e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended June 30, 2007
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission File Number
000-29472
AMKOR TECHNOLOGY,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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23-1722724
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(State of
incorporation)
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(I.R.S. Employer
Identification Number)
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1900 South Price Road
Chandler, AZ 85286
(480) 821-5000
(Address of principal executive
offices and zip 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 is a large
accelerated filer, an accelerated filer, or a nonaccelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b 2 of the Exchange
Act). Yes o No þ
The number of outstanding shares of the registrants Common
Stock as of July 31, 2007 was 181,678,824.
QUARTERLY
REPORT ON
FORM 10-Q
June 30, 2007
TABLE OF
CONTENTS
1
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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AMKOR
TECHNOLOGY, INC.
(Unaudited)
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For the Six Months
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For the Three Months Ended June 30,
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Ended June 30,
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2007
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2006
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2007
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2006
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(In thousands, except per share data)
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Net sales
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$
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652,486
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$
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686,631
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$
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1,303,474
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$
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1,331,720
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Cost of sales
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490,794
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517,307
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994,444
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1,007,659
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Gross profit
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161,692
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169,324
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309,030
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324,061
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Operating expenses:
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Selling, general and administrative
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62,360
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58,967
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125,027
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120,171
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Research and development
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11,023
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10,315
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20,648
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19,745
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Total operating expenses
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73,383
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69,282
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145,675
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139,916
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Operating income
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88,309
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100,042
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163,355
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184,145
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Other (income) expense:
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Interest expense, net
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31,114
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40,600
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66,274
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81,757
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Interest expense, related party
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1,562
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1,563
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3,125
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3,351
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Foreign currency loss
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4,562
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1,079
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4,547
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5,007
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Debt retirement costs, net
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15,875
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27,860
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15,875
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27,389
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Other (income) expense, net
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(532
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2,840
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(1,218
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2,375
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Total other expense
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52,581
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73,942
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88,603
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119,879
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Income before income taxes and
minority interests
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35,728
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26,100
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74,752
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64,266
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Income tax expense
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4,272
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1,972
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8,379
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5,584
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Income before minority interests
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31,456
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24,128
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66,373
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58,682
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Minority interests, net of tax
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(466
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(340
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(793
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(455
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Net income
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$
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30,990
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$
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23,788
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$
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65,580
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$
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58,227
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Net income per common share:
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Basic
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$
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0.17
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$
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0.13
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$
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0.37
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$
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0.33
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Diluted
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$
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0.16
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$
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0.13
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$
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0.34
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$
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0.32
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Shares used in computing net
income per common share:
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Basic
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180,392
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177,689
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179,456
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177,245
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Diluted
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209,868
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196,869
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208,282
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193,946
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The accompanying notes are an integral part of these statements.
2
AMKOR
TECHNOLOGY, INC.
(Unaudited)
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June 30,
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December 31,
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2007
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2006
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(In thousands)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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238,407
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$
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244,694
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Restricted cash
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2,542
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2,478
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Accounts receivable:
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Trade, net of allowances
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362,621
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380,888
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Other
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3,882
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5,969
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Inventories, net
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141,010
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164,178
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Other current assets
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35,071
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39,650
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Total current assets
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783,533
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837,857
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Property, plant and equipment, net
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1,418,093
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1,443,603
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Goodwill
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672,370
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671,900
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Intangibles, net
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24,441
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29,694
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Investments
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5,683
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6,675
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Restricted cash
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1,699
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1,688
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Other assets
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47,496
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49,847
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Total assets
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$
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2,953,315
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$
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3,041,264
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current liabilities:
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Short-term borrowings and current
portion of long-term debt
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$
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159,297
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$
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185,414
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Trade accounts payable
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280,741
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291,847
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Accrued expenses
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133,044
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145,501
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Total current liabilities
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573,082
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622,762
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Long-term debt
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1,553,412
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1,719,901
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Long-term debt, related party
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100,000
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100,000
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Pension and severance obligations
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195,060
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170,070
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Other non-current liabilities
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32,992
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30,008
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Total liabilities
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2,454,546
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2,642,741
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Commitments and contingencies (see
Note 14)
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Minority interests
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5,389
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4,603
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Stockholders equity:
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Preferred stock, $0.001 par
value, 10,000 shares authorized, designated Series A,
none issued
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Common stock, $0.001 par
value, 500,000 shares authorized, issued and outstanding of
181,513 in 2007 and 178,109 in 2006
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181
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178
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Additional paid-in capital
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1,477,489
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1,441,194
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Accumulated deficit
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(975,810
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(1,041,390
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Accumulated other comprehensive
loss
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(8,480
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)
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(6,062
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)
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Total stockholders equity
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493,380
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393,920
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Total liabilities and
stockholders equity
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$
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2,953,315
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$
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3,041,264
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The accompanying notes are an integral part of these statements.
3
AMKOR
TECHNOLOGY, INC.
(Unaudited)
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For the Six Months
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Ended June 30,
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2007
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2006
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(In thousands)
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Cash flows from operating
activities:
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Net income
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$
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65,580
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$
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58,227
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Depreciation and amortization
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141,504
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133,525
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Debt retirement costs
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6,875
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27,389
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Other operating activities and
non-cash items
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9,342
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23,363
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Changes in assets and liabilities
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30,682
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(2,698
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)
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Net cash provided by operating
activities
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253,983
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239,806
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Cash flows from investing
activities:
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Payments for property, plant and
equipment
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(102,212
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)
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(169,469
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)
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Proceeds from the sale of
property, plant and equipment
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4,566
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1,333
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Other investing activities
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(1,469
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)
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Net cash used in investing
activities
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(99,115
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)
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(168,136
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)
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Cash flows from financing
activities:
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Borrowings under revolving credit
facilities
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61,836
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111,185
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Payments under revolving credit
facilities
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(79,448
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)
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(95,462
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)
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Proceeds from issuance of
long-term debt
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300,000
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590,000
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Payments for debt issuance costs
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(3,437
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)
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(14,852
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)
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Payments on long-term debt
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(474,746
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)
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(731,634
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)
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Proceeds from issuance of stock
through stock compensation plans
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34,466
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|
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4,959
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|
|
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|
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Net cash used in financing
activities
|
|
|
(161,329
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)
|
|
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(135,804
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)
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|
|
|
|
|
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Effect of exchange rate
fluctuations on cash and cash equivalents
|
|
|
174
|
|
|
|
1,066
|
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|
|
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|
|
|
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Net decrease in cash and cash
equivalents
|
|
|
(6,287
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)
|
|
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(63,068
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)
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Cash and cash equivalents,
beginning of period
|
|
|
244,694
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|
|
|
206,575
|
|
|
|
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|
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Cash and cash equivalents, end of
period
|
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$
|
238,407
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|
|
$
|
143,507
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|
|
|
|
|
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|
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Supplemental disclosures of cash
flow information:
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Cash paid during the period for:
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|
|
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Interest
|
|
$
|
71,142
|
|
|
$
|
94,705
|
|
Income taxes
|
|
$
|
6,872
|
|
|
$
|
3,216
|
|
Non cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Application of deposit upon
closing of acquisition of minority interest
|
|
$
|
|
|
|
$
|
17,822
|
|
The accompanying notes are an integral part of these statements.
4
AMKOR
TECHNOLOGY, INC.
(Unaudited)
|
|
1.
|
Interim
Financial Statements
|
Basis of Presentation. The Consolidated
Financial Statements and related disclosures as of June 30,
2007 and for the three and six months ended June 30, 2007
and 2006 are unaudited, pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC). The
December 31, 2006 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 generally
accepted accounting principles 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 latest annual report for the year
ended December 31, 2006 filed on
Form 10-K
with the SEC on February 26, 2007. The results of
operations for the three and six months ended June 30, 2007
are not necessarily indicative of the results to be expected for
the full year. Certain previously reported amounts have been
reclassified to conform to the current presentation.
Use of Estimates. The Consolidated Financial
Statements have been prepared in conformity with accounting
principles generally accepted in the U.S., using
managements 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.
New
Accounting Standards
Recently
Adopted Standards
In February 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 155, Accounting for
Certain Hybrid Financial Instruments
(SFAS No. 155), which amends
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133)
and SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
(SFAS No. 140). SFAS No. 155
simplifies the accounting for certain derivatives embedded in
other financial instruments by allowing them to be accounted for
as a whole if the holder elects to account for the whole
instrument on a fair value basis. SFAS No. 155 also
clarifies and amends certain other provisions of
SFAS No. 133 and SFAS No. 140.
SFAS No. 155 is effective for all financial
instruments acquired, issued or subject to a remeasurement event
occurring in fiscal years beginning after September 15,
2006. We adopted the provisions of SFAS No. 155 on
January 1, 2007. The adoption of this statement did not
have any impact on our financial statements and disclosures.
In June 2006, the FASB ratified Emerging Issues Task Force
(EITF) Issue
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation)
(Issue
No. 06-03).
Under Issue
No. 06-03,
a company must disclose its accounting policy regarding the
gross or net presentation of certain taxes. If taxes included in
gross revenues are significant, a company must disclose the
amount of such taxes for each period for which an income
statement is presented (i.e., both interim and annual periods).
Taxes within the scope of this Issue are those that are imposed
on and concurrent with a specific revenue-producing transaction.
Taxes assessed on an entitys activities over a period of
time, such as gross receipts taxes, are not within the scope of
the issue. Issue
No. 06-03
is effective for the first annual or interim reporting period
beginning after December 15, 2006. We adopted the
provisions of EITF Issue
No. 06-03
on January 1, 2007. We present applicable taxes on a net
basis in our consolidated financial statements. The adoption of
Issue
No. 06-03
did not have an impact on our financial statements and
disclosures.
5
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), which clarifies the
accounting and disclosure for uncertainty in income tax
positions, as defined. FIN 48 seeks to reduce the diversity
in practice associated with certain aspects of the recognition
and measurement related to accounting for income taxes.
FIN 48 requires that we recognize in our consolidated
financial statements the impact of a tax position, if that
position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of
FIN 48 also provide guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, and disclosures. This interpretation is effective for
fiscal years beginning after December 15, 2006, with the
cumulative effect of the change in accounting principle recorded
as an adjustment to the opening balance of retained earnings. We
adopted the provisions of FIN 48 on January 1, 2007.
The adoption of FIN 48 did not have a material impact on
the opening balance of retained earnings. See Note 4 for
more information.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of SFAS Statement
No. 87, Employers Accounting for Pensions,
SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans
and Termination Benefits, SFAS No. 106,
Employers Accounting for Postretirement Benefits Other
Than Pensions, and SFAS No. 132(R), Employers
Disclosure about Pensions and Other Postretirement Benefits
(SFAS No. 158). SFAS No. 158
requires the recognition of the funded status of a defined
benefit pension plan (other than a multi-employer plan) as an
asset or liability in the statement of financial position and
the recognition of changes in the funded status through
comprehensive income in the year in which such changes occur. We
adopted the recognition provisions of SFAS No. 158 and
initially applied those to the funded status of our defined
benefit pension plans as of December 31, 2006. The initial
recognition of the funded status of our defined benefit pension
plans resulted in a decrease in stockholders equity of
$11.8 million, which was net of a tax benefit of
$0.8 million.
SFAS No. 158 also requires that the funded status of a
plan be measured as of the date of the year-end statement of
financial position effective for fiscal years ending after
December 15, 2008. We currently measure our funded status
as of the balance sheet date. Accordingly, the adoption of the
measurement provisions of SFAS No. 158 will have no
impact on our financial statements.
Recently
Issued Standards
The FASB issued SFAS No. 157, Fair Value
Measurements (SFAS No. 157), which
provides guidance for using fair value to measure assets and
liabilities. The standard also responds to investors
requests for more information about (1) the extent to which
companies measure assets and liabilities at fair value,
(2) the information used to measure fair value, and
(3) the effect that fair value measurements have on
earnings. SFAS No. 157 will apply whenever another
standard requires (or permits) assets or liabilities to be
measured at fair value. The standard does not expand the use of
fair value to any new circumstances. SFAS No. 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. We are currently evaluating the
impact of this standard on our financial statements and
disclosures.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159). SFAS No. 159
provides the option to report certain financial assets and
liabilities at fair value, with the intent to mitigate
volatility in financial reporting that can occur when related
assets and liabilities are recorded on different bases.
