9.54 |
| | 2.78 |
| | $ | 71 |
|
Exercisable at September 30, 2012 | 4,665 |
| | $ | 9.71 |
| | 2.48 |
| | $ | 71 |
|
The following assumptions were used in the Black-Scholes option pricing model to calculate weighted average fair values of the options granted for the nine months ended September 30, 2012 and 2011.
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| | | | | | | |
| For the Nine Months Ended September 30, |
| 2012 | | 2011 |
Expected life (in years) | 6.0 |
| | 6.2 |
|
Risk-free interest rate | 1.0 | % | | 2.4 | % |
Volatility | 65 | % | | 67 | % |
Dividend yield | — |
| | — |
|
Weighted average grant-date fair value per option granted | $ | 2.68 |
| | $ | 4.06 |
|
The intrinsic value of options exercised for the three and nine months ended September 30, 2012, was less than $0.1 million and $0.1 million, respectively. The intrinsic value of options exercised for the three and nine months ended September 30, 2011, was less than $0.1 million and $0.4 million, respectively. For the nine months ended September 30, 2012 and 2011, cash received for stock option exercises was $0.2 million and $0.9 million, respectively. The related cash receipts are included in financing activities in the accompanying Condensed Consolidated Statements of Cash Flows. Total unrecognized compensation expense from stock options, including a forfeiture estimate, was approximately $0.6 million as of September 30, 2012, which is expected to be recognized over a weighted-average period of 1.3 years beginning October 1, 2012. To the extent the actual forfeiture rate is different than what we have anticipated, share-based compensation related to these awards will be different from our expectations.
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Restricted Shares
The following table summarizes our restricted share activity for the nine months ended September 30, 2012:
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| | | | | | |
| Number of Shares (In thousands) | | Weighted Average Grant-Date Fair Value (Per share) |
Nonvested at December 31, 2011 | 693 |
| | $ | 7.33 |
|
Awards granted | — |
| | — |
|
Awards vested | (253 | ) | | 7.40 |
|
Awards forfeited | (59 | ) | | 7.24 |
|
Nonvested at September 30, 2012 | 381 |
| | $ | 7.30 |
|
The fair value of shares vested during the nine months ended September 30, 2012 was $1.5 million.
Unrecognized compensation cost, including a forfeiture estimate, was $2.3 million as of September 30, 2012, which is expected to be recognized over a weighted average period of approximately 2.0 years beginning October 1, 2012. To the extent that the actual forfeiture rate is different than what we have anticipated, the share-based compensation expense related to these awards will be different from our expectations.
In November 2012, we granted 0.4 million restricted shares to employees under the 2007 Equity Incentive Plan. The restricted shares vest over a four-year period and their valuation is determined based on the fair market value of the underlying shares on the date of grant.
4. Income Taxes
Our income tax expense of $9.0 million for the nine months ended September 30, 2012, primarily reflects $5.7 million of expense related to income taxes at certain of our foreign operations, $1.5 million of foreign withholding taxes and $2.3 million of deferred taxes on undistributed earnings from our investment in J-Devices Corporation ("J-Devices") offset by a net $0.5 million reduction in unrecognized tax benefits. Our income tax expense reflects income taxed in foreign jurisdictions where we benefit from tax holidays. At September 30, 2012, we had U.S. net operating loss carryforwards totaling $369.5 million, which expire at various times through 2031. Additionally, at September 30, 2012, we had $73.2 million of non-U.S. net operating loss carryforwards, substantially all of which will expire at various times through 2022.
We maintain a valuation allowance on all of our U.S. net deferred tax assets, including our net operating loss carryforwards. We also have valuation allowances on deferred tax assets in certain foreign jurisdictions. Such valuation allowances are released as the related tax benefits are realized on our tax returns or when sufficient net positive evidence exists to conclude it is more likely than not that the deferred tax assets will be realized.
Our gross unrecognized tax benefits decreased from $7.9 million at December 31, 2011, to $5.8 million as of September 30, 2012, primarily because of a $4.0 million reduction as a result of a favorable ruling request related to revenue attribution and a $1.2 million settlement of contested prior years' deductions in a foreign jurisdiction, which were partially offset by a $3.1 million addition related to the application of a law change in a foreign jurisdiction. Substantially all of the remaining balance of our unrecognized tax benefits at September 30, 2012, would reduce our effective tax rate, if recognized. Our unrecognized tax benefits are subject to change as examinations of tax years are completed. Tax return examinations involve uncertainties, and there can be no assurances that the outcome of examinations will be favorable.
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
5. Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income attributable to Amkor common shareholders by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding includes restricted shares held by retirement eligible recipients and is reduced for treasury stock. Unvested share-based compensation awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of EPS pursuant to the two-class method. We grant restricted shares which entitle recipients to voting and nonforfeitable dividend rights from the date of grant. As a result, we have applied the two-class method to determine EPS.
Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares include outstanding stock options, unvested restricted shares and convertible debt. The following table summarizes the computation of basic and diluted EPS:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| (In thousands, except per share data) |
Net income attributable to Amkor | $ | 22,317 |
| | $ | 27,367 |
| | $ | 34,672 |
| | $ | 66,958 |
|
Income allocated to participating securities | (55 | ) | | (106 | ) | | (81 | ) | | (259 | ) |
Net income available to Amkor common stockholders | 22,262 |
| | 27,261 |
| | 34,591 |
| | 66,699 |
|
Adjustment for dilutive securities on net income: | |
| | |
| | |
| | |
|
Net income allocated to participating securities in basic calculation | 55 |
| | 106 |
| | 81 |
| | 259 |
|
Interest on 6.0% convertible notes due 2014, net of tax | 4,026 |
| | 4,026 |
| | 12,077 |
| | 12,077 |
|
Net income attributable to Amkor — diluted | $ | 26,343 |
| | $ | 31,393 |
| | $ | 46,749 |
| | $ | 79,035 |
|
| | | | | | | |
Weighted average shares outstanding — basic | 154,365 |
| | 195,364 |
| | 162,699 |
| | 195,510 |
|
Effect of dilutive securities: | |
| | |
| | |
| | |
|
Stock options and restricted share awards | 37 |
| | 46 |
| | 74 |
| | 361 |
|
6.0% convertible notes due 2014 | 82,658 |
| | 82,658 |
| | 82,658 |
| | 82,658 |
|
Weighted average shares outstanding — diluted | 237,060 |
| | 278,068 |
| | 245,431 |
| | 278,529 |
|
Net income attributable to Amkor per common share: | |
| | |
| | |
| | |
|
Basic | $ | 0.14 |
| | $ | 0.14 |
| | $ | 0.21 |
| | $ | 0.34 |
|
Diluted | 0.11 |
| | 0.11 |
| | 0.19 |
| | 0.28 |
|
The following table summarizes the potential shares of common stock that were excluded from diluted EPS, because the effect of including these potential shares was antidilutive:
|
| | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| (In thousands) |
Stock options and restricted share awards | 4,856 |
| | 6,122 |
| | 4,597 |
| | 5,158 |
|
6.25% convertible notes due 2013 | — |
| | — |
| | — |
| | 929 |
|
2.5% convertible notes due 2011 | — |
| | — |
| | — |
| | 1,459 |
|
Total potentially dilutive shares | 4,856 |
| | 6,122 |
| | 4,597 |
| | 7,546 |
|
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
6. Equity and Comprehensive Income
The following table reflects the changes in equity attributable to both Amkor and the noncontrolling interests:
|
| | | | | | | | | | | |
| Attributable to Amkor | | Attributable to Noncontrolling Interests | | Total |
| (In thousands) |
Equity at December 31, 2011 | $ | 693,266 |
| | $ | 7,955 |
| | $ | 701,221 |
|
Net income | 34,672 |
| | 358 |
| | 35,030 |
|
Other comprehensive income | 1,706 |
| | — |
| | 1,706 |
|
Issuance of stock through employee share-based compensation plans | 181 |