SFAS No. 159 also amends SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, by providing the option to record
unrealized gains and losses on held-for-sale and
held-to-maturity securities currently. SFAS No. 159 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. We are currently evaluating the
impact of this standard on our financial statements and
disclosures.
|
|
2.
|
Stock
Compensation Plans
|
We account for our stock option plans in accordance with
SFAS No. 123(R)Share-Based Payments
(SFAS No. 123(R)).
SFAS No. 123(R) requires that all share-based payments
to employees, including grants
6
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of employee stock options, be measured at fair value and
expensed over the service period (generally the vesting period).
The following table presents stock-based employee compensation
expense included in the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
For the Three Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Cost of sales
|
|
$
|
352
|
|
|
$
|
357
|
|
|
$
|
681
|
|
|
$
|
638
|
|
Selling, general, and
administrative
|
|
|
678
|
|
|
|
845
|
|
|
|
1,150
|
|
|
|
1,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
1,030
|
|
|
$
|
1,202
|
|
|
$
|
1,831
|
|
|
$
|
2,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plans. Substantially all of the
options granted are generally exercisable pursuant to a two,
three or four-year vesting schedule and the term of the options
granted is no longer than ten years. A summary of the stock
option plans and the respective plan termination dates and
shares available for grant as of June 30, 2007 is shown
below.
|
|
|
|
|
|
|
|
|
1998 Director
|
|
1998 Stock
|
|
2003 Inducement
|
Stock Option Plans
|
|
Option Plan
|
|
Plan
|
|
Plan
|
|
Contractual Life (yrs)
|
|
10
|
|
10
|
|
10
|
Plan termination date
|
|
January 2008
|
|
January 2008
|
|
Board of Directors Discretion
|
Shares available for grant at
June 30, 2007
|
|
141,666
|
|
7,392,109
|
|
378,500
|
In order to calculate the fair value of stock options at the
date of grant, we used the Black-Scholes option pricing model.
Expected volatilities are weighted based on the historical
performance of our stock. We also use historical data to
estimate the timing and amount of option exercises and
forfeitures within the valuation model. The expected term of the
options is based on evaluations of historical and expected
future employee exercise behavior and represents the period of
time that options granted are expected to be outstanding. The
risk-free interest rate for periods within the contractual life
of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
The following assumptions were used to calculate weighted
average fair values of the options granted for the three and six
months ended June 30, 2006. There were no grants during the
three and six months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
Expected life (in years)
|
|
|
5.8
|
|
|
|
5.8
|
|
Risk-free interest rate
|
|
|
4.9
|
%
|
|
|
4.6
|
%
|
Volatility
|
|
|
74
|
%
|
|
|
78
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
Weighted average grant date fair
value per option granted
|
|
$
|
7.09
|
|
|
$
|
4.84
|
|
The intrinsic value of options exercised for the three and six
months ended June 30, 2007 was $7.5 million and
$10.9 million, respectively. The intrinsic value of options
exercised for the three and six months ended June 30, 2006
was $0.9 million and $1.5 million, respectively.
7
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of all option activity for the six
months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
(Years)
|
|
|
Value
|
|
|
Outstanding at December 31,
2006
|
|
|
15,334,089
|
|
|
$
|
10.47
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,403,875
|
)
|
|
|
10.13
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(681,919
|
)
|
|
|
12.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007
|
|
|
11,248,295
|
|
|
|
10.45
|
|
|
|
5.03
|
|
|
$
|
61,482,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007
|
|
|
9,552,200
|
|
|
|
11.26
|
|
|
|
4.50
|
|
|
$
|
44,762,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully vested and expected to vest
at June 30, 2007
|
|
|
11,028,812
|
|
|
|
10.54
|
|
|
|
4.97
|
|
|
$
|
59,307,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrecognized compensation expense from stock options,
excluding any forfeiture estimate, was $5.2 million as of
June 30, 2007, which is expected to be recognized over a
weighted-average period of 1.1 years.
For the six months ended June 30, 2007 and 2006, cash
received from option exercises under all share-based payment
arrangements was $34.5 million and $5.0 million,
respectively. There was no tax benefit realized. The related
cash receipts are included in financing activities in the
accompanying Condensed Consolidated Statements of Cash Flows.
The components of comprehensive income are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
30,990
|
|
|
$
|
23,788
|
|
|
$
|
65,580
|
|
|
$
|
58,227
|
|
Unrealized loss on investments,
net of tax
|
|
|
(292
|
)
|
|
|
|
|
|
|
(1,004
|
)
|
|
|
(2,571
|
)
|
Reclassification adjustment for
losses included in net income
|
|
|
|
|
|
|
2,624
|
|
|
|
|
|
|
|
2,624
|
|
Change in unrecognized pension
costs, net of tax
|
|
|
128
|
|
|
|
|
|
|
|
251
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
(824
|
)
|
|
|
(71
|
)
|
|
|
(1,665
|
)
|
|
|
2,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
30,002
|
|
|
$
|
26,341
|
|
|
$
|
63,162
|
|
|
$
|
60,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive loss consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Unrealized gains (losses) on
securities
|
|
$
|
(44
|
)
|
|
$
|
960
|
|
Unrecognized pension costs
|
|
|
(11,584
|
)
|
|
|
(11,835
|
)
|
Cumulative unrealized foreign
currency translation gains
|
|
|
3,148
|
|
|
|
4,813
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other
comprehensive loss
|
|
$
|
(8,480
|
)
|
|
$
|
(6,062
|
)
|
|
|
|
|
|
|
|
|
|
8
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We operate in and file income tax returns in various
U.S. and foreign jurisdictions that are subject to
examination by tax authorities. Our estimated tax liability is
subject to change as examinations of our tax returns are
completed by the tax authorities in the respective
jurisdictions. We believe that any additional taxes or related
interest over the amounts accrued will not have a material
effect on our financial condition, results of operations or cash
flows, nor do we expect that such examinations will result in a
material favorable impact. However, resolution of these matters
involves uncertainties and there are no assurances that the
outcome will be favorable.
Income tax expense for the three and six months ended
June 30, 2007 and 2006 is attributable to foreign
withholding taxes and income taxes at certain of our profitable
foreign operations. Our effective tax rate of 11.2% for the six
months ended June 30, 2007 reflects the utilization of foreign
net operating loss carryforwards and tax holidays in certain
foreign jurisdictions. At June 30, 2007, we had
U.S. net operating loss carryforwards totaling
$400.6 million, which expire at various times through 2027.
Additionally, at June 30, 2007, we had $46.6 million
of
non-U.S. operating
loss carryforwards, which expire at various times through 2012.
We maintain a valuation allowance on substantially all of our
deferred tax assets, including our net operating loss
carryforwards, and we will release such valuation allowance as
the related tax benefits are realized on our tax returns or when
sufficient net positive evidence exists to conclude that the
deferred tax assets will be realized.
We adopted the provisions of FIN 48 on January 1,
2007. We recognized no cumulative effect of the adoption of
FIN 48 to the opening balance of retained earnings as a
result of the implementation of FIN 48. The gross amount of
unrecognized tax benefits upon adoption of FIN 48 was
$11.8 million. The gross amount of unrecognized tax
benefits resulting from prior periods decreased by
$0.2 million during the quarter ended June 30, 2007.
The total amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate is
$1.6 million as of January 1, 2007 and
$1.7 million as of June 30, 2007. It is reasonably
possible that the total amount of unrecognized tax benefits will
decrease within 12 months due to statutes of limitations
expiring in certain foreign jurisdictions which would decrease
our non-US unrecognized tax benefits related to foreign revenue
attribution by less than $1.0 million.
We have recognized less than $0.1 million of interest and
penalties in the Consolidated Statement of Income for the three
and six months ended June 30, 2007 in connection with our
unrecognized tax benefits. Interest and penalties are classified
as income taxes in the financial statements. The total amount of
interest and penalties included in long-term liabilities in
connection with our unrecognized tax benefits is
$0.3 million and $0.4 million as of January 1,
2007 and June 30, 2007, respectively.
As of January 1, 2007 and June 30, 2007, the following
tax years remain subject to examination in the following major
tax jurisdictions:
China 2001 through 2006
Japan 2001 through 2006
Korea 2001 through 2006
Philippines 2003 through 2006
Singapore 2004 through 2006
Taiwan 2001 through 2006
United States (Federal) 2003 through 2006
9
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Basic earnings per share (EPS) is computed by
dividing net income by the weighted average number of common
shares outstanding during the period. Diluted EPS adjusts net
income and the outstanding shares for the dilutive effect of
stock options and convertible debt. The following table
summarizes the computation of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
(In thousands, except per share data)
|
|
|
Net income
|
|
$
|
30,990
|
|
|
$
|
23,788
|
|
|
$
|
65,580
|
|
|
$
|
58,227
|
|
Adjustment for dilutive securities
on net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on 2.5% convertible notes
due 2011, net of tax
|
|
|
1,187
|
|
|
|
448
|
|
|
|
2,375
|
|
|
|
448
|
|
Interest on 6.25% convertible
notes due 2013, net of tax
|
|
|
1,562
|
|
|
|
1,563
|
|
|
|
3,125
|
|
|
|
3,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income diluted
|
|
$
|
33,739
|
|
|
$
|
25,799
|
|
|
$
|
71,080
|
|
|
$
|
62,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding basic
|
|
|
180,392
|
|
|
|
177,689
|
|
|
|
179,456
|
|
|
|
177,245
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
3,102
|
|
|
|
677
|
|
|
|
2,452
|
|
|
|
760
|
|
2.5% convertible notes due 2011
|
|
|
13,023
|
|
|
|
5,152
|
|
|
|
13,023
|
|
|
|
2,590
|
|
6.25% convertible notes due 2013
|
|
|
13,351
|
|
|
|
13,351
|
|
|
|
13,351
|
|
|
|
13,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding diluted
|
|
|
209,868
|
|
|
|
196,869
|
|
|
|
208,282
|
|
|
|
193,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.13
|
|
|
$
|
0.37
|
|
|
$
|
0.33
|
|
Diluted
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
|
$
|
0.34
|
|
|
$
|
0.32
|
|
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 Six
|
|
|
|
For the Three Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Stock options
|
|
|
1,148
|
|
|
|
12,330
|
|
|
|
2,007
|
|
|
|
12,956
|
|
5.0% convertible notes due 2007
|
|
|
|
|
|
|
2,572
|
|
|
|
1,021
|
|
|
|
2,564
|
|
5.75% convertible notes due 2013
|
|
|
|
|
|
|
2,514
|
|
|
|
|
|
|
|
3,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive shares
|
|
|
1,148
|
|
|
|
17,416
|
|
|
|
3,028
|
|
|
|
18,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts receivable, trade consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accounts receivable
|
|
$
|
371,324
|
|
|
$
|
392,370
|
|
Allowance for sales credits
|
|
|
(7,589
|
)
|
|
|
(9,247
|
)
|
Allowance for doubtful accounts
|
|
|
(1,114
|
)
|
|
|
(2,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
362,621
|
|
|
$
|
380,888
|
|
|
|
|
|
|
|
|
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Raw materials and purchased
components
|
|
$
|
106,497
|
|
|
$
|
126,492
|
|
Work-in-process
|
|
|
33,139
|
|
|
|
34,676
|
|
Finished goods
|
|
|
1,374
|
|
|
|
3,010
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
141,010
|
|
|
$
|
164,178
|
|
|
|
|
|
|
|
|
|
|
We report inventories net of the allowance for excess and
obsolete inventory of $29.9 million and $25.5 million
at June 30, 2007 and December 31, 2006, respectively.
|
|
8.
|
Property,
Plant and Equipment
|
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Land
|
|
$
|
110,436
|
|
|
$
|
110,730
|
|
Land use rights in China
|
|
|
19,945
|
|
|
|
19,945
|
|
Buildings and improvements
|
|
|
793,980
|
|
|
|
790,847
|
|
Machinery and equipment
|
|
|
2,123,036
|
|
|
|
2,057,939
|
|
Furniture, fixtures and other
equipment
|
|
|
142,583
|
|
|
|
141,621
|
|
Construction and assets in progress
|
|
|
26,284
|
|
|
|
8,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,216,264
|
|
|
|
3,129,699
|
|
Less Accumulated
depreciation and amortization
|
|
|
(1,798,171
|
)
|
|
|
(1,686,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,418,093
|
|
|
$
|
1,443,603
|
|
|
|
|
|
|
|
|
|
|
Construction and assets in progress at June 30, 2007 and
December 31, 2006, includes $19.0 million and
$5.1 million, respectively, related to implementing a new
enterprise resource planning system to replace many of our
existing systems at significant locations.
11
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table reconciles our activity related to property,
plant and equipment as presented on the Condensed Consolidated
Statements of Cash Flows to property, plant and equipment
additions as reflected in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Payments for property, plant, and
equipment
|
|
$
|
102,212
|
|
|
$
|
169,469
|
|
Net increase in related accounts
payable and deposits
|
|
|
12,607
|
|
|
|
26,805
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
additions
|
|
$
|
114,819
|
|
|
$
|
196,274
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Goodwill
and Other Intangibles Assets
|
The change in the carrying value of goodwill, all of which
relates to our packaging services segment, is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance as of December 31,
2006
|
|
$
|
671,900
|
|
Additions
|
|
|
782
|
|
Translation adjustments
|
|
|
(312
|
)
|
|
|
|
|
|
Balance as of June 30, 2007
|
|
$
|
672,370
|
|
|
|
|
|
|
In March 2007, we increased goodwill by $0.8 million for
additional consideration paid with respect to an earn-out
provision in connection with our investment in Unitive
Semiconductor Taiwan (UST).
During the second quarter of 2007, in accordance with the
provisions of FASB Statement No. 142, Goodwill and Other
Intangible Assets, we performed our annual impairment test
on goodwill and concluded that goodwill was not impaired.
Intangibles as of June 30, 2007 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(In thousands)
|
|
|
Patents and technology rights
|
|
$
|
74,824
|
|
|
$
|
(54,884
|
)
|
|
$
|
19,940
|
|
Customer relationship and supply
agreements
|
|
|
8,858
|
|
|
|
(4,357
|
)
|
|
|
4,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83,682
|
|
|
$
|
(59,241
|
)
|
|
$
|
24,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles as of December 31, 2006 consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(In thousands)
|
|
|
Patents and technology rights
|
|
$
|
74,468
|
|
|
$
|
(50,167
|
)
|
|
$
|
24,301
|
|
Customer relationship and supply
agreements
|
|
|
8,858
|
|
|
|
(3,465
|
)
|
|
|
5,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83,326
|
|
|
$
|
(53,632
|
)
|
|
$
|
29,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of identifiable intangible assets was
$2.4 million for the three months ended June 30, 2007
and 2006. Amortization of identifiable intangible assets was
$5.6 million and $4.7 million for the six months ended
June 30, 2007 and 2006, respectively.
12
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Based on the amortizing intangible assets recognized in our
balance sheet at June 30, 2007, amortization for each of
the next five fiscal years is estimated as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2007 Remaining
|
|
$
|
4,755
|
|
2008
|
|
|
9,451
|
|
2009
|
|
|
4,693
|
|
2010
|
|
|
2,560
|
|
2011
|
|
|
926
|
|
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accrued interest
|
|
$
|
21,569
|
|
|
$
|
22,721
|
|
Accrued payroll
|
|
|
25,305
|
|
|
|
39,998
|
|
Customer advances
|
|
|
11,707
|
|
|
|
17,533
|
|
Accrued income taxes
|
|
|
4,318
|
|
|
|
5,382
|
|
Other accrued expenses
|
|
|
70,145
|
|
|
|
59,867
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
133,044
|
|
|
$
|
145,501
|
|
|
|
|
|
|
|
|
|
|
Following is a summary of short-term borrowings and long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Debt of Amkor Technology, Inc.
|
|
|
|
|
|
|
|
|
Senior secured credit facilities
|
|
|
|
|
|
|
|
|
$100 million revolving credit
facility, LIBOR plus 1.5% 2.25%, due November 2009
|
|
$
|
|
|
|
$
|
|
|
Second lien term loan, LIBOR plus
4.5%, due October 2010
|
|
|
|
|
|
|
300,000
|
|
Senior notes
|
|
|
|
|
|
|
|
|
9.25% Senior notes due
February 2008
|
|
|
88,206
|
|
|
|
88,206
|
|
7.125% Senior notes due March
2011
|
|
|
248,993
|
|
|
|
248,877
|
|
7.75% Senior notes due May
2013
|
|
|
425,000
|
|
|
|
425,000
|
|
9.25% Senior notes due June
2016
|
|
|
400,000
|
|
|
|
400,000
|
|
Senior subordinated notes
|
|
|
|
|
|
|
|
|
10.5% Senior subordinated
notes due May 2009
|
|
|
|
|
|
|
21,882
|
|
2.5% Convertible senior
subordinated notes due May 2011
|
|
|
190,000
|
|
|
|
190,000
|
|
Subordinated notes
|
|
|
|
|
|
|
|
|
5.0% Convertible subordinated
notes due March 2007, convertible at $57.34 per share
|
|
|
|
|
|
|
142,422
|
|
6.25% Convertible
subordinated notes due December 2013, convertible at $7.49 per
share, related party
|
|
|
100,000
|
|
|
|
100,000
|
|
13
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Debt of subsidiaries
|
|
|
|
|
|
|
|
|
Secured term loans
|
|
|
|
|
|
|
|
|
Term loan, Woori Bank base rate
plus 0.5% due April 2014
|
|
|
300,000
|
|
|
|
|
|
Term loan, Taiwan
90-Day
Commercial Paper secondary market rate plus 2.25% due
June 20, 2008
|
|
|
6,863
|
|
|
|
8,411
|
|
Term loan, Taiwan
90-Day
Commercial Paper primary market rate plus 1.2%, due November 2010
|
|
|
39,286
|
|
|
|
45,024
|
|
Secured equipment and property
financing
|
|
|
9,476
|
|
|
|
12,626
|
|
Revolving credit facilities
|
|
|
4,885
|
|
|
|
22,571
|
|
Other debt
|
|
|
|
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,812,709
|
|
|
|
2,005,315
|
|
Less: Short-term borrowings and
current portion of long-term debt
|
|
|
(159,297
|
)
|
|
|
(185,414
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt (including related
party)
|
|
$
|
1,653,412
|
|
|
$
|
1,819,901
|
|
|
|
|
|
|
|
|
|
|
Debt
of Amkor Technology Inc.
Senior
Secured Credit Facilities
In November 2005, we entered into a $100.0 million first
lien revolving credit facility available through November 2009,
with a letter of credit sub-limit of $25.0 million.
Interest is charged under the credit facility at a floating rate
based on the base rate in effect from time to time plus the
applicable margins which range from 0.0% to 0.5% for base rate
revolving loans, or LIBOR plus 1.5% to 2.25% for LIBOR revolving
loans. The LIBOR-based interest rate at June 30, 2007 was
6.86%; however, no borrowings were outstanding on this credit
facility. As of June 30, 2007, we had utilized
$0.2 million of the available letter of credit sub-limit,
and had $99.8 million available under this facility. The
borrowing base for the revolving credit facility is based on the
valuation of our eligible accounts receivable. We incur
commitment fees on the unused amounts of the revolving credit
facility ranging from 0.25% to 0.50%, based on our liquidity.
This facility includes a number of affirmative and negative
covenants, which could restrict our operations. If we were to
default under the first lien revolving credit facility, we would
not be permitted to draw additional amounts, and the banks could
accelerate our obligation to pay all outstanding amounts.
In October 2004, we entered into a $300.0 million second
lien term loan with a group of institutional lenders. The term
loan bore interest at a rate of LIBOR plus 450 basis points
(9.87% at December 31, 2006); and would have matured in
October 2010. The loan was secured by a second lien on
substantially all of our U.S. subsidiaries assets,
including a portion of the shares of certain of our foreign
subsidiaries. The second lien term loan was refinanced and paid
in full on April 5, 2007 with the proceeds of the
$300.0 million,
7-year
secured credit facility with Woori Bank in Korea. In connection
with the prepayment of the second lien term loan, we recorded a
loss on debt retirement of $15.7 million in April 2007,
which included $9.0 million in prepayment fees and
$6.7 million of unamortized deferred debt issuance costs.
This repayment transaction fully discharged all of our
obligations under the second lien term loan and fully discharged
all subsidiary guarantees and releases all the collateral
securing the second lien term loan.
Senior
and Senior Subordinated Notes
In February 2001, we issued $500.0 million of
9.25% Senior Notes due February 2008 (the 2008
Notes). As of December 31, 2005, we had purchased
$29.5 million of these notes. In January 2006, we purchased
an additional
14
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$30.0 million of these notes and recorded a gain on
extinguishment of $0.7 million which is included in debt
retirement costs, net, which was partially offset by the
write-off of a proportionate amount of our deferred debt
issuance costs of $0.2 million. A portion of the 2008 Notes
are not redeemable prior to their maturity. In April 2006, we
announced a tender offer for the 2008 Notes. We used the net
proceeds from the 2016 Notes (described below) to purchase
$352.3 million in notes tendered. We recorded a
$20.2 million loss on extinguishment related to premiums
paid for the purchase of the 2008 Notes and a $2.2 million
charge for the associated unamortized deferred debt issuance
costs. Both charges are included in debt retirement costs, net
in the Consolidated Statements of Income.
In March 2004, we issued $250.0 million of
7.125% Senior Notes due March 2011 (the 2011
Notes). The 2011 Notes were priced at 99.321%, yielding an
effective interest rate of 7.25%. The 2011 Notes are redeemable
by us at any time provided we pay the holders a
make-whole premium. Prior to March 15, 2007, we
could have redeemed up to 35% of the aggregate principal amount
of the 2011 Notes from the proceeds of one or more equity
offerings at a price of 107.125% of the principal amount plus
accrued and unpaid interest. No redemptions were made prior to
March 15, 2007.
In May 2003, we issued $425.0 million of 7.75% Senior
Notes due May 2013 (the 2013 Notes). The 2013 Notes
are not redeemable at our option until May 2008.
In May 2006, we issued $400.0 million of 9.25% Senior
Notes due June 2016 (the 2016 Notes). The Notes are
redeemable by us prior to June 1, 2011 provided we pay the
holders a make-whole premium. After June 1,
2011, the 2016 Notes are redeemable at specified prices. In
addition, prior to June 1, 2009, we may redeem up to 35% of
the 2016 Notes at a specified price with the proceeds of certain
equity offerings. After deducting fees to the underwriter, the
net proceeds were used to purchase a portion of the 2008 Notes,
and to pay respective accrued interest and tender premiums.
In May 1999, we issued $200.0 million of 10.5% Senior
Subordinated Notes due May 2009 (the
2009 Notes). In June 2006, we used the proceeds
from the May 2011 Notes (described below) in connection with a
partial call of the 2009 Notes for which $178.1 million of
the 2009 Notes were repurchased. We recorded a $3.1 million
loss on extinguishment related to premiums paid for the purchase
of the 2009 Notes and a $2.2 million charge for the
associated unamortized deferred debt issuance costs. Both
charges are included in debt retirement costs, net. In June
2007, we redeemed the remaining $21.9 million of the 2009
Notes outstanding with cash on hand, and the indenture has been
terminated. We recorded a charge of $0.2 million to
write-off the unamortized deferred debt issuance costs in June
2007.
The senior notes contain a number of affirmative and negative
covenants, which could restrict our operations.