| | — |
| | 181 |
|
Treasury stock acquired through surrender of shares for tax withholding | (546 | ) | | — |
| | (546 | ) |
Share-based compensation expense | 2,048 |
| | — |
| | 2,048 |
|
Repurchase of common stock | (79,814 | ) | | — |
| | (79,814 | ) |
Equity at September 30, 2012 | $ | 651,513 |
| | $ | 8,313 |
| | $ | 659,826 |
|
|
| | | | | | | | | | | |
| Attributable to Amkor | | Attributable to Noncontrolling Interests | | Total |
| (In thousands) |
Equity at December 31, 2010 | $ | 630,013 |
| | $ | 6,668 |
| | $ | 636,681 |
|
Net income | 66,958 |
| | 576 |
| | 67,534 |
|
Other comprehensive income | 3,567 |
| | — |
| | 3,567 |
|
Issuance of stock through employee share-based compensation plans | 933 |
| | — |
| | 933 |
|
Treasury stock acquired through surrender of shares for tax withholding | (793 | ) | | — |
| | (793 | ) |
Share-based compensation expense | 4,047 |
| | — |
| | 4,047 |
|
Repurchase of common stock | (48,938 | ) | | — |
| | (48,938 | ) |
Conversion of debt to common stock | 100,497 |
| | — |
| | 100,497 |
|
Equity at September 30, 2011 | $ | 756,284 |
| | $ | 7,244 |
| | $ | 763,528 |
|
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
7. Inventories
Inventories consist of the following:
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| (In thousands) |
Raw materials and purchased components | $ | 165,174 |
| | $ | 158,656 |
|
Work-in-process | 53,169 |
| | 39,771 |
|
Total inventories | $ | 218,343 |
| | $ | 198,427 |
|
8. Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| (In thousands) |
Land | $ | 106,338 |
| | $ | 106,338 |
|
Land use rights | 19,945 |
| | 19,945 |
|
Buildings and improvements | 901,946 |
| | 871,970 |
|
Machinery and equipment | 3,310,351 |
| | 3,016,430 |
|
Software and computer equipment | 191,332 |
| | 186,378 |
|
Furniture, fixtures and other equipment | 19,469 |
| | 19,736 |
|
Construction in progress | 28,130 |
| | 26,818 |
|
| 4,577,511 |
| | 4,247,615 |
|
Less accumulated depreciation and amortization | (2,745,124 | ) | | (2,591,401 | ) |
Total property, plant and equipment, net | $ | 1,832,387 |
| | $ | 1,656,214 |
|
The following table presents depreciation expense as included in the Consolidated Statements of Income:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| (In thousands) |
Cost of sales | $ | 85,172 |
| | $ | 74,671 |
| | $ | 247,160 |
| | $ | 224,241 |
|
Selling, general and administrative | 4,670 |
| | 5,601 |
| | 15,066 |
| | 16,874 |
|
Research and development | 2,889 |
| | 1,536 |
| | 7,666 |
| | 4,524 |
|
Total depreciation expense | $ | 92,731 |
| | $ | 81,808 |
| | $ | 269,892 |
| | $ | 245,639 |
|
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
The following table reconciles our activity related to property, plant and equipment additions as reflected on the Consolidated Balance Sheets to purchases of property, plant and equipment as presented on the Condensed Consolidated Statements of Cash Flows:
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2012 | | 2011 |
| (In thousands) |
Property, plant and equipment additions | $ | 446,767 |
| | $ | 325,350 |
|
Net change in related accounts payable and deposits | (66,423 | ) | | (1,001 | ) |
Purchases of property, plant and equipment | $ | 380,344 |
| | $ | 324,349 |
|
9. Intangible Assets
Intangibles as of September 30, 2012, consist of the following:
|
| | | | | | | | | | | |
| Gross | | Accumulated Amortization | | Net |
| (In thousands) |
Patents and technology rights | $ | 22,060 |
| | $ | (19,361 | ) | | $ | 2,699 |
|
Customer relationships | 8,000 |
| | (5,209 | ) | | 2,791 |
|
Total intangibles | $ | 30,060 |
| | $ | (24,570 | ) | | $ | 5,490 |
|
Intangibles as of December 31, 2011, consist of the following:
|
| | | | | | | | | | | |
| Gross | | Accumulated Amortization | | Net |
| (In thousands) |
Patents and technology rights | $ | 29,774 |
| | $ | (26,158 | ) | | $ | 3,616 |
|
Customer relationships | 13,625 |
| | (8,859 | ) | | 4,766 |
|
Total intangibles | $ | 43,399 |
| | $ | (35,017 | ) | | $ | 8,382 |
|
Amortization of identifiable intangible assets for the three and nine months ended September 30, 2012, was $1.0 million and $3.0 million, respectively. Amortization of identifiable intangible assets for the three and nine months ended September 30, 2011, was $1.3 million and $3.9 million, respectively. Based on the amortizing assets recognized in our balance sheet at September 30, 2012, amortization for each of the next five years is estimated as follows:
|
| | | |
| (In thousands) |
2012 remaining | $ | 846 |
|
2013 | 3,346 |
|
2014 | 636 |
|
2015 | 339 |
|
2016 | 117 |
|
Thereafter | 206 |
|
Total amortization | $ | 5,490 |
|
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
10. Investments
Investments consist of the following:
|
| | | | | | | | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| Carrying Value (In thousands) | | Ownership Percentage | | Carrying Value (In thousands) | | Ownership Percentage |
Investment in unconsolidated affiliate | $ | 42,324 |
| | 30.0 | % | | $ | 36,707 |
| | 30.0 | % |
J-Devices Corporation
During 2009, Amkor and Toshiba Corporation (“Toshiba”) invested in Nakaya Microdevices Corporation (“NMD”) and formed a joint venture to provide semiconductor packaging and test services in Japan. As a result of the transaction, NMD is now owned 60% by the former shareholders of NMD, 30% by Amkor and 10% by Toshiba and has changed its name to J-Devices. J-Devices is a variable interest entity, but as we are not the primary beneficiary, the investment is accounted for under the equity method as an unconsolidated affiliate.
Our investment includes our 30% equity interest and options to acquire additional equity interests. The options, exercisable at our discretion, permit us to increase our percentage ownership of J-Devices on the anniversary date up to 60% in 2012 by purchasing primary shares from J-Devices, up to 66% in 2014 by purchasing shares owned by one of the other shareholders and up to 80% in 2015 by purchasing shares owned by the other shareholders. We expect that the exercise period for the initial 2012 option will expire sometime during the first quarter of 2013, depending on the receipt of certain financial statements from J-Devices. In 2014 and beyond, Toshiba has the option, at its discretion, to sell shares it owns to us if we have exercised any of our options. After we own 80% or more shares, the former shareholders of NMD have a put option which allows them to sell their shares to us. The exercise price for all options is payable in cash and is to be determined using a formula based primarily upon the net book value and a multiple of earnings before interest, taxes, depreciation and amortization of J-Devices.
Under the equity method of accounting, we recognize our 30% proportionate share of J-Devices' net income or loss, which is after J-Devices' income taxes in Japan, during each accounting period as a change in our investment in unconsolidated affiliate. For the three and nine months ended September 30, 2012, our equity in earnings in J-Devices, net of J-Devices' income taxes in Japan, was $2.5 million and $5.4 million, respectively. For the three and nine months ended September 30, 2011, our equity in earnings in J-Devices, net of J-Devices' income taxes in Japan, was $3.0 million and $6.6 million, respectively.
In addition, we record equity method adjustments as a change in our investment in unconsolidated affiliate. These adjustments include the amortization of a basis difference as our carrying value exceeded our equity in the net assets of J-Devices at the date of investment as well as other adjustments required by the equity method.
In conjunction with entering into the joint venture, one of our existing subsidiaries in Japan purchased packaging and test equipment from Toshiba and leased the equipment to J-Devices under an agreement which is accounted for as a direct financing lease. For the three and nine months ended September 30, 2012, we recognized interest income of $0.1 million and $0.3 million, respectively. For the three and nine months ended September 30, 2011, we recognized interest income of $0.2 million and $0.6 million, respectively. Our lease receivable, net was $10.6 million and $20.2 million as of September 30, 2012, and December 31, 2011, respectively, and was recorded as a component of other accounts receivable. At the end of the lease in October 2012, J-Devices exercised an option to purchase the remaining packaging and test equipment for ¥761.4 million (approximately $9.8 million).