Senior
Subordinated and Subordinated Convertible Notes
In May 2006, we issued $190.0 million of our
2.5% Convertible Senior Subordinated Notes due 2011 (the
May 2011 Notes). The May 2011 Notes are convertible
at any time prior to the maturity date into our common stock at
a price of $14.59 per share, subject to adjustment. The May 2011
Notes are subordinated to the prior payment in full of all of
our senior debt. After deducting fees to the underwriter, the
net proceeds from the issuance of the May 2011 Notes were used
to repurchase a portion of the 2009 Notes, pay respective
accrued interest and call premiums. The senior subordinated
notes contain a number of affirmative and negative covenants
which could restrict our operations.
In March 2000, we issued $258.8 million of our
5.0% Convertible Subordinated Notes due March 2007 (the
2007 Notes). The 2007 Notes were subordinated to the
prior payment in full of all of our senior and senior
subordinated debt. In November 2003, we repurchased
$112.3 million of our 2007 Notes with the proceeds of an
equity offering. In June 2006, we repurchased $4.0 million
of our 2007 Notes at 99.875%. In March 2007, we repaid the
remaining balance of $142.4 million at the maturity date
with cash on hand.
15
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In November 2005, we issued $100.0 million of our
6.25% Convertible Subordinated Notes due December 2013
(the December 2013 Notes) in a private placement to
James J. Kim, our Chairman and Chief Executive Officer, and
certain Kim family members. The December 2013 Notes are
presented as long-term debt, related party on the Consolidated
Balance Sheets. The December 2013 Notes are convertible at any
time prior to the maturity date into our common stock at an
initial price of $7.49 per share (the market price of our common
stock on the date of issuance of the December 2013 Notes was
$6.20 per share), subject to adjustment. The December 2013 Notes
are subordinated to the prior payment in full of all of our
senior and senior subordinated debt. In March 2006, we filed a
registration statement with the SEC registering the notes and
the shares of common stock issuable upon conversion, pursuant to
the requirements of a registration rights agreement. The
proceeds from the sale of the December 2013 Notes were used to
purchase a portion of the 2006 Notes described above. The
December 2013 Notes are not redeemable at our option until
December 2010.
Debt
of Subsidiaries
Secured
Term Loans
In April 2007, Amkor Technology Korea, Inc., a Korean subsidiary
(ATK), entered into a $300.0 million,
7-year
secured term loan (Term Loan) with Woori Bank. The
Term Loan is guaranteed on an unsecured basis by Amkor
Technology, Inc (Amkor). The Term Loan is secured by
substantially all the land, factories, and equipment located at
our ATK facilities. The Term Loan bears interest at Wooris
base rate plus 50 basis points (6.6% as of June 30,
2007) and amortizes in 28 equal quarterly payments through
April 2014. The proceeds of the Term Loan were used to refinance
Amkors existing $300.0 million second lien term loan,
due October 2010 (see above). We incurred $3.4 million in
debt issuance costs in connection with the Woori loan, which
amount was funded from cash on hand.
In June 2005, UST entered into a New Taiwan Dollar
(NT$) 400.0 million (approximately
$12.2 million) term loan due June 20, 2008 (the
UST Note), which accrues interest at the Taiwan
90-Day
Commercial Paper Secondary Market rate plus 2.25% (4.7% and
4.23% as of June 30, 2007 and December 31, 2006,
respectively). The proceeds of the UST Note were used to satisfy
notes previously held by UST. Amkor has guaranteed the repayment
of this loan. The agreement governing the UST Note includes a
number of affirmative and negative covenants which could
restrict our operations. If we were to default under the
facility, the lenders could accelerate our obligation to pay all
outstanding amounts.
In November 2005, Amkor Technology Taiwan, Inc.
(ATT) entered into a NT$1.8 billion
(approximately $53.5 million) syndication loan due November
2010 (the Syndication Loan), which accrues interest
at the Taiwan
90-Day
Commercial Paper Primary Market rate plus 1.2% (4.21% and 3.22%
as of June 30, 2007 and December 31, 2006,
respectively). Amkor has guaranteed the repayment of this loan.
The agreement governing the Syndication Loan includes a number
of affirmative, negative and financial covenants, which could
restrict our operations. If we were to default under the
facility, the lenders could accelerate our obligation to pay all
outstanding amounts.
Secured
Equipment and Property Financing
Our secured equipment and property financing consists of loans
secured with specific assets at our Japanese, Singaporean and
Chinese subsidiaries. Our credit facility in Japan provides for
equipment financing on a three-year basis for each piece of
equipment purchased. The Japanese facility accrues interest at
3.59% on all outstanding balances and has maturities at various
times between 2006 and 2008. In December 2005, our Singaporean
subsidiary entered into a loan with a finance company for
$10.0 million, which accrues interest at 4.86% and is due
December 2008. The loan, guaranteed by Amkor is secured by a
monetary security deposit and certain equipment in our Singapore
facility. In May 2004, our Chinese subsidiary entered into a
$5.5 million credit facility secured with buildings at one
of our Chinese production facilities and is payable ratably
through January 2012. The interest rate for the Chinese
financing at June 30, 2007 and December 31, 2006, was
6.73% and 6.14%, respectively. These equipment and property
financings contain affirmative and negative covenants, which
could restrict our operations,
16
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and, if we were to default on our obligations under these
financings, the lenders could accelerate our obligation to repay
amounts borrowed under such facilities.
Revolving
Credit Facilities
Amkor Iwate Corporation, a Japanese subsidiary
(AIC), has a revolving line of credit with a
Japanese bank for 2.5 billion Japanese yen (approximately
$21.2 million), maturing in September 2007, that accrues
interest at the Tokyo Interbank Offering Rate
(TIBOR) plus 0.6%. The interest rate at
June 30, 2007 ranged from 1.23% to 1.24%, and
December 31, 2006 ranged from 0.97% to 1.04%. Amounts drawn
on the line of credit were $2.4 million and
$7.6 million at June 30, 2007 and December 31,
2006, respectively.
Additionally, AIC has a revolving line of credit at a Japanese
bank for 300.0 million Japanese yen (approximately
$2.4 million), maturing in June 2008, that accrues interest
at TIBOR plus 0.5%. The interest rate at June 30, 2007 and
at December 31, 2006 was 1.12% and 0.92%, respectively.
There was $2.4 million drawn on the line of credit as of
June 30, 2007. There were no amounts outstanding at
December 31, 2006.
Our Philippine subsidiary has a revolving line of credit of
895.0 million Philippine peso (approximately
$18.5 million), maturing October 2007, that accrues
interest at LIBOR plus 1.0% (6.36% and 6.23% at June 30,
2007 and December 31, 2006, respectively). There were no
amounts outstanding at June 30, 2007 and December 31,
2006.
In January 2006, Amkor Assembly & Test (Shanghai) Co.
Ltd., a Chinese subsidiary (AATS), entered into a
$15.0 million working capital facility which accrues
interest at LIBOR plus 1.25%, and was paid off at maturity in
January 2007 with cash on hand. The borrowings outstanding as of
December 31, 2006 were $15.0 million. At
December 31, 2006, the interest rate ranged from 6.62% to
6.81% based on the dates of borrowing.
UST had a revolving line of credit with a Taiwan bank for
NT$60.0 million (approximately $1.9 million) that
matured in June 2007. We expect to renew this facility for
NT$20.0 million (approximately $0.6 million) in August
2007. The line of credit accrues interest at a variable interest
rate. The interest rate at June 30, 2007 and
December 31, 2006 was 3.98% and 3.60%, respectively. There
were no amounts drawn on the line of credit as of June 30,
2007 and December 31, 2006.
These lines of credit contain certain affirmative and negative
covenants, which could restrict our operations. If we were to
default on our obligations under any of these lines of credit,
we would not be permitted to draw additional amounts, and the
lenders could accelerate our obligation to pay all outstanding
amounts.
Other
Debt
Other debt includes debt related to our Taiwanese subsidiaries
with fixed and variable interest rates that matured in June
2007. The interest rate on this debt ranged from 3.14% to 4.5%
as of December 31, 2006.
Interest expense related to short-term borrowings and long-term
debt is presented net of interest income in the accompanying
Consolidated Statements of Income. Interest income for the three
and six months ended June 30, 2007 was $1.7 million
and $3.8 million, respectively. For the three and six
months ended June 30, 2006, interest income was
$2.2 million and $3.6 million, respectively.
Compliance
with Debt Covenants
We were in compliance with all of our covenants as of
June 30, 2007 and December 31, 2006.
|
|
12.
|
Pension
and Severance Plans
|
Our Philippine, Taiwanese and Japanese subsidiaries sponsor
defined benefit plans that cover substantially all of their
respective employees who are not covered by statutory plans.
Charges to expense are based upon costs
17
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
computed by independent actuaries. The components of net
periodic pension cost for these defined benefit plans are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
For the Three Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Components of net periodic pension
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,564
|
|
|
$
|
1,025
|
|
|
$
|
3,069
|
|
|
$
|
2,182
|
|
Interest cost
|
|
|
902
|
|
|
|
682
|
|
|
|
1,762
|
|
|
|
1,366
|
|
Expected return on plan assets
|
|
|
(466
|
)
|
|
|
(388
|
)
|
|
|
(910
|
)
|
|
|
(778
|
)
|
Amortization of transitional
obligation
|
|
|
19
|
|
|
|
17
|
|
|
|
38
|
|
|
|
34
|
|
Amortization of prior service cost
|
|
|
18
|
|
|
|
17
|
|
|
|
36
|
|
|
|
35
|
|
Recognized actuarial loss
|
|
|
113
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic pension cost
|
|
$
|
2,150
|
|
|
$
|
1,353
|
|
|
$
|
4,215
|
|
|
$
|
2,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2007,
$0.5 million and $1.0 million, respectively, was
contributed to fund the pension plans. In 2007, we anticipate
contributing an additional $8.3 million to fund the pension
plans.
Our Korean subsidiary participates in an accrued severance plan
that covers employees and directors with at least one year of
service. Eligible employees are entitled to receive a lump-sum
payment upon termination of their employment, 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. For the three months ended
June 30, 2007 and 2006, the provision recorded for
severance benefits was $8.9 million and $7.8 million,
respectively. For the six months ended June 30, 2007 and
2006, the provision recorded for severance benefits was
$23.4 million and $17.1 million, respectively. The
balance recorded in pension and severance obligations for
accrued severance at our Korean subsidiary was
$162.3 million and $142.3 million at June 30,
2007 and December 31, 2006, respectively.
|
|
13.
|
Other
Non-Current Liabilities
|
Other non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Customer advances
|
|
$
|
20,429
|
|
|
$
|
24,397
|
|
Other non-current liabilities
|
|
|
12,563
|
|
|
|
5,611
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,992
|
|
|
$
|
30,008
|
|
|
|
|
|
|
|
|
|
|
Customer advances relate to supply agreements with customers
where we commit capacity in exchange for customer prepayment of
services.
|
|
14.
|
Commitments
and Contingencies
|
Indemnifications
and Guarantees
We have indemnified members of our Board of Directors and our
corporate officers against any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that the individual is or
was a director or officer of the company. The individuals are
indemnified, to the fullest
18
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
extent permitted by law, against related expenses, judgments,
fines and any amounts paid in settlement. We also maintain
directors and officers insurance coverage in order to mitigate
our exposure to these indemnification obligations. The maximum
amount of future payments is generally unlimited. There is no
amount recorded for these indemnifications at June 30, 2007
and December 31, 2006. Due to the nature of these
indemnifications, it is not possible to make a reasonable
estimate of the maximum potential loss or range of loss. No
assets are held as collateral and no specific recourse
provisions exist related to these indemnifications.
As of June 30, 2007, we have outstanding $0.2 million
of standby letters of credit and have available an additional
$24.8 million. 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 we 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
results of operations or financial condition. 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 on our
financial position, results of operations or cash flows. The
estimate of the potential impact of these claims and legal
proceedings on our financial position, results of operations or
cash flows could change in the future.
We currently are party to the legal proceedings described below.
Attorney fees related to legal matters are expensed as incurred.
During the six months ended June 30, 2006, we recorded a
provision of $1.0 million related to the epoxy mold
compound matter. There were no charges in 2007.
Tessera,
Inc. v. Amkor Technology, Inc.
On March 2, 2006, Tessera, Inc. filed a Request for
Arbitration (the Request) with the International
Court of Arbitration of the International Chamber of Commerce,
captioned Tessera, Inc. v. Amkor Technology, Inc.
The subject matter of the arbitration is a Limited TCC
License Agreement (Agreement) entered into between
Tessera and our predecessor in 1996. The Agreement licenses
certain patents and know-how relating to semiconductor
packaging. In their Request, Tessera alleges breach of contract
and asserts Amkor owes Tessera royalties under the Agreement in
an amount between $85 and $115 million for semiconductor
packages assembled by us through 2005 and that Amkor has
thereafter continued to assemble semiconductor packages subject
to royalties. In our Answer and Counterclaim, we denied that any
royalties were owed, and asserted that we are not using any of
the licensed Tessera patents or know-how. We also asserted
defenses and counterclaims of invalidity and unenforceability of
the four patents identified by Tessera in their Request as the
basis for their claim (U.S. Patent Nos. 5,679,977,
5,852,326, 6,433,419 and 6,465,893). On November 10, 2006,
Tessera provided their Preliminary Claim Charts and added two
additional patents to the proceeding, U.S. Patent Nos.
6,133,627 and 5,861,666.
On April 17, 2007, Tessera served notice to Amkor that it
has terminated the Agreement, which is the basis for the breach
of contract dispute in the ICC Arbitration. Amkor has disputed
Tesseras purported notice that it is entitled to terminate
the Agreement. Also on April 17, 2007, Tessera instituted
an action in Federal District Court for the Eastern District of
Texas against certain of Amkors customers, and on
May 15, 2007, at Tesseras request, the United States
International Trade Commission (ITC) instituted an
investigation of certain Amkor customers. Both the ITC
investigation and the Texas action allege infringement of two of
the same patents asserted by Tessera in the arbitration, and
Tessera may seek to include in those actions some of the same
products packaged by Amkor that are at issue in the arbitration.
Although Amkor has not been named as a respondent in the ITC
investigation or a
19
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
defendant in the Texas action, Amkor has received notification
from a customer of a request for indemnification in connection
with Tesseras claims in those actions. Amkor has not
accepted such request for indemnification.
The arbitration is currently set for a hearing beginning March
2008. Although we believe that we have meritorious defenses and
counterclaims in this matter and will seek a judgment in our
favor, it is not possible to predict the outcome of the
arbitration or the total cost of resolving this controversy
including the impact of possible future claims of additional
royalties by Tessera. The final resolution of this controversy
could result in significant liabilities and could have a
material adverse effect on our financial condition, results of
operations and cash flows.
Securities
Class Action Litigation
On January 23, 2006, a purported securities class action
suit entitled Nathan Weiss et al. v. Amkor Technology,
Inc. et al., was filed in U.S. District Court for the
Eastern District of Pennsylvania against Amkor and certain of
its current and former officers. Subsequently, other law firms
filed two similar cases, which were consolidated with the
initial complaint. In August 2006 and again in November 2006,
the plaintiffs amended the complaint. The plaintiffs added
additional officer, director and former director defendants and
allege improprieties in certain option grants. The amended
complaint further alleges that defendants improperly recorded
and accounted for the options in violation of generally accepted
accounting principles and made materially false and misleading
statements and omissions in its disclosures in violation of the
federal securities laws, during the period from July 2001 to
July 2006. The amended complaint seeks certification as a class
action pursuant to Fed. R. Civ. Proc. 23, compensatory damages,
costs and expenses, and such other further relief as the Court
deems just and proper. On December 28, 2006, pursuant to
motion by defendants, the U.S. District Court for the
Eastern District of Pennsylvania transferred this action to the
U.S. District Court for the District of Arizona. Defendants
have filed motions to dismiss the complaint.
Shareholder
Derivative Lawsuits
On February 23, 2006, a purported shareholder derivative
lawsuit entitled Scimeca v. Kim, et al. was filed in
the U.S. District Court for the District of Arizona against
certain of Amkors current and former officers and
directors. Amkor is named as a nominal defendant. In September
2006 and again in November 2006, the plaintiff amended the
complaint to add allegations relating to option grants and added
additional defendants, including the remaining members of the
current board, former board members, and former officers. The
complaint includes claims for violation of Section 14(a) of
the Exchange Act, breach of fiduciary duty, abuse of control,
waste of corporate assets, unjust enrichment and mismanagement,
and is generally based on the same allegations as in the
securities class action litigation described above. Defendants
have filed motions to dismiss the complaint.
On March 2, 2006, a purported shareholder derivative
lawsuit entitled Khan v. Kim, et al. was filed in
the Superior Court of the State of Arizona against certain of
Amkors current and former officers and directors. Amkor is
named as a nominal defendant. The complaint includes claims for
breach of fiduciary duty and unjust enrichment, and is based on
allegations similar to those made in the previously filed
federal shareholder derivative action. This action has been
stayed pending resolution of the federal derivative suit
referenced above.
On or about October 10, 2006, a purported shareholder
derivative lawsuit entitled Feldgus v. Kim, et al.
was filed in the Superior Court of the State of Arizona
against certain of Amkors current and former officers and
directors. Amkor is named as a nominal defendant. The complaint
includes claims for breach of fiduciary duty and unjust
enrichment and contains allegations relating to option grants
similar to those made in the previously filed federal
shareholder derivative action referred to above. This action has
been stayed pending resolution of the federal derivative suit
referenced above.
20
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The derivative complaints seek monetary damages, an order
directing the Company to take all necessary actions to improve
corporate governance as may be necessary, equitable
and/or
injunctive relief as permitted by law, disgorgement,
restitution, costs, fees, expenses and such other relief as the
Court deems just and proper.
Securities
and Exchange Commission Investigation
In August 2005, the Securities and Exchange Commission
(SEC) issued a formal order of investigation
regarding certain activities with respect to Amkor securities.
The primary focus of the investigation appears to be activities
during the period from June 2003 to July 2004. We believe that
the investigation continues to relate primarily to transactions
in our securities by certain individuals, and that the
investigation may in part relate to whether tipping with respect
to trading in our securities occurred. The matters at issue
involve activities with respect to Amkor securities during the
subject period by certain insiders or former insiders and
persons or entities associated with them, including activities
by or on behalf of certain current and former members of the
Board of Directors and Amkors Chief Executive Officer.
Amkor has cooperated fully with the SEC on the formal
investigation and the informal inquiry that preceded it. Amkor
cannot predict the outcome of the investigation. We have learned
that our former general counsel, whose employment with us
terminated in March of 2005, has been indicted by the United
States Attorneys Office for the Eastern District of
Pennsylvania for violation of the securities laws. The
indictment alleges that the former general counsel traded in
Amkor securities on the basis of material non-public
information. We have also learned that the SEC has filed a civil
action against our former general counsel based on substantially
the same allegations as contained in the indictment.
As previously disclosed, in July 2006, the Board of Directors
established a Special Committee to review our historical stock
option practices and informed the SEC of these efforts. The SEC
informed us that it is expanding the scope of its investigation
and has requested that we provide documentation related to these
matters. We intend to continue to cooperate with the SEC.
Additionally, we have voluntarily provided information to the
Department of Justice relating to our historical stock option
practices.
Amkor
Technology, Inc. v. Motorola, Inc.
In August 2002, we filed a complaint against Motorola, Inc.
(Motorola) seeking declaratory judgment relating to
a controversy between us and Motorola concerning: (i) the
assignment by Citizen Watch Co., Ltd. (Citizen) to
us of a Patent License Agreement dated January 25, 1996
between Motorola and Citizen (the License Agreement)
and concurrent assignment by Citizen to us of Citizens
interest in U.S. Patents 5,241,133 and 5,216,278 (the
133 and 278 Patents) which patents
relate to ball grid array packages; and (ii) our obligation
to make certain payments pursuant to an immunity agreement (the
Immunity Agreement) dated June 30, 1993 between
us and Motorola, pending in the Superior Court of the State of
Delaware in and for New Castle County.
We and Motorola resolved the controversy with respect to all
issues relating to the Immunity Agreement, and all claims and
counterclaims filed by the parties in the case relating to the
Immunity Agreement were dismissed or otherwise disposed of
without further litigation. The claims relating to the License
Agreement and the 133 and 278 Patents remained
pending.
We and Motorola both filed motions for summary judgment on the
remaining claims, and oral arguments were heard in September
2003. On October 6, 2003, the Superior Court of Delaware
ruled in favor of us and issued an Opinion and Order granting
our motion for summary judgment and denying Motorolas
motion for summary judgment. Motorola filed an appeal in the
Supreme Court of Delaware. In May 2004, the Supreme Court
reversed the Superior Courts decision, and remanded for
further development of the factual record. The bench trial in
this matter was concluded on January 27, 2006. Post-trial
briefs were submitted and post-trial oral arguments were heard
by the Court in April 2006. Additional post-trial oral arguments
were heard by the Court on September 11, 2006. A decision
from the Court is still pending. Although we believe that we
have meritorious claims in this matter and will continue to seek
judgment in our favor, as of the date of this Quarterly Report,
it is not possible to predict the outcome of this litigation or
the total cost of resolving this controversy, including the
impact of possible future
21
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
claims for royalties which may be made by Motorola if the final
outcome is unfavorable. The final resolution of this controversy
could result in potential liabilities that could have a material
adverse effect on our financial condition, results of operations
and cash flows.
Alcatel
Business Systems v. Amkor Technology, Inc., Anam
Semiconductor, Inc.
On November 5, 1999, we agreed to sell certain
semiconductor parts to Alcatel Microelectronics, N.V.
(AME), a subsidiary of Alcatel S.A. The parts were
manufactured for us by Anam Semiconductor, Inc.
(ASI) and delivered to AME. AME transferred the
parts to another Alcatel subsidiary, Alcatel Business Systems
(ABS), which incorporated the parts into cellular
phone products. In early 2001, a dispute arose as to whether the
parts sold by us were defective.
Paris Commercial Court. On March 18,
2002, ABS and its insurer filed suit against us and ASI in the
Paris Commercial Court of France, claiming damages of
approximately 50.4 million Euros (approximately
$67.9 million based on the spot exchange rate at
June 30, 2007.) We have denied all liability and have not
established a loss accrual associated with this claim.
Additionally, we have entered into a written agreement with ASI
whereby ASI has agreed to indemnify us fully against any and all
loss related to the claims of AME, ABS and ABS insurer.
Dongbu Electronics (now known as Dongbu Hitek), successor in
interest to ASI, has acknowledged that it is the indemnifying
party with respect to claims against us in this matter and in
the Arbitration matter described below. The Paris Commercial
Court commenced a special proceeding before a technical expert
to report on the facts of the dispute. The report of the
court-appointed expert was put forth on December 31, 2003.
The report does not specifically allocate liability to any
particular party. On May 18, 2004, the Paris Commercial
Court declared that it did not have jurisdiction over the
matter. Following a 2004 ruling by the Court of Appeal of Paris
confirming the first tier ruling, on March 27, 2007, the
French Supreme Court (the highest court in the French judicial
system) issued a final non-appealable ruling in our favor that
the Paris Commercial Court does not have jurisdiction over this
matter. Based on this ruling, we do not anticipate any further
proceedings in the French courts on this matter.
Arbitration. In response to the French lawsuit
described above, on May 22, 2002, we filed a petition to
compel arbitration in the United States District Court for the
Eastern District of Pennsylvania against ABS, AME and ABS
insurer, claiming that the dispute is subject to the arbitration
clause of the November 5, 1999 agreement between us and
AME. That U.S. District Court proceeding was stayed pending
resolution of the French lawsuit described above. Until
recently, ABS had refused to arbitrate. However, in December
2006, ABS filed a demand with the American Arbitration
Association (AAA) for arbitration under the 1999
agreement, which demand is based on substantially the same
claims raised in the French lawsuit described above.
Notwithstanding the French Supreme Courts final ruling in
our favor described above, the arbitration filed with the AAA in
December 2006 remains pending.
Amkor
Technology, Inc. v. Carsem (M) Sdn Bhd, Carsem
Semiconductor Sdn Bhd, and Carsem Inc.
In November 2003, we filed a complaint against Carsem
(M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc.