11. Accrued Expenses
Accrued expenses consist of the following:
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| (In thousands) |
Payroll and benefits | $ | 63,948 |
| | $ | 59,928 |
|
Customer advances and deferred revenue | 45,752 |
| | 34,672 |
|
Accrued interest | 29,907 |
| | 11,941 |
|
Accrued royalties (Note 16) | 13,324 |
| | — |
|
Accrued severance plan obligations (Note 13) | 8,055 |
| | 7,476 |
|
Income taxes payable | 4,935 |
| | 4,446 |
|
Other accrued expenses | 31,877 |
| | 39,824 |
|
Total accrued expenses | $ | 197,798 |
| | $ | 158,287 |
|
Accrued royalties relate to our estimate for unpaid royalties owed to Tessera as a result of an interim order received from an arbitration panel on July 5, 2012 (Note 16).
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
12. Debt
Following is a summary of short-term borrowings and long-term debt:
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| (In thousands) |
Debt of Amkor Technology, Inc.: | |
| | |
|
Senior secured credit facilities: | |
| | |
|
$150 million revolving credit facility, LIBOR plus 1.5%-2.25%, due June 2017 (1) | $ | — |
| | $ | — |
|
Senior notes: | |
| | |
|
7.375% Senior notes, due May 2018 | 345,000 |
| | 345,000 |
|
6.625% Senior notes, due June 2021, $75 million related party | 400,000 |
| | 400,000 |
|
6.375% Senior notes, due October 2022 (2) | 300,000 |
| | — |
|
Senior subordinated notes: | |
| | |
|
6.0% Convertible senior subordinated notes, due April 2014, $150 million related party | 250,000 |
| | 250,000 |
|
Debt of subsidiaries: | |
| | |
|
Amkor Technology Korea, Inc.: | | | |
$41 million revolving credit facility, foreign currency funding-linked base rate plus 2.33%, due June 2013 (3) | — |
| | — |
|
Term loan, bank base rate plus 0.5%, due April 2014 (2) | 107,140 |
| | 107,140 |
|
Term loan, foreign currency funding-linked base rate plus 2.30%, due March 2015 (4) | 100,000 |
| | — |
|
Term loan, bank funding rate-linked base rate plus 1.7%, due March 2016 (2) | 50,000 |
| | 12,512 |
|
Term loan, LIBOR plus 3.90% or 3.94%, due July 2017 (5) | 75,000 |
| | — |
|
Term loan, bank funding rate-linked base rate plus 1.99%, due May 2013 (4) | — |
| | 103,000 |
|
Term loan, bank base rate plus 1.06% or 1.16%, due July 2014 (5) | — |
| | 50,000 |
|
Other: | | | |
Revolving credit facility, TAIFX plus a bank-determined spread, due April 2015 (Taiwan) (6) | — |
| | — |
|
Term loan, TIBOR plus 0.8%, due September 2012 (Japan) (2) | — |
| | 9,495 |
|
Term loan, LIBOR plus 2.8%, due 12 months from date of draw (China) (2) | — |
| | 20,000 |
|
Term loan, TAIFX plus a bank-determined spread, due April 2015 (Taiwan) (2)(6) | — |
| | 49,504 |
|
| 1,627,140 |
| | 1,346,651 |
|
Less: Short-term borrowings and current portion of long-term debt | (40,475 | ) | | (59,395 | ) |
Long-term debt (including related party) | $ | 1,586,665 |
| | $ | 1,287,256 |
|
| |
(1) | In June 2012, Amkor Technology, Inc. ("ATI") amended and restated the $100.0 million senior secured revolving credit facility to increase the facility amount to $150.0 million and extend its term by two years to June 2017. The facility has a letter of credit sub-limit of $25.0 million. As amended, interest is charged under the facility at a floating rate based on the base rate in effect from time to time plus the applicable margins which range from 0.25% to 1.00% for base rate revolving loans, or LIBOR plus 1.5% to 2.25% for LIBOR revolving loans. In connection with amending and extending the facility, ATI capitalized $0.8 million of deferred debt issuance costs for the nine months ended September 30, 2012. |
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
| |
(2) | In September 2012, ATI issued $300.0 million of 6.375% Senior Notes due October 2022 (the “2022 Notes”). The 2022 Notes were issued at par and are senior unsecured obligations. Interest is payable semi-annually on April 1 and October 1 of each year, commencing on April 1, 2013. In addition, we entered into a Registration Rights Agreement with the initial purchasers of the 2022 Notes for freely tradable notes issued by us. If we are unable to effect the exchange offer within 240 days of the issuance of the 2022 Notes, we have agreed to pay additional interest on the notes up to 0.5%. We used $224.9 million of the net proceeds from the issuance of the 2022 Notes to repay subsidiary debt of which $67.8 million was paid prior to September 30, 2012 and $157.1 million was paid in October 2012. We incurred $5.2 million of debt issuance costs associated with the 2022 Notes. In October 2012, we repaid the term loans due 2014 and 2016 and recorded a $1.2 million loss on extinguishment related to prepayment fees of $0.5 million and a charge for the write-off of associated unamortized deferred debt issuance costs of $0.7 million. |
| |
(3) | In June 2012, Amkor Technology Korea, Inc., a Korean subsidiary (“ATK”) entered into a $41.0 million revolving credit facility with a Korean Bank with a term of 12 months. The loan bears interest at the foreign currency funding-linked base rate plus 2.33% (4.49% as of September 30, 2012). Principal is payable upon maturity and interest is paid monthly. The loan is collateralized with certain land, buildings and equipment at our ATK facilities. |
| |
(4) | In March 2012, ATK repaid the remaining outstanding balance of the ATK term loan due May 2013 by entering into a $100.0 million term loan with the same Korean bank, which is due upon maturity in March 2015. The term loan bears interest at a foreign currency funding-linked base rate plus 2.30% (4.58% as of September 30, 2012) to be paid monthly. The term loan is collateralized by substantially all the land, factories and equipment located at our ATK facilities. |
| |
(5) | In June 2012, ATK entered into a $150.0 million, five-year secured term loan with a Korean bank which is collateralized by substantially all the land, factories and equipment located at our ATK facilities. Interest is paid quarterly, $50.0 million at LIBOR plus 3.90% (4.36% as of September 30, 2012) ("Tranche A") and $100.0 million at LIBOR plus 3.94% (4.38% as of September 30, 2012) ("Tranche B"). As of September 30, 2012, ATK borrowed $50.0 million from Tranche A and $25.0 million from Tranche B. The proceeds of Tranche A were used to fully repay the ATK term loan due July 2014. In October 2012, an additional $20.0 million was borrowed from Tranche B. The remaining $55.0 million available under Tranche B can be borrowed through June 2013 to fund capital additions. The term loan is due in full upon maturity in July 2017. |
| |
(6) | In January 2012, Amkor Technology Taiwan Ltd, a Taiwanese subsidiary, converted the existing NT$1.5 billion term loan from a Taiwanese to a U.S. dollar denominated term loan. The term loan previously bore interest at the 90-day primary commercial paper rate plus 0.835% and now bears interest at the Taipei Foreign Exchange ("TAIFX") six month U.S. dollar rate plus a bank-determined spread (2.54% as of September 30, 2012). In September 2012, as noted above at (2), the term loan was paid off in full. In addition, the term loan was converted to a revolving credit facility. All other terms and conditions remain the same. At conversion, availability under the revolving credit facility was $44.0 million and subsequent availability steps down $5.0 million every six months from the original available balance, with a balloon payment of the remaining balance at maturity. As of September 30, 2012, $44.0 million was available to be drawn. |
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. Our collateralized bank debt agreements and the indentures governing our outstanding notes contain a number of affirmative and negative covenants which could restrict our operations. We were in compliance with all of our covenants as of September 30, 2012.