(collectively Carsem) with the International Trade
Commission (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 an exclusionary order barring the
importation by Carsem of infringing products. Subsequently, we
filed a complaint in the Northern District of California,
alleging infringement of the Amkor Patents and seeking an
injunction enjoining Carsem from further infringing the Amkor
Patents, treble damages plus interest, costs and attorneys
fees. We allege that by making, using, selling, offering for
sale, or importing into the U.S. the Carsem Dual and Quad
Flat No-Lead Package, Carsem has infringed on one or more of our
Micro LeadFrame packaging technology claims in the Amkor
Patents. The District Court action had 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 issued an initial
determination that Carsem infringed some of our patent claims
relating to our Micro LeadFrame package technology, that
some of our 21 asserted patent claims are
22
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
valid, and that all of our asserted patent claims are
enforceable. However, the ALJ did not find a statutory violation
of the Tariff Act. We filed a petition in November 2004 to have
the ALJs ruling reviewed by the full International Trade
Commission. 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 that Carsem infringed some of
our patent claims and ruled that Carsem violated
Section 337 of the Tariff Act. The ITC subsequently
authorized the ALJ to reopen the record on certain discovery
issues related to third party documents. On February 9,
2006, the ITC ordered a delay in issuance of the Final
Determination, pending resolution of the third party discovery
issues. The discovery issues are the subject of a subpoena
enforcement action which is pending in the District Court for
the District of Columbia. The case we filed in 2003 in the
Northern District of California remains stayed pending
completion of the ITC investigation.
|
|
15.
|
Related
Party Transactions
|
We purchase leadframe inventory from Acqutek
Semiconductor & Technology Co., Ltd. James J.
Kims, our Chairman and Chief Executive Officer, ownership
in Acqutek Semiconductor & Technology Co., Ltd. is
approximately 17.7%. For the three months ended June 30,
2007 and 2006, purchases from Acqutek Semiconductor &
Technology Co., Ltd. were $4.3 million and
$4.6 million, respectively. For the six months ended
June 30, 2007 and 2006, purchases from Acqutek
Semiconductor and Technology Co., Ltd. were $8.4 million
and $7.3 million, respectively. Amounts due to Acqutek
Semiconductor & Technology Co., Ltd. at June 30,
2007 and December 31, 2006 were $1.5 million and
$1.3 million, respectively.
Mr. JooHo Kim is an employee of Amkor and a brother of
Mr. James J. Kim, our Chairman and Chief Executive Officer.
Mr. JooHo Kim, together with his wife and children, own
96.1% of Jesung C&M, a company that provides cafeteria
services to Amkor Technology Korea, Inc. For the three months
ended June 30, 2007 and 2006, purchases from Jesung
C&M were $1.4 million and $1.7 million,
respectively. For the six months ended June 30, 2007 and
2006, purchases from Jesung C&M were $3.0 million and
$3.3 million, respectively. Amounts due to Jesung C&M
at June 30, 2007 and December 31, 2006 were
$0.4 million and $0.5 million, respectively.
We had leased, through June 2007, 2,700 square feet of
office space in West Chester, Pennsylvania from trusts related
to James J. Kim. Amounts paid for this lease for the three and
six months ended June 30, 2007 and 2006 were less than
$0.1 million. The lease expired on June 30, 2007 and
was not renewed. We vacated the space in June 2007.
In accordance with SFAS No. 131 Disclosures about
Segments of an Enterprise and Related Information, we have
determined we have two reportable segments, packaging and test.
Packaging and test are integral parts of the process of
manufacturing semiconductor devices and our customers will
engage with us for both packaging and test services, or just
packaging or test services. Our packaging services process
creates an electrical interconnect between the semiconductor
chip and the system board through wire bonding or bumping
technologies. In packaging, individual chips are separated from
the fabricated semiconductor wafers, attached to a substrate and
then encased in a protective material to provide optimal
electrical connectivity and thermal performance. Our test
services include the probing of fabricated wafers and testing of
packaged chips using sophisticated equipment to ensure that
design specifications are satisfied.
The accounting policies for segment reporting are the same as
those for our consolidated financial statements. We evaluate our
operating segments based on gross margin and gross property,
plant and equipment. We do not specifically identify and
allocate total assets by operating segment. Summarized financial
information concerning
23
AMKOR
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reportable segments is shown in the following table. The
other column includes other corporate adjustments,
sales office and corporate property, plant and equipment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Packaging
|
|
|
Test
|
|
|
Other
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Three Months Ended Months
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
583,818
|
|
|
$
|
68,668
|
|
|
$
|
|
|
|
$
|
652,486
|
|
Gross profit
|
|
|
142,417
|
|
|
|
19,751
|
|
|
|
(476
|
)
|
|
|
161,692
|
|
Three Months Ended Months
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
616,540
|
|
|
$
|
70,334
|
|
|
$
|
(243
|
)
|
|
$
|
686,631
|
|
Gross profit
|
|
|
145,685
|
|
|
|
23,962
|
|
|
|
(323
|
)
|
|
|
169,324
|
|
Six Months Ended Months
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,162,543
|
|
|
$
|
141,171
|
|
|
$
|
(240
|
)
|
|
$
|
1,303,474
|
|
Gross profit
|
|
|
265,132
|
|
|
|
42,715
|
|
|
|
1,183
|
|
|
|
309,030
|
|
Six Months Ended Months
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,200,218
|
|
|
$
|
131,922
|
|
|
$
|
(420
|
)
|
|
$
|
1,331,720
|
|
Gross profit
|
|
|
282,458
|
|
|
|
42,044
|
|
|
|
(441
|
)
|
|
|
324,061
|
|
Gross Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
$
|
2,483,227
|
|
|
$
|
612,171
|
|
|
$
|
120,866
|
|
|
$
|
3,216,264
|
|
December 31, 2006
|
|
|
2,421,171
|
|
|
|
596,079
|
|
|
|
112,449
|
|
|
|
3,129,699
|
|
|
|
17.
|
Restructuring
and Reduction in Force
|
During the second quarter of 2007, we commenced a phased
transition of wafer level processing production from our wafer
bumping facility in North Carolina to our facility in Taiwan as
part of our ongoing efforts to help our customers shorten
time-to-market and get closer to the upstream production
sources. The North Carolina facility will primarily focus on
research and development activities after the transition is
complete. We expect to complete the transition of production to
Taiwan by April 2008. In April 2007, the specific details
surrounding the related reduction in force were communicated to
the impacted employees at our North Carolina facility. The costs
associated with this activity are accounted for in accordance
with SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (as amended). We recorded a
charge for termination benefits of $0.4 million, primarily
included in cost of goods sold during the quarter ended
June 30, 2007. The amount recorded in accrued expenses for
termination benefits was $0.4 million as of June 30,
2007. We currently anticipate that an additional
$0.9 million related to termination benefits will be
charged primarily to cost of goods sold over the remaining
employment service period through April 2008. We anticipate
total termination benefits of $1.3 million will be paid
through April 2008.
24
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the
meaning of the federal securities laws. All statements other
than statements of historical fact are considered forward
looking statements including but not limited to statements
regarding: trends in outsourcing and reductions in inventory,
demand and selling prices for our services and products; future
capacity utilization rates, revenue, gross margins and operating
performance; our ability to focus capital investments on
increasing wafer bumping, flip chip, test, advanced laminate
packaging capacity and information systems; entry into supply
agreements with customers and forecast customer demand;
anticipated tax rate; sufficient cash flows and liquidity to
fund working capital, estimated capital expenditures of
$275 million to $300 million, debt service
requirements and no declaration of cash dividends; our
substantial indebtedness; our expectations regarding continued
compliance with our debt covenants; the continued service of key
senior management and technical personnel; increase in the scope
and growth of our operations and ability to implement expansion
plans; our ability to offset an increase in fixed commodity
prices; the favorable outcome of litigation proceedings; our
ability to comply with environmental regulations and foreign
laws; our ability to quickly respond to a natural disaster or
terrorist attack; the condition, growth and cyclical nature of
the semiconductor industry; our contractual obligations; and
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. These
forward-looking statements involve a number of risks,
uncertainties, assumptions and other factors that could affect
future results and cause actual results and events to differ
materially from historical and expected results and those
expressed or implied in the forward looking statements,
including, but not limited to, those set forth in the following
discussion as well as in Risk Factors that May Affect
Future Operating Performance set forth in this quarterly
report on
Form 10-Q
in Part II, Item 1A Risk Factors. The
following discussion provides information and analysis of our
results of operations for the three and six months ended
June 30, 2007 and our liquidity and capital resources. You
should read the following discussion in conjunction with our
Consolidated Financial Statements and the related notes included
elsewhere in this quarterly report, as well as other reports we
file with the Securities and Exchange Commission.
Results
of Operations
Overview
Amkor is one of the worlds largest subcontractors of
semiconductor packaging and test services. Packaging and test
are integral parts of the process of manufacturing semiconductor
devices. This process begins with silicon wafers and involves
the fabrication of electronic circuitry into complex patterns,
thus creating large numbers of individual chips on the wafers.
The fabricated wafers are then probed to ensure the individual
devices meet design specifications. The packaging process
creates an electrical interconnect between the semiconductor
chip and the system board. In packaging, individual chips are
separated from the fabricated semiconductor wafers, and
typically attached through wire bond or wafer bump technologies
to a substrate or leadframe, and then encased in a protective
material. Packages are designed to provide optimal electrical
connectivity and thermal performance. The packaged chips are
then tested using sophisticated equipment to ensure that each
packaged chip meets its design specifications. Increasingly,
packages are custom designed for specific chips and specific
end-market applications. We are able to provide turnkey
solutions including semiconductor wafer bump, wafer probe, wafer
backgrind, package design and assembly, test and drop shipment
services.
Our second quarter net income was $31.0 million, or $0.16
per diluted share, versus net income in the second quarter of
2006 of $23.8 million, or $0.13 per diluted share. In the
three months ended June 30, 2007, sales decreased
$34.1 million or 5.0% to $652.5 million from
$686.6 million in the three months ended June 30,
2006. During the second quarter of 2007 compared to the second
quarter of 2006, we experienced a volume decrease in wirebond
packaging services partially offset by an increase in flip chip
packaging services. Although sales declined, gross margin
remained relatively flat for the second quarter of 2007 at 24.8%
compared to 24.7% for the second quarter of 2006 largely because
of a change in sales mix to packages with lower material costs.
In connection with
25
refinancing transactions during the second quarter of 2007 and
2006, $15.9 million and $27.9 million of net debt
retirement costs were recorded, respectively.
We continue to manage our production lines, allocate assets and
selectively expand our capacity. Second quarter 2007 capital
additions totaled $59.5 million. We expect that our full
year 2007 capital additions will be in the range of
$275 million to $300 million, which is subject to
adjustment based on business conditions. Our capital investments
have been, and we expect will continue to be, primarily focused
on increasing our advanced laminate, test services, wafer bump
and flip chip packaging capacity. In addition, we continue to
make investments in our information systems.
Cash provided by operating activities increased
$14.2 million to $254.0 million for the six months
ended June 30, 2007 as compared to $239.8 million for
the six months ended June 30, 2006. Cash flow from
operations generated during the six months ended June 30,
2007 funded capital purchases of $102.2 million leaving
$151.8 million of Free Cash Flow (defined below). Please
see the Liquidity and Capital Resources section below for a
further analysis of the change in our balance sheet and cash
flows during the first half of 2007.
The following table sets forth certain operating data as a
percentage of net sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
For the Three Months Ended June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Gross profit
|
|
|
24.8
|
%
|
|
|
24.7
|
%
|
|
|
23.7
|
%
|
|
|
24.3
|
%
|
Operating income
|
|
|
13.5
|
%
|
|
|
14.6
|
%
|
|
|
12.5
|
%
|
|
|
13.8
|
%
|
Income before income taxes and
minority interests
|
|
|
5.5
|
%
|
|
|
3.8
|
%
|
|
|
5.7
|
%
|
|
|
4.8
|
%
|
Net income
|
|
|
4.7
|
%
|
|
|
3.5
|
%
|
|
|
5.0
|
%
|
|
|
4.4
|
%
|
Three
Months Ended June 30, 2007 Compared to Three Months Ended
June 30, 2006
Net Sales. Sales decreased $34.1 million,
or 5.0%, to $652.5 million in the three months ended
June 30, 2007 from $686.6 million in the three months
ended June 30, 2006 principally driven by decreases in
wirebond packaging services, offset by an increase in flip chip
packaging services.
Packaging Net Sales. Packaging net sales
decreased $32.7 million, or 5.3%, to $583.8 million in
the three months ended June 30, 2007 from
$616.5 million in the three months ended June 30, 2006
principally driven by decreased volume for wirebond packaging
services partially offset by improved flip chip packaging
services. Packaging unit volume decreased 4.9% to
2.1 billion units in the three months ended June 30,
2007 from 2.2 billion units in the second quarter of 2006.
Test Net Sales. Test net sales decreased
$1.6 million, or 2.3%, to $68.7 million in the three
months ended June 30, 2007 from $70.3 million in the
three months ended June 30, 2006 principally due to a
decrease in unit volume.
Cost of Sales. Our cost of sales consists
principally of materials, labor, depreciation and manufacturing
overhead. Because a substantial portion of our costs at our
factories is fixed, relatively insignificant increases or
decreases in capacity utilization rates can have a significant
effect on our gross margin.
Material costs as a percent of revenue decreased to 36.7% for
the three months ended June 30, 2007 from 39.2% for the
three months ended June 30, 2006 due to change in product
mix resulting in lower material costs per product.
Labor costs as a percentage of net sales, increased to 16.5% for
the three months ended June 30, 2007 from 14.9% for the
three months ended June 30, 2006 due to lower net sales,
higher labor and benefit costs driven in part by wage increases
and the depreciation of the U.S. dollar, partially offset
by a net reduction in headcount.
As a percentage of net sales, other manufacturing costs
increased to 22.0% for the three months ended June 30, 2007
from 21.2% for the three months ended June 30, 2006. The
second quarter of 2007 includes additional costs
26
associated with our newer factories and increased depreciation
costs as a result of our capital expenditures, which are focused
on increasing our test, flip chip and advanced laminate
packaging capacity.
Stock-based compensation included in cost of sales was
$0.4 million for the three months ended June 30, 2007
and June 30, 2006.
Gross Profit. Gross profit decreased
$7.6 million to $161.7 million, or 24.8% of net sales
in the three months ended June 30, 2007 from
$169.3 million, or 24.7% of net sales, in the three months
ended June 30, 2006. The decrease in gross profit was due
to higher labor costs offset by lower material costs due to a
change in product mix.
Packaging Gross Profit. Gross profit for
packaging decreased $3.3 million to $142.4 million, or
24.4% of packaging net sales, in the three months ended
June 30, 2007 from $145.7 million, or 23.6% of
packaging net sales, in the three months ended June 30,
2006. The packaging gross profit decrease was primarily due to
decreased volume partially offset by a change in product mix
which improved gross profit.
Test Gross Profit. Gross profit for test
decreased $4.2 million to $19.8 million, or 28.8% of
test net sales, in the three months ended June 30, 2007
from $24.0 million, or 34.1% of test net sales, in the
three months ended June 30, 2006. This decrease was
primarily due to increased depreciation costs as a result of our
capital expenditures.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses increased $3.4 million, or 5.8%, to
$62.4 million for the three months ended June 30,
2007, from $59.0 million for the three months ended
June 30, 2006 reflecting higher spending for professional
fees and travel expenses.
Other (Income) Expense. Other expenses, net
decreased $21.4 million from the three months ended
June 30, 2006 to the three months ended June 30, 2007.
In the three months ended June 30, 2007 and 2006, we
recognized $15.9 million and $27.9 million,
respectively, of debt retirement costs, net. In addition, there
was a decrease of $9.5 million in net interest expense in
the three months ended June 30, 2007 compared to the three
months ended June 30, 2006, due to our continued focus on
strengthening our liquidity by reducing debt as well as
refinancing debt with lower interest rate borrowings.
Income Tax Expense. Income tax expense for the
three months ended June 30, 2007 and 2006 is attributable
to foreign withholding taxes and income taxes at certain of our
profitable foreign operations. For the full year of 2007, we
anticipate an effective income tax rate of approximately 9.2%,
which reflects the utilization of foreign net operating loss
carryforwards and tax holidays in certain foreign jurisdictions.
The effective rate for the three months ended June 30, 2007
was 12.0% and 7.6% for the three months ended June 30,
2006. The increase is primarily attributable to a change in the
mix of income reported in tax jurisdictions with varying tax
rates.
At June 30, 2007, we had U.S. net operating loss
carryforwards totaling $400.6 million, which expire at
various times through 2027. Additionally, at June 30, 2007,
we had $46.6 million of
non-U.S. operating
loss carryforwards, which expire at various times through 2012.
We maintain a valuation allowance on substantially all of our
deferred tax assets, including our net operating loss
carryforwards, and will release such valuation allowance as the
related deferred tax benefits are realized on our tax returns or
when sufficient net positive evidence exists to conclude that
the deferred tax assets will be realized.
Six
Months Ended June 30, 2007 Compared to Six Months Ended
June 30, 2006
Net Sales. Net sales decreased
$28.2 million, or 2.1%, to $1,303.5 million for the
six months ended June 30, 2007 from $1,331.7 million
for the six months ended June 30, 2006, principally driven
by decreased unit volume for wirebond packaging services
partially offset by an increase in flip chip packaging services.
Packaging Net Sales. Packaging net sales
decreased $37.7 million, or 3.1%, to $1,162.5 million
in the six months ended June 30, 2007 from
$1,200.2 million in the six months ended June 30, 2006
principally driven by decreased unit volume. Packaging unit
volume decreased 7.2% to 4.1 billion units in the six
months ended June 30, 2007 from 4.4 billion units in
the 2006 period. The decrease in unit volume is principally
attributed to our wirebond packaging services, partially offset
by an increase in our flip chip packaging services.
27
Test Net Sales. Test net sales increased
$9.3 million, or 7.1%, to $141.2 million in the six
months ended June 30, 2007 from $131.9 million in the
six months ended June 30, 2006, principally due to the
production ramp of our new test facility in Singapore and an
increase in test units in our other test facilities.
Cost of Sales. Our cost of sales consists
principally of materials, labor, depreciation and manufacturing
overhead. Because a substantial portion of our costs at our
factories is fixed, relatively insignificant increases or
decreases in capacity utilization rates can have a significant
effect on our gross margin.
Material costs decreased due to the volume decrease. Material
costs as a percent of revenue decreased from 38.9% for the six
months ended June 30, 2006 to 38.0% for the six months
ended June 30, 2007 primarily as a result of product mix
and favorable pricing.
Labor costs in absolute dollars were up due to increased labor
and benefit costs. Labor as a percentage of net sales, increased
to 16.5% for the six months ended June 30, 2007, from 15.0%
for the six months ended June 30, 2006, due to increased
labor wages, lower utilization of our capacity and the
depreciation of the U.S. dollar, partially offset by a net
reduction in headcount.
Other manufacturing costs decreased as a result of the decreased
volume partially offset by increased depreciation costs as a
result of our capital expenditures which are focused on
increasing our wafer bumping, flip chip, test and advanced
laminate packaging capacity. As a percentage of net revenues,
other manufacturing costs increased slightly to 21.8% for the
six months ended June 30, 2007, from 21.7% for the six
months ended June 30, 2006, due to lower overhead
utilization.
Stock-based compensation included in cost of sales amount to
$0.7 million for the six months ended June 30, 2007
compared to $0.6 million for the six months ended
June 30, 2006.
Gross Profit. Gross profit decreased
$15.0 million to $309.0 million, or 23.7% of net sales
in the six months ended June 30, 2007 from
$324.1 million, or 24.3% of net sales, in the six months
ended June 30, 2006. This decrease in gross profit was due
to higher labor costs partially offset by lower material costs
due to product mix.
Packaging Gross Profit. Gross profit for
packaging decreased $17.4 million to $265.1 million,
or 22.8% of packaging net sales, in the six months ended
June 30, 2007 from $282.5 million, or 23.5% of
packaging net sales, in the six months ended June 30, 2006.
The packaging gross profit decrease was primarily due to
decreased utilization of our capacity and our significant fixed
costs at our factories.
Test Gross Profit. Gross profit for test
increased $0.7 million to $42.7 million, or 30.2% of
test net sales, in the six months ended June 30, 2007 from
$42.0 million, or 31.8% of test net sales, in the six
months ended June 30, 2006. This increase was primarily due
to increased volume partially offset by increased depreciation
costs as a result of our capital expenditures.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses increased $4.9 million, or 4.0%, to
$125.0 million for the six months ended June 30, 2007,
from $120.2 million for the six months ended June 30,
2006 reflecting higher spending for professional fees, indirect
factory costs and incentive compensation partially offset by a
gain recognized on the disposition of real property used for
administrative purposes.
Other (Income) Expense. Other expenses, net,
decreased $31.3 million to $88.6 million, or 6.8% of
net sales, for the six months ended June 30, 2007 from
$119.9 million, or 9.0% of net sales, for the six months
ended June 30, 2006. In the six months ended June 30,
2007 and 2006, we recognized $15.9 million and
$27.4 million, respectively, of debt retirement costs, net.
In addition, there was a decrease of $15.7 million in net
interest expense in the six months ended June 30, 2007
compared to the six months ended June 30, 2006, due to our
continued focus to strengthen our liquidity by reducing debt as
well as refinancing debt with lower interest rate instruments.
Income Tax Expense. Income tax expense for the
six months ended June 30, 2007 and 2006 is attributable to
foreign withholding taxes and income taxes at certain of our
profitable foreign operations. For the full year of 2007, we
anticipate an effective income tax rate of approximately 9.2%,
which reflects the utilization of foreign net operating loss
carryforwards and tax holidays in certain foreign jurisdictions.
The effective rate for the six months ended June 30, 2007
was 11.2% and 8.7% for the six months ended June 30, 2006.
The increase is primarily
28
attributable to a change in the mix of income reported in tax
jurisdictions with varying tax rates. Additionally, the
effective tax rate for the six months ended June 30, 2007
reflects certain discrete period items recorded in the first and
second quarters of 2007. We maintain a full valuation allowance
on substantially all of our deferred tax assets, including our
net operating loss carryforwards, and will release such
valuation allowance as the related deferred tax benefits are
realized on our tax returns or when sufficient net positive
evidence exists to conclude that the deferred tax assets will be
realized.
At June 30, 2007, we had U.S. net operating loss
carryforwards totaling $400.6 million, which expire at
various times through 2027. Additionally, we had
$46.6 million of
non-U.S. net
operating loss carryforwards, which expire at various times
through 2012.
Liquidity
and Capital Resources
We generated net income of $65.6 and $58.2 for the six months
ended June 30, 2007 and 2006, respectively. During the
second quarter of 2007 and 2006, we recorded in connection with
refinancing transactions $15.9 million and
$27.9 million of net debt retirement costs, respectively.
Our operating activities provided cash totaling $254.0 and
$239.8 in the six months ended June 30, 2007 and 2006,
respectively. In March 2007, we used existing cash resources to
retire the remaining $142.4 million in 5% convertible notes
at maturity, and in June 2007 we redeemed the remaining
$21.9 million of the 2009 10.5% senior subordinated
notes outstanding with cash on hand.
In April 2007, we entered into a $300.0 million,
7-year
secured credit facility with Woori Bank (Term Loan).
The Term Loan is secured by substantially all the land,
factories, and equipment located at our Korean facilities. The
Term Loan bears interest at Wooris base rate plus
50 basis points (6.6% as of June 30, 2007) and
amortizes in 28 equal quarterly payments through April 2014. The
proceeds of the Term Loan were used to refinance our existing
$300.0 million second lien term loan due, October 2010,
which bore interest at a rate of LIBOR plus 450 basis
points (9.86% at March 31, 2007). This financing
transaction, together with payment of prepayment fees and
accrued and unpaid interest, fully discharged all of our
obligations under the second lien term loan and fully discharged
all subsidiary guarantees and releases all the collateral
securing the second lien term loan.