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Maturities
|
| | | |
| Total Debt (1) |
| (In thousands) |
Payments due for the year ending December 31, | |
|
2012 - Remaining | $ | — |
|
2013 | 55,356 |
|
2014 | 330,950 |
|
2015 | 116,667 |
|
2016 | 4,167 |
|
Thereafter | 1,120,000 |
|
Total debt | $ | 1,627,140 |
|
| |
(1) | In September 2012, we issued $300.0 million of the 2022 Notes and $224.9 million of the net proceeds from the issuance of the 2022 Notes was used to repay subsidiary debt, of which $67.8 million was paid prior to September 30, 2012 and $157.1 million was paid in October 2012. The $157.1 million payment in October 2012 prepaid the $55.4 million due in 2013, $80.9 million due in 2014, $16.6 million due in 2015, and $4.2 million due in 2016. |
13. Pension and Severance Plans
Foreign Pension Plans
Our subsidiaries in Japan, the Philippines and Taiwan sponsor defined benefit pension plans that cover substantially all of their respective employees who are not covered by statutory plans. Charges to expense are based upon actuarial analyses. The components of net periodic pension cost for these defined benefit plans are as follows:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
| (In thousands) |
Components of net periodic pension cost and total pension expense: | |
| | |
| | |
| | |
|
Service cost | $ | 1,561 |
| | $ | 1,694 |
| | $ | 4,789 |
| | $ | 4,964 |
|
Interest cost | 817 |
| | 937 |
| | 2,439 |
| | 2,767 |
|
Expected return on plan assets | (800 | ) | | (897 | ) | | (2,370 | ) | | (2,659 | ) |
Amortization of transition obligation | 2 |
| | 1 |
| | 6 |
| | 5 |
|
Amortization of prior service cost | 54 |
| | 67 |
| | 179 |
| | 223 |
|
Recognized actuarial loss | 51 |
| | 21 |
| | 154 |
| | 66 |
|
Net periodic pension cost | 1,685 |
| | 1,823 |
| | 5,197 |
| | 5,366 |
|
Curtailment loss | — |
| | 769 |
| | 1,089 |
| | 769 |
|
Settlement loss (gain) | — |
| | 168 |
| | (100 | ) | | 168 |
|
Total pension expense | 1,685 |
| | $ | 2,760 |
| | $ | 6,186 |
| | $ | 6,303 |
|
During the nine months ended September 30, 2012, we recognized net curtailment and settlement losses of $1.0 million resulting from the remeasurement of our defined benefit plan in Japan due to reductions in workforce (Note 18). During the three and nine months ended September 30, 2011, we recognized curtailment and settlement losses of $0.9 million resulting from the remeasurement of our defined benefit plan in the Philippines due to reductions in workforce (Note 18).
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
For the three and nine months ended September 30, 2012, we contributed $0.1 million and $0.3 million to the pension plans, respectively. We expect to contribute approximately $3.1 million to the pension plans during the remainder of 2012. For the three and nine months ended September 30, 2011, we contributed $3.2 million and $3.4 million to the pension plans, respectively.
Korean Severance Plan
Our Korean subsidiary participates in an accrued severance plan that covers employees with at least one year of service. To the extent eligible employees are terminated, our Korean subsidiary would be required to make lump-sum severance payments on behalf of these eligible employees based on their length of service, seniority and rate of pay at the time of termination. Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date. Our contributions to the National Pension Plan of the Republic of Korea are deducted from accrued severance benefit liabilities.
The provision recorded for severance benefits for the three months ended September 30, 2012 and 2011, was $7.0 million and $8.1 million, respectively. The provision recorded for severance benefits for the nine months ended September 30, 2012 and 2011, was $14.6 million and $21.6 million, respectively. The balance of our Korean severance obligation consists of the following:
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| (In thousands) |
Current (Accrued expenses) | $ | 8,055 |
| | $ | 7,476 |
|
Non-current (Pension and severance obligations) | 111,765 |
| | 99,000 |
|
Total Korean severance obligation | $ | 119,820 |
| | $ | 106,476 |
|
14. Treasury Stock
Stock Repurchase Program
Our Board of Directors previously authorized the repurchase of up to $300.0 million of our common stock, $150.0 million in August 2011 and $150.0 million in February 2012, exclusive of any fees, commissions or other expenses. The purchase of stock under the program may be made in the open market or through privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, the cash needs and investment opportunities for the business, price, applicable legal requirements and other factors. Our stock repurchase program may be suspended or discontinued at any time.
During the three and nine months ended September 30, 2012, we purchased 8.4 million and 16.5 million shares of common stock for an aggregate purchase price of $41.8 million and $79.5 million, respectively, net of $0.2 million and $0.3 million of commissions, respectively, for an average price of $4.99 and $4.83, respectively. During the three and nine months ended September 30, 2011, we purchased 10.9 million shares of common stock for an aggregate purchase price of $48.7 million, net of $0.2 million of commissions, for an average price of $4.47. Since inception of the program, we have purchased a total of 45.0 million shares at an aggregate purchase price of $208.4 million, net of $0.9 million of commissions. At September 30, 2012, approximately $91.6 million was available to repurchase common stock pursuant to the stock repurchase program.
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
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.
Our assets and liabilities recorded at fair value on a recurring basis include cash equivalent money market funds and restricted cash money market funds. Cash equivalent money market funds and restricted cash money market funds are invested in U.S. money market funds and various U.S. and foreign bank operating and time deposit accounts, which are due on demand or carry a maturity date of less than three months when purchased. No restrictions have been imposed on us regarding withdrawal of balances with respect to our cash equivalents as a result of liquidity or other credit market issues affecting the money market funds we invest in or the counterparty financial institutions holding our deposits. Money market funds are valued using quoted market prices in active markets for identical assets. We also measure certain assets and liabilities, including property, plant and equipment, intangible assets and an equity investment, at fair value on a nonrecurring basis. For the three and nine months ended September 30, 2012, such measurements included the consideration of third party valuation reports based on a combination of market and cost approach valuation techniques. The valuation reports contained various inputs including semiconductor industry data, replacement costs, price lists and general information regarding the assets being evaluated. Nonrecurring fair value measurements related to property, plant and equipment impairments reflect the fair value of the assets at the dates the impairments were taken during the period. Our fair value measurements consist of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2012 | | For the Nine Months Ended September 30, 2012 | | September 30, 2012 | | For the Three Months Ended September 30, 2011 | | For the Nine Months Ended September 30, 2011 | | December 31, 2011 |
| Gains (Losses) | | Gains (Losses) | | Fair Value | | Gains (Losses) | | Gains (Losses) | | Fair Value |
| (In thousands) |
Recurring fair value measurements: | | | | | | | | | | | |
Cash equivalent money market funds (Level 1) | | | | | $ | 178,322 |
| | | | | | $ | 165,540 |
|
Restricted cash money market funds (Level 1) | | | | | 2,680 |
| | | | | | 2,680 |
|
| | | | | | | | | | | |
Nonrecurring fair value measurements: | | | | | | | | | | | |
Long-lived assets held for use or disposal (Level 3) | $ | (250 | ) | | $ | (586 | ) | | $ | 868 |
| | $ | (1,335 | ) | | $ | (2,484 | ) | | |
For the three and nine months ended September 30, 2012 and 2011, all impairment losses on property, plant and equipment were recorded as cost of sales.
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
We measure the fair value of our debt on a quarterly basis for disclosure purposes. The following table presents the fair value of financial instruments that are not recorded at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
| (In thousands) |
Senior notes (Level 1) | $ | 1,068,500 |
| | $ | 1,045,000 |
| | $ | 737,049 |
| | $ | 745,000 |
|
Convertible senior subordinated notes (Level 1) | 404,350 |
| | 250,000 |
| | 405,625 |
| | 250,000 |
|
Subsidiary revolvers and term loans (Level 2) | 331,711 |
| | 332,140 |
| | 352,679 |
| | 351,651 |
|
Total debt | $ | 1,804,561 |
| | $ | 1,627,140 |
| | $ | 1,495,353 |
| | $ | 1,346,651 |
|
The estimated fair value of the debt is based primarily on quoted market prices reported on or near the balance sheet date for our senior and senior subordinated notes. The estimated fair value for the debt of our subsidiaries is based on market based assumptions including current borrowing rates for similar types of borrowing arrangements adjusted for duration, optionality and risk profile.
16. Commitments and Contingencies
We have a letter of credit sub-facility of $25.0 million under our $150.0 million senior secured revolving credit facility that matures in June 2017. As of September 30, 2012, we had $0.3 million of standby letters of credit outstanding and had an additional $24.7 million available for letters of credit. Such standby letters of credit are used in the ordinary course of our business and are collateralized by our cash balances.
We generally warrant that our services will be performed in a professional and workmanlike manner and in compliance with our customers' specifications. We accrue costs for known warranty issues. Historically, our warranty costs have been immaterial.
Legal Proceedings
We are involved in claims and legal proceedings and may become involved in other legal matters arising in the ordinary course of our business. We evaluate these claims and legal matters on a case-by-case basis to make a determination as to the impact, if any, on our business, liquidity, results of operations, financial condition or cash flows. Except as indicated below, we currently 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. Attorney fees related to legal matters are expensed as incurred.
In accordance with the accounting guidance for loss contingencies, including pending claims, legal proceedings and other legal matters, we accrue for a loss contingency when we conclude that the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. When the reasonable estimate of the loss is within a range of amounts, and no amount in the range constitutes a better estimate than any other amount, we accrue for the amount at the low end of the range. We adjust our accruals from time to time as we receive additional information, but the loss we incur may be significantly greater than or less than the amount we have accrued. We disclose loss contingencies if there is at least a reasonable possibility that a loss has been incurred.
Arbitration Proceedings with Tessera, Inc.
On March 2, 2006, Tessera, Inc. (“Tessera”) filed a request for arbitration with the International Court of Arbitration of the International Chamber of Commerce (the “ICC”), captioned Tessera, Inc. v. Amkor Technology, Inc. (the "First Tessera Arbitration"). The subject matter of the arbitration was a license agreement (“License Agreement”) entered into between Tessera and our predecessor in 1996. In its rulings in 2008 and 2009, the arbitration panel in the First Tessera Arbitration
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
found that most of the packages accused by Tessera were not subject to the patent royalty provisions of the License Agreement, awarded Tessera $60.6 million as damages for some infringing packages for the period March 2, 2002, through December 1, 2008, and denied Tessera's request to terminate the License Agreement. The final award, plus interest and the royalties through December 2008 amounting to $64.7 million, was expensed in 2008 and paid when due in February 2009.
Following Tessera's favorable decision in the U.S International Trade Commission (the “ITC”) in May 2009 against some of our customers, Tessera began making repeated statements to customers and others claiming that we were in breach of the royalty provisions of the License Agreement. We informed Tessera that we believed we were in full compliance with the License Agreement and of our intent to continue making the royalty payments when due in accordance with the terms of the License Agreement.
On August 7, 2009, we filed a request for arbitration in the ICC against Tessera, captioned Amkor Technology, Inc. v. Tessera, Inc. (the “Second Tessera Arbitration”). We instituted the action in order to obtain declaratory relief confirming that we were a licensee in good standing under our 1996 License Agreement with Tessera and that the License Agreement remained in effect.
On November 2, 2009, Tessera filed an answer to our request for arbitration and counterclaims in the ICC. In the answer and counterclaims, Tessera denied Amkor's claims, alleged breach of contract, sought termination of the License Agreement and asserted that Amkor owed Tessera additional royalties under the License Agreement, including royalties for use of thirteen U.S. and six foreign patents that Tessera did not assert in the First Tessera Arbitration. Tessera later dropped its claims on five of those patents. On February 17, 2011, Tessera sent Amkor a notice of termination of the License Agreement.
In May 2011, Tessera filed a new request for arbitration against Amkor with the ICC captioned Tessera, Inc. v. Amkor Technology, Inc. (the "Third Tessera Arbitration") seeking undisclosed damages and a declaration that the License Agreement had been terminated.
In July 2011, the panel issued its decision in the first phase of the Second Tessera Arbitration. The panel found that we did not owe any of the approximately $18 million of additional royalties claimed by Tessera for packages assembled by us for customers who had been involved in proceedings with Tessera before the ITC. Our request for a declaration confirming that we were in compliance with the License Agreement and that our royalty calculations from the First Tessera Arbitration were correct was denied. The panel found that we had materially breached the License Agreement by not paying the full amount of royalties due and by failing to satisfy the audit provisions of the License Agreement. The final amount of royalties and interest owed relating to the first phase of the Second Tessera Arbitration was approximately $0.5 million, which has been fully paid.
On July 5, 2012, the panel issued an interim order in the second phase of the Second Tessera Arbitration finding that royalties are due to Tessera on three of the ten asserted U.S. patents remaining at issue but not on the other seven, royalties are due on four foreign patents related to U.S. patents that the panel found to be royalty bearing in the First Tessera Arbitration and that the License Agreement was terminated by Tessera as of February 17, 2011. We do not believe the termination of the license agreement will interfere in any significant way with our ability to use our technology, conduct our business or service our customers.
The panel reserved for later decision the issues of the amount of royalties and pre-judgment interest due, the allocation of costs and the question of whether Tessera intends to pursue its allegations regarding other patents which have not yet been addressed by the panel. In July 2012, Tessera publicly announced its intention to seek an amount in excess of $125 million in the arbitration and informed the panel that it intends to proceed on its claims related to three additional U.S. patents.
We recorded a charge of $34.0 million for the three months ended June 30, 2012, based on our estimates of the damages and interest due to date in respect of the Second Tessera Arbitration. We believe that $34.0 million of damages and interest is a reasonable estimate of the low end of the possible range of loss up to the amount claimed by Tessera. Because we believe that no amount in the range constitutes a better estimate than any other amount, we recorded the $34.0 million estimate. Of our total accrual, $30.0 million was recorded as cost of goods sold and $4.0 million was recorded as interest expense. The ultimate amount of damages and interest is subject to determination by the panel based on a number of
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
complex factors, including the panel's determination of which package families the patents apply to, whether those packages meet criteria previously laid out by the panel, overlaps among the packages, the final date through which royalties are applicable and other factors. The final award could be more than the amount currently accrued, and we expect to record our estimate of interest accruing with the passage of time and may record additional charges as information develops or upon the issuance of the final award.
In August 2012, we paid $19.9 million to Tessera representing the undisputed amount and related interest that we owe in connection with the Second Tessera Arbitration.
On July 6, 2012, Tessera filed a complaint in the U.S. District Court for the District of Delaware. The complaint seeks injunctive relief and damages with respect to Amkor's alleged infringement of one of the U.S. patents that the panel found to be royalty bearing in the Second Tessera Arbitration. We strongly dispute Tessera's claims and intend to vigorously defend against them. However, the outcome of this matter is uncertain, and an adverse decision could have a material adverse effect on our results of operations, financial condition and cash flows.
Amkor Technology, Inc. v. Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc.
On November 17, 2003, we filed a complaint against Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc. (collectively “Carsem”) with the ITC in Washington, D.C., alleging infringement of our United States Patent Nos. 6,433,277; 6,455,356 and 6,630,728 (collectively the “Amkor Patents”) and seeking, under Section 337 of the Tariff Act of 1930, an exclusion order barring the importation by Carsem of infringing products. We allege that by making, using, selling, offering for sale or importing into the U.S. the Carsem Dual and Quad Flat No-Lead Packages, Carsem has infringed on one or more of our MicroLeadFrame packaging technology claims in the Amkor Patents.
On November 18, 2003, we also filed a complaint in the U.S. District Court for the Northern District of California, alleging infringement of the Amkor Patents and seeking an injunction enjoining Carsem from further infringing the Amkor Patents, compensatory damages and treble damages due to willful infringement plus interest, costs and attorney's fees. This District Court action has been stayed pending resolution of the ITC case.
The ITC Administrative Law Judge (“ALJ”) conducted an evidentiary hearing during July and August of 2004 in Washington D.C. and, on November 18, 2004, issued an Initial Determination that Carsem infringed some of our patent claims relating to our MicroLeadFrame package technology, that some of our 21 asserted patent claims are valid, that we have a domestic industry in our patents and that all of our asserted patent claims are enforceable. However, the ALJ did not find a statutory violation of Section 337 of the Tariff Act.
We filed a petition in November 2004 to have the ALJ's ruling reviewed by the full ITC. On March 31, 2005, the ITC ordered a new claims construction related to various disputed claim terms and remanded the case to the ALJ for further proceedings. On November 9, 2005, the ALJ issued an Initial Determination on remand finding that Carsem infringed some of our patent claims and that Carsem had violated Section 337 of the Tariff Act.
On remand, the ITC had also authorized the ALJ to reopen the record on certain discovery issues related to a subpoena of documents from a third party. An order by the U.S. District Court for the District of Columbia enforcing the subpoena became final on January 9, 2009, and the third party produced documents pursuant to the subpoena.
On July 1, 2009, the ITC remanded the investigation for a second time to the ALJ to reopen the record to admit into evidence documents and related discovery obtained from the enforcement of the above-referenced third-party subpoena.
Following a two-day hearing, on October 30, 2009, the ALJ issued an Initial Determination reaffirming his prior ruling that the Carsem Dual and Quad Flat No-Lead Packages infringe some of Amkor's patent claims relating to MicroLeadFrame package technology, that all of Amkor's asserted patent claims are valid and that Carsem violated Section 337 of the Tariff Act.
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
On December 16, 2009, the ITC ordered a review of the ALJ's Initial Determination. On February 18, 2010, the Commission reversed a finding by the ALJ on the issue of whether a certain invention constitutes prior art to Amkor's asserted patents. The ITC remanded the investigation to the ALJ to make further findings in light of the ITC's ruling. On March 22, 2010, the ALJ issued a Supplemental Initial Determination. Although the ALJ's ruling did not disturb the prior finding that certain Carsem Dual and Quad Flat No-Lead Packages infringe some patent claims of Amkor's U.S. Patent No. 6,433,277 (the "'277 Patent"), the ALJ found that these infringed claims are invalid and, as a result, the ALJ did not find a statutory violation of the Tariff Act. On July 20, 2010, the ITC issued a Notice of Commission Final Determination, in which the ITC determined that there is no violation of Section 337 of the Tariff Act and terminated the investigation. We appealed the ITC's ruling of invalidity for the claims of the '277 Patent to the U.S. Court of Appeals for the Federal Circuit (the "Federal Circuit"), and oral arguments were heard in November 2011.
On August 22, 2012, the Federal Circuit issued a favorable ruling in Amkor's appeal in its patent infringement case against Carsem before the ITC. In its ruling, the Federal Circuit reversed the ITC's determination of invalidity on the '277 Patent, and remanded the matter to the ITC for further proceedings consistent with its opinion. On October 5, 2012, Carsem filed a Petition for Rehearing requesting the Federal Circuit to vacate its decision and affirm the ITC's determination of no violation of Section 337 of the Tariff Act.
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
17. Business Segments
We have two reportable segments, packaging and test. Packaging and test are integral steps in the process of manufacturing semiconductor devices, and our customers may engage with us for both packaging and test services, or for packaging or test services individually.
The accounting policies for segment reporting are the same as those for our Consolidated Financial Statements as a whole. We evaluate our operating segments based on gross profit and gross property, plant and equipment. We do not specifically identify and allocate total assets by operating segment. Summarized financial information concerning reportable segments is shown in the following table. The “other” column includes corporate adjustments, gross property, plant and equipment of our corporate and sales offices and capital additions that do not directly support manufacturing operations, such as research and development and infrastructure projects.
|
| | | | | | | | | | | | | | | |
| Packaging | | Test | | Other | | Total |
| (In thousands) |
Three months ended September 30, 2012 | | | | | | | |
Net sales | $ | 615,933 |
| | $ | 79,420 |
| | $ | — |
| | $ | 695,353 |
|
Depreciation expense | 60,493 |
| | 24,679 |
| | — |
| | 85,172 |
|
Gross profit | 96,550 |
| | 20,237 |
| | — |
| | 116,787 |
|
Capital additions | 63,982 |
| | 92,737 |
| | 16,698 |
| | 173,417 |
|
Three months ended September 30, 2011 | | | | | | | |
Net sales | $ | 667,301 |
| | $ | 72,655 |
| | $ | 51 |
| | $ | 740,007 |
|
Depreciation expense | 53,924 |
| | 20,641 |
| | 106 |
| | 74,671 |
|
Gross profit | 104,654 |
| | 17,909 |
| | (324 | ) | | 122,239 |
|
Capital additions | 78,770 |
| | 35,532 |
| | 9,067 |
| | 123,369 |
|
Nine months ended September 30, 2012 | | | | | | | |
Net sales | $ | 1,808,111 |
| | $ | 228,779 |
| | $ | — |
| | $ | 2,036,890 |
|
Depreciation expense | 177,294 |
| | 69,866 |
| | — |
| | 247,160 |
|
Gross profit | 251,851 |
| | 59,237 |
| | — |
| | 311,088 |
|
Capital additions | 184,836 |
| | 176,966 |
| | 84,965 |
| | 446,767 |
|
Nine months ended September 30, 2011 | | | | | | | |
Net sales | $ | 1,877,470 |
| | $ | 214,997 |
| | $ | 123 |
| | $ | 2,092,590 |
|
Depreciation expense | 162,508 |
| | 61,526 |
| | 207 |
| | 224,241 |
|
Gross profit | 325,339 |
| | 54,058 |
| | (655 | ) | | 378,742 |
|
Capital additions | 200,648 |
| | 77,122 |
| | 47,580 |
| | 325,350 |
|
Gross property, plant and equipment | | | | | | | |
September 30, 2012 | $ | 3,365,641 |
| | $ | 1,060,821 |
| | $ | 151,049 |
| | $ | 4,577,511 |
|
December 31, 2011 | 3,217,308 |
| | 880,611 |
| | 149,696 |
| | 4,247,615 |
|
AMKOR TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
18. Exit Activities and Reductions in Force
As part of our ongoing efforts to improve our manufacturing operations and manage costs, we regularly evaluate our staffing levels and facility requirements compared to business needs. The following table summarizes our exit activities and reduction in force initiatives associated with these efforts. “Charges” represents the initial charge related to the exit activity. “Cash Payments” consists of the utilization of “Charges.” “Non-cash Amounts” consists of pension plan curtailments and settlements and foreign currency adjustments.
|
| | | |
| Employee Separation Costs |
| (In thousands) |
Accrual at December 31, 2011 | $ | — |
|
Charges | 7,160 |
|
Cash Payments | (6,209 | ) |
Non-cash Amounts | (951 | ) |
Accrual at September 30, 2012 | $ | — |
|
|
| | | |
| Employee Separation Costs |
| (In thousands) |
Accrual at December 31, 2010 | $ | 670 |
|
Charges | 4,811 |
|
Cash Payments | (4,518 | ) |
Non-cash Amounts | (936 | ) |
Accrual at September 30, 2011 | $ | 27 |
|
Reductions in Force
During the nine months ended September 30, 2012, we reduced our workforce by approximately 120 employees at our manufacturing operations in Japan. We recorded $7.2 million in charges for one-time termination benefits including $1.0 million in net curtailment and settlement charges, of which $5.5 million, $1.6 million and $0.1 million were charged to cost of sales; selling, general and administrative expenses and research and development expenses, respectively. All amounts were paid prior to September 30, 2012.
During the nine months ended September 30, 2011, we reduced our workforce by approximately 500 employees at our manufacturing operations in the Philippines. We recorded $4.8 million in charges for one-time termination benefits including $0.9 million in curtailment and settlement charges, of which $4.4 million and $0.4 million were charged to cost of sales and selling, general and administrative expenses, respectively. All amounts were paid prior to September 30, 2011.
Singapore Manufacturing Operations
In June 2009, we communicated to our employees the decision to wind-down and exit our manufacturing operations in Singapore. We completed our exit as of December 31, 2010. This wind-down affected approximately 600 employees and enabled us to improve our cost structure by consolidating factories. The majority of the machinery and equipment was relocated to and utilized in other factories. In June 2011, we sold the facility in Singapore for $13.3 million in cash, net of goods and services tax, and recorded a gain of less than $0.1 million, with no net tax effect.
The liability for one-time involuntary termination benefits for employees that provided service beyond a minimum retention period was recognized over the service period. During the three and nine months ended September 30, 2011, charges for termination benefits were not significant. All amounts accrued at September 30, 2011 were classified in current liabilities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of the federal securities laws, including but not limited to statements regarding: (1) anticipated demand for our services related to smartphones and tablets, (2) the amount, timing and focus of our expected capital investments, (3) our ability to fund our operating activities for the next twelve months, (4) the effect of capacity utilization rates on our gross margin, (5) the focus of our research and development activities, (6) the expiration of tax holidays in jurisdictions in which we operate and expectations regarding our effective tax rate, (7) the release of valuation allowances related to taxes in the future, (8) the expected use of future cash flows, if any, for the expansion of our business, capital expenditures, the repayment of debt and the repurchase of common stock, (9) our repurchase or repayment of outstanding debt or the conversion of debt in the future, (10) payment of dividends, (11) compliance with our covenants, (12) expected contributions to foreign pension plans, (13) liability for unrecognized tax benefits, (14) the effect of foreign currency exchange rate exposure on our financial results, (15) the volatility of the trading price of our common stock, (16) changes to our internal controls related to implementation of a new enterprise resource planning (“ERP”) system, (17) the timing and amount of the charge and cash payment in respect of the final award in the Tessera arbitration, (18) the timing, costs, benefits and features of the Incheon, Korea facility project and (19) other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intend” or the negative of these terms or other comparable terminology. Because such statements include risks and uncertainties, actual results may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the following discussion as well as in Part II, Item 1A of this Quarterly Report. The following discussion provides information and analysis of our results of operations for the three and nine months ended September 30, 2012, and our liquidity and capital resources. You should read the following discussion in conjunction with Item 1 in this Quarterly Report as well as other reports we file with the Securities and Exchange Commission (“SEC”).
Overview
Amkor is one of the world's leading providers of outsourced semiconductor packaging and test services. Packaging and test are integral steps in the process of manufacturing semiconductor devices. The semiconductor manufacturing process begins with the fabrication of tiny transistor elements into complex patterns of electronic circuitry on silicon wafers, thereby creating large numbers of individual semiconductor devices or integrated circuits on each wafer (generally referred to as “chips” or “die”). Each device on the wafer is tested, and the wafer is cut into pieces called chips. The chips are attached through wirebonding to a substrate or leadframe, or to a substrate in the case of flip chip interconnect, and then encased in a protective material to create a package. For a wafer-level package, the electrical interconnections are created directly on the surface of the wafer without a substrate or leadframe. The packages are then tested using sophisticated equipment to ensure that each packaged chip meets its design and performance specifications.
Our packages are designed based on application and chip specific requirements including the type of interconnect technology employed, size, thickness and electrical, mechanical and thermal performance. We are able to provide turnkey packaging and test services including semiconductor wafer bump, wafer probe, wafer backgrind, package design, packaging, test and drop shipment services.
Our customers include, among others: Altera Corporation; Analog Devices, Inc.; Broadcom Corporation; Infineon Technologies AG; International Business Machines Corporation; LSI Corporation; Qualcomm Incorporated; ST Microelectronics N.V.; Texas Instruments Incorporated and Toshiba Corporation. The outsourced semiconductor packaging and test market is very competitive. We also compete with the internal semiconductor packaging and test capabilities of many of our customers.
Our net sales decreased $44.7 million or 6.0% to $695.4 million for the three months ended September 30, 2012, from $740.0 million for the three months ended September 30, 2011. The decrease was driven by a decline of $51.4 million or 7.7% in packaging net sales primarily as a result of weakness in demand for wirebond array packages. The decrease in packaging net sales was partially offset by a $6.8 million or 9.3% increase in our test net sales. The increase in test net sales was the result of strength in the communications end market.
Gross margin for the three months ended September 30, 2012, increased to 16.8% from 16.5% for the three months ended September 30, 2011. Gross margin for the three months ended September 30, 2011, included a charge for restructuring activities, and gross margin for the three months ended September 30, 2012, reflected the benefit from prior restructuring efforts. The increase in gross margin was also due to favorable foreign currency exchange rate movements, partially offset by increased depreciation expense as a result of our continued investment in property, plant and equipment.
Our capital additions totaled $446.8 million or 21.9% of net sales for the nine months ended September 30, 2012, compared to $325.4 million or 15.5% of net sales for the nine months ended September 30, 2011. During the nine months ended September 30, 2012, 41.4% of our capital additions were made in packaging, 39.6% in test and 19.0% for research and development and infrastructure projects. During the nine months ended September 30, 2011, 61.7% of our capital additions were made in packaging, 23.7% in test and 14.6% for research and development and infrastructure projects.
For the nine months ended September 30, 2012, we experienced negative free cash flow of $95.9 million, primarily due to our capital purchases to support anticipated customer demand for packaging and test services related to smartphones and tablets. We define free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. Free cash flow is not defined by U.S. generally accepted accounting principles (“U.S. GAAP”), and a reconciliation of free cash flow to net cash provided by operating activities is set forth under the caption “Cash Flows” below.
We believe our financial position and liquidity are sufficient to fund our operating activities for at least the next twelve months. At September 30, 2012, our cash and cash equivalents totaled approximately $549.1 million. In September 2012, we issued $300.0 million of our 6.375% Senior Notes due 2022 and used $224.9 million of the net proceeds from the issuance of the notes to repay subsidiary debt of which $67.8 million was paid prior to September 30, 2012 and $157.1 million was paid in October 2012. After the use of the net proceeds, we have no debt due until April 2014.
Our Board of Directors previously authorized the repurchase of up to $300.0 million of our common stock, $150.0 million in August 2011 and $150.0 million in February 2012, exclusive of any fees, commissions or other expenses. During the three months ended September 30, 2012, we repurchased 8.4 million shares for $41.8 million, net of $0.2 million of commissions, under this program. Since the inception of the program, we have purchased a total of 45.0 million shares at an aggregate purchase price of $208.4 million, net of $0.9 million of commissions. At September 30, 2012, approximately $91.6 million was available to repurchase common stock pursuant to the stock repurchase program. Our stock repurchase program may be suspended or discontinued at any time.
Results of Operations
The following table sets forth certain operating data as a percentage of net sales for the periods indicated:
|
| | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Gross profit | 16.8 | % | | 16.5 | % | | 15.3 | % | | 18.1 | % |
Depreciation and amortization | 13.5 | % | | 11.2 | % | | 13.4 | % | | 11.9 | % |
Operating income | 7.8 | % | | 5.9 | % | | 5.4 | % | | 7.2 | % |
Income before income taxes | 4.6 | % | | 4.0 | % | | 2.2 | % | | 3.7 | % |
Net income attributable to Amkor | 3.2 | % | | 3.7 | % | | 1.7 | % | | 3.2 | % |
Net Sales
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | Change | | 2012 | | 2011 | | Change |
| (In thousands, except percentages) |
Net sales | $ | 695,353 |
| | $ | 740,007 |
| | $ | (44,654 | ) | | (6.0 | )% | | $ | 2,036,890 |
| | $ | 2,092,590 |
| | $ | (55,700 | ) | | (2.7 | )% |
Packaging net sales | 615,933 |
| | 667,301 |
| | (51,368 | ) | | (7.7 | )% | | 1,808,111 |
| | 1,877,470 |
| | (69,359 | ) | | (3.7 | )% |
Test net sales | 79,420 |
| | 72,655 |
| | 6,765 |
| | 9.3 | % | | 228,779 |
| | 214,997 |
| | 13,782 |
| | 6.4 | % |
Net Sales. Net sales in the three and nine months ended September 30, 2012, decreased compared to the three and nine months ended September 30, 2011, as a result of lower net sales of our packaging services, partially offset by an increase in test net sales.
Packaging Net Sales. Packaging net sales in the three and nine months ended September 30, 2012, decreased compared to the three and nine months ended September 30, 2011. For the three months ended September 30, 2012, the decrease was primarily driven by weakness in demand for wirebond array packages, lower demand in gaming and the impact of lower demand by the less dominant OEMs that sell smartphones and tablets. For the nine months ended September 30, 2012, the decrease was attributable to lower net sales of our ball grid array packaging services supporting gaming, networking and home electronics as well as lower demand for leadframe packaging services. This decrease was partially offset by increased sales of our chip scale packaging services for wireless communications products, such as smartphones and tablets.
Packaging unit volume increased 0.1 billion units to 2.2 billion units during the three months ended September 30, 2012, compared to 2.1 billion units during the three months ended September 30, 2011, primarily due to an increase in wafer level and flip chip chip scale packaging services partially offset by a decrease in leadframe packaging services. Packaging unit volume decreased 0.2 billion units to 6.2 billion units during the nine months ended September 30, 2012, compared to 6.4 billion units during the nine months ended September 30, 2011, primarily due to a decrease in unit demand for our leadframe packaging services partially offset by increased demand for wafer level and flip chip chip scale packaging services.
Test Net Sales. Test net sales in the three and nine months ended September 30, 2012, increased compared to the three and nine months ended September 30, 2011. The increase was primarily attributable to higher test services for wireless communications products, such as smartphones and tablets.
Cost of Sales
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | Change | | 2012 | | 2011 | | Change |
| (In thousands, except percentages) |
Cost of sales | $ | 578,566 |
| | $ | 617,768 |
| | $ | (39,202 | ) | | (6.3 | )% | | $ | 1,725,802 |
| | $ | 1,713,848 |
| | $ | 11,954 |
| | 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, relatively modest increases or decreases in capacity utilization rates can have a significant effect on our gross margin.
Material costs as a percentage of net sales decreased to 42.8% and 43.6% for the three and nine months ended September 30, 2012, from 45.5% and 43.8% for the three and nine months ended September 30, 2011. The decrease as a percentage of sales and in absolute dollars was primarily due to a shift to a mix of packaging services with a lower material content as a percentage of net sales and higher test net sales, which have lower material costs. In addition, the decline in absolute dollars was driven by lower net sales during the three and nine months ended September 30, 2012.
Labor costs as a percentage of net sales decreased to 14.8% and 14.4% for the three and nine months ended September 30, 2012, from 15.2% and 14.8% for the three and nine months ended September 30, 2011. Labor costs as a percentage of sales, and in absolute dollars, decreased primarily due to our continuing efforts to rationalize our labor cost structure. Additionally, labor costs for the three months ended September 30, 2011 included a charge for restructuring activities, and labor costs for the three months ended September 30, 2012 reflected the benefit from prior restructuring efforts. The decrease was also due to favorable foreign currency exchange rate movements as substantially all of our manufacturing operations' workforce is paid in local currencies. These cost savings were partially offset by a $5.5 million charge for the restructuring activities at our manufacturing operations in Japan for the nine months ended September 30, 2012.
Other manufacturing costs as a percentage of net sales increased to 25.6% and 26.7% for the three and nine months ended September 30, 2012, from 22.7% and 23.3% for the three and nine months ended September 30, 2011. The increase in other manufacturing costs as a percentage of sales, and in absolute dollars, was attributable to increased depreciation expense due to our continued investments in property, plant and equipment. For the nine months ended September 30, 2012, the increase was also due to the estimated $30.0 million loss contingency accrual resulting from an interim order issued by the arbitration panel relating to our license agreement with Tessera.
Gross Profit
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| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | Change | | 2012 | | 2011 | | Change |
| (In thousands, except percentages) |
Gross profit | $ | 116,787 |
| | $ | 122,239 |
| | $ | (5,452 | ) | | $ | 311,088 |
| | $ | 378,742 |
| | $ | (67,654 | ) |
Gross margin | 16.8 | % | | 16.5 | % | | 0.3 | % | | 15.3 | % | | 18.1 | % | | (2.8 | )% |
Gross profit for the three months ended September 30, 2012, decreased compared to the three months ended September 30, 2011, due to increased depreciation expense from our continued investments in property, plant and equipment and lower net sales. Gross margin for the three months ended September 30, 2012, increased compared to the three months ended September 30, 2011. Gross margin for the three months ended September 30, 2011, included a charge for restructuring activities, and gross margin for the three months ended September 30, 2012, reflected the benefit from prior restructuring efforts. The increase in gross margin was also due to favorable foreign currency exchange rate movements.
Gross profit and gross margin for the nine months ended September 30, 2012, decreased compared to the nine months ended September 30, 2011. The decrease in gross profit and gross margin was driven by the estimated $30.0 million loss contingency accrual resulting from an interim order issued by the arbitration panel relating to our license agreement with Tessera. In addition, the decline in gross profit and gross margin was driven by lower packaging net sales and increased depreciation expense as a result of our continued investment in property, plant and equipment. For the nine months ended September 30, 2012, gross profit and gross margin were favorably impacted by the benefit from prior restructuring activities.
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| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | Change | | 2012 | | 2011 | | Change |
| (In thousands, except percentages) |
Packaging gross profit | $ | 96,550 |
| | $ | 104,654 |
| | $ | (8,104 | ) | | $ | 251,851 |
| | $ | 325,339 |
| | $ | (73,488 | ) |
Packaging gross margin | 15.7 | % | | 15.7 | % | | — | % | | 13.9 | % | | 17.3 | % | | (3.4 | )% |
Packaging Gross Profit. Gross profit for packaging net sales for the three months ended September 30, 2012, decreased compared to the three months ended September 30, 2011. The decline in gross profit was primarily due to increased depreciation expense from our continued investments in property, plant and equipment and lower packaging net sales. Gross margin for packaging net sales for the three months ended September 30, 2012, remained consistent with the three months ended September 30, 2011. For the nine months ended September 30, 2012, gross profit and gross margin decreased compared to the nine months ended September 30, 2011. This decrease was driven by the Tessera loss contingency accrual discussed above, which relates entirely to the packaging segment. The decline in gross profit and gross margin was also driven by lower packaging net sales and increased depreciation expense as a result of our continued investment in property, plant and equipment, partially offset by the benefit from prior restructuring activities.
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| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | Change | | 2012 | | 2011 | | Change |
| (In thousands, except percentages) |
Test gross profit | $ | 20,237 |
| | $ | 17,909 |
| | $ | 2,328 |
| | $ | 59,237 |
| | $ | 54,058 |
| | $ | 5,179 |
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Test gross margin | 25.5 | % | | 24.6 | % | | 0.9 | % | | 25.9 | % | | 25.1 | % | | 0.8 | % |
Test Gross Profit. Gross profit and gross margin for test net sales for the three and nine months ended September 30, 2012, increased compared to the three and nine months ended September 30, 2011. The increase in gross profit and margin was primarily a result of increased customer demand for test services and higher utilization of our test assets.
Selling, General and Administrative Expenses
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| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | Change | | 2012 | | 2011 | | Change |
| (In thousands, except percentages) |
Selling, general and administrative | $ | 49,297 |
| | $ | 65,011 |
| | $ | (15,714 | ) | | (24.2 | )% | | $ | 160,041 |
| | $ | 190,853 |
| | $ | (30,812 | ) | | (16.1 | )% |
Selling, general and administrative expenses for the three and nine months ended September 30, 2012, decreased compared to the three and nine months ended September 30, 2011. The decrease was mainly attributable to reduced employee compensation expense and lower professional fees.
Research and Development
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| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2012 | | 2011 | | Change | | 2012 | | 2011 | | Change |
| (In thousands, except percentages) |
Research and development | $ | 13,472 |
| | $ | 13,233 |
| | $ | 239 |
| | 1.8 | % | | $ | 40,764 |
| | $ | 37,921 |
| | $ | 2,843 |
| | 7.5 | % |
Research and development activities are focused on developing new packaging interconnect and test services and improving the efficiency and capabilities of our existing production processes. Areas of focus include 3D packaging, including silicon interposers and Through Silicon Via technologies, fine pitch copper pillar packaging and wafer level processing. Research and development expenses for the three months ended September 30, 2012, remained consistent with the three months ended September 30, 2011. The increase in research and development expenses for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011, was primarily attributable to increased depreciation from research and development capital additions as a result of our continued investment in research and development initiatives and increased headcount.
Other Expense, Net