We have a significant level of debt, with $1,812.7 million
outstanding at June 30, 2007, of which $159.3 million
is current. The terms of such debt require significant scheduled
principal payments in the coming years, including
$34.3 million during the remainder of 2007,
$154.1 million in 2008, $54.7 million in 2009,
$54.7 million in 2010, $482.6 million in 2011 and
$1,032.3 million thereafter.
The interest payments required on our debt are also substantial.
For example, in the six months ended June 30, 2007, we paid
$71.1 million of interest. (See Capital Additions and
Contractual Obligations below for a summary of principal
and interest payments.) We were in compliance with all debt
covenants at June 30, 2007 and expect to remain in
compliance with these covenants through June 30, 2008.
We operate in a capital intensive industry. Servicing our
current and future customers requires that we incur significant
operating expenses and continue to make significant capital
expenditures, which are generally made in advance of the related
revenues and without any firm customer commitments. During the
first half of 2007, we had capital additions of
$114.8 million and for all of 2007 we currently anticipate
making capital additions in the range of $275 million to
$300 million, which estimate is subject to adjustment based
on business conditions. Our 2007 capital additions budget
remains focused on strategic growth areas of wafer bump, test
and flip chip packaging.
The source of funds for our operations, including making capital
expenditures and servicing principal and interest obligations
with respect to our debt, are cash flows from our operations,
current cash and cash equivalents, borrowings under available
debt facilities, or proceeds from any additional debt or equity
financing. As of June 30, 2007, we had cash and cash
equivalents of $238.4 million and $99.8 million
available under our senior secured revolving credit facility.
We assess our liquidity based on our current expectations
regarding sales, operating expenses, capital spending and debt
service requirements. Based on this assessment, we believe that
our cash flow from operating activities together with existing
cash and cash equivalents and availability under our senior
secured revolving credit facility will be sufficient to fund our
working capital, capital expenditure and debt service
requirements through at least June 30, 2008. Thereafter,
our liquidity will continue to be affected by, among other
things, the performance of our
29
business, our capital expenditure levels and our ability to
either repay debt out of operating cash flow or refinance debt
with the proceeds of debt or equity offerings at or prior to
maturity. If our performance or access to the capital markets
differs materially from our expectations, our liquidity may be
adversely impacted.
If we fail to generate the necessary net income or operating
cash flows to meet the funding needs of our business beyond
June 30, 2008 due to a variety of factors, including the
cyclical nature of the semiconductor industry and the other
factors discussed in Part II, Item 1A Risk
Factors, our liquidity would be adversely affected. We
would consider taking a variety of actions, including:
attempting to reduce our high fixed costs (for example, closing
facilities and reducing the size of our work force), curtailing
or reducing planned capital additions, raising additional
equity, borrowing additional funds, refinancing existing
indebtedness or taking other actions. There can be no assurance,
however, that we will be able to successfully take any of these
actions, including adjusting our expenses sufficiently or in a
timely manner, or raising additional equity, increasing
borrowings or completing refinancings on any terms or on terms
which are acceptable to us. Our inability to take these actions
as and when necessary would materially adversely affect our
liquidity, results of operations and financial condition.
Many of our debt agreements restrict our ability to pay
dividends. We have never paid a dividend to our shareholders and
we do not anticipate paying any cash dividends in the
foreseeable future. We expect cash flows, if any, to be used in
the operation and expansion of our business and the repayment of
debt.
Cash
flows
Cash provided by operating activities was $254.0 million
for the six months ended June 30, 2007 compared to
$239.8 million for the six months ended June 30, 2006.
Free cash flow (defined below) increased by $81.4 million
to $151.8 million for the six months ended June 30,
2007 compared to $70.3 million for the six months ended
June 30, 2006.
Net cash provided by (used in) operating, investing and
financing activities for the six months ended June 30, 2007
and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
$
|
253,983
|
|
|
$
|
239,806
|
|
Investing activities
|
|
|
(99,115
|
)
|
|
|
(168,136
|
)
|
Financing activities
|
|
|
(161,329
|
)
|
|
|
(135,804
|
)
|
Operating activities: Our cash flow from
operating activities for the six months ended June 30, 2007
increased $14.2 million to $254.0 million from
$239.8 million for the six months ended June 30, 2006.
This increase in operating cash flows is a result of positive
changes in assets and liabilities and lower interest paid offset
by a decrease in our operating income and the payment of
prepayment fees in connection with a refinancing. Our operating
income adjusted for depreciation and amortization expenses and
other operating activities and non-cash items decreased
$26.8 million largely attributed to decreased utilization
of our capacity and our significant fixed costs at our factories
together with increased selling, general and administrative
costs. Interest expense for the six months ended June 30,
2007 decreased by $15.7 million as compared with the six
months ended June 30, 2006 as a result of reduced debt
levels as well as refinancing debt with lower interest rate
instruments. Operating cash flows for the six months ended
June 30, 2007 were reduced by $9.0 million in
prepayment fees in connection with refinancing our second lien
term loan. Changes in assets and liabilities increased operating
cash flows by $33.4 million for the six months ended
June 30, 2007 compared with the six months ended
June 30, 2006 driven largely by reduced levels of
receivables, inventory and accounts payable in line with the
reduced unit volumes and changes in sales mix as well as an
increase in employee benefit liabilities. Other changes in
operating activities including foreign currency losses, other
income and expenses, taxes and minority interest explained
$0.9 million of the increase in operating cash flows.
Investing activities: Our cash flows used in
investing activities for the six months ended June 30, 2007
decreased by $69.0 million to $99.1 million from
$168.1 million for the six months ended June 30, 2006.
This decrease was primarily due to a $67.3 million decrease
in payments for property, plant and equipment from
30
$169.5 million in the six months ended June 30, 2006
to $102.2 million in the six months ended June 30,
2007. Investing activities were higher in 2006 principally as a
result of our expansion of our facilities in China and
Singapore. Investing activities during the six months ended
June 30, 2007 included increased proceeds from the sale of
property, plant and equipment of $3.2 million primarily
driven by a sale of real property in Korea used for
administrative purposes.
Financing activities: Our net cash used in
financing activities for the six months ended June 30, 2006
was $135.8 million, compared with $161.3 million for
the six months ended June 30, 2007. The net cash used in
financing activities for the six months ended June 30, 2007
was primarily driven by the repayment of the $142.4 million
of our 5% convertible notes at maturity in March 2007, and the
redemption of the remaining $21.9 million 2009
10.5% senior subordinated notes in June 2007. The net cash
used in financing activities for the six months ended
June 30, 2006 was primarily driven by the repayment of the
$132.0 million for our 5.75% convertible subordinated notes
at maturity in June 2006. Proceeds from the issuance of stock
through our stock compensation plans for the six months ended
June 30, 2007 was $34.5 million, compared with
$5.0 million for the six months ended June 30, 2006.
We provide the following supplemental data to assist our
investors and analysts in understanding our liquidity and
capital resources. Free cash flow represents net cash provided
by operating activities less investing activities related to the
acquisition of property, plant and equipment. Free cash flow is
not defined by generally accepted accounting principles
(GAAP) and our definition of free cash flow may not
be comparable to similar companies and should not be considered
a substitute for cash flow measures in accordance with GAAP. We
believe free cash flow provides our investors and analysts
useful information to analyze our liquidity and capital
resources.
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating
activities
|
|
$
|
253,983
|
|
|
$
|
239,806
|
|
Less purchases of property, plant
and equipment
|
|
|
(102,212
|
)
|
|
|
(169,469
|
)
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
151,771
|
|
|
$
|
70,337
|
|
|
|
|
|
|
|
|
|
|
Debt
Instruments and Related Covenants
We now have, and for the foreseeable future will continue to
have, a significant amount of indebtedness. Our indebtedness
requires us to dedicate a substantial portion of our cash flow
from operations to service payments on our debt. (See table
included in Capital Additions and Contractual
Obligations below). Total debt decreased to
$1,812.7 million at June 30, 2007 from $2,005.3 at
December 31, 2006. In March 2007, we used existing cash
resources to retire the remaining $142.4 million in 5%
convertible notes at maturity. In June 2007, we redeemed the
remaining $21.9 million of the 2009 10.5% Senior
Subordinated Notes outstanding with cash on hand. Amkor
Technology, Inc. also guarantees certain debt of our
subsidiaries.
We were in compliance with all our debt covenants contained in
our loan agreements at June 30, 2007. Additional details
about our debt are available in Note 11 accompanying the
unaudited Consolidated Financial Statements included within
Part I, Item 1 of this quarterly report.
31
Capital
Additions and Contractual Obligations
Our capital additions were $114.8 million for the six
months ended June 30, 2007. We expect that our full year
2007 capital additions will be in the range of $275 million
to $300 million, as discussed above in the
Overview. Ultimately, the amount of our 2007 capital
additions will depend on several factors including, among
others, the performance of our business, the need for additional
capacity to service anticipated customer demand and the
availability of suitable cash flow from operations or financing.
The following table reconciles our activity related to property,
plant and equipment payments as presented on the Condensed
Consolidated Statements of Cash Flow statement to property,
plant and equipment additions as reflected in the Consolidated
Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Payments for property, plant, and
equipment
|
|
$
|
102,212
|
|
|
$
|
169,469
|
|
Net increase in related accounts
payable and deposits
|
|
|
12,607
|
|
|
|
26,805
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
additions
|
|
$
|
114,819
|
|
|
$
|
196,274
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our contractual obligations at
June 30, 2007, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2007 Remaining
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Total debt(1)
|
|
$
|
1,812,709
|
|
|
$
|
34,326
|
|
|
$
|
154,108
|
|
|
$
|
54,686
|
|
|
$
|
54,728
|
|
|
$
|
482,541
|
|
|
$
|
1,032,320
|
|
Scheduled interest payment
obligations(2)
|
|
|
723,549
|
|
|
|
62,008
|
|
|
|
118,228
|
|
|
|
113,995
|
|
|
|
110,656
|
|
|
|
89,797
|
|
|
|
228,865
|
|
Purchase obligations(3)
|
|
|
51,844
|
|
|
|
51,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
46,671
|
|
|
|
2,958
|
|
|
|
5,612
|
|
|
|
3,917
|
|
|
|
3,687
|
|
|
|
3,822
|
|
|
|
26,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
2,634,773
|
|
|
$
|
151,136
|
|
|
$
|
277,948
|
|
|
$
|
172,598
|
|
|
$
|
169,071
|
|
|
$
|
576,160
|
|
|
$
|
1,287,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The decrease in our total debt from the Annual Report on
Form 10-K
as of December 31, 2006, is primarily driven by the
repayment of $142.4 million of our 5% convertible notes at
maturity in March 2007, and $21.9 million for the
redemption of the remaining 10.5% Senior Subordinated 2009
Notes outstanding in June 2007. |
|
(2) |
|
Scheduled interest payment obligations were calculated using
stated coupon rates for fixed rate debt and interest rates
applicable at June 30, 2007 for variable rate debt. |
|
(3) |
|
Includes $40.3 million of capital-related purchase
obligations. |
In addition to the obligations identified in the table above,
non-current liabilities recorded in our unaudited Consolidated
Balance Sheet at June 30, 2007, include $195.1 million
related to pension and severance obligations, which the timing
of the ultimate payment of these obligations was uncertain at
June 30, 2007. Additionally, $20.4 million of customer
advances are included in non-current liabilities and relate to
supply agreements with customers where we commit capacity in
exchange for customer prepayment of services. Generally
customers forfeit the prepayment if the capacity is not utilized
per contract terms.
The table above excludes liabilities we have with respect
to unrecognized tax benefits. As discussed in Note 4 to our
unaudited Consolidated Financial Statements, we adopted the
provisions of FIN 48 on January 1, 2007. At June 30,
2007 the gross amount of our unrecognized tax benefits was
approximately $11.6 million, which does not generally represent
future cash payments because of the interaction with other tax
attributes available such as net operating loss or tax credit
carryforwards. Due to the high degree of uncertainty regarding
the amount and the timing of any future cash outflows associated
with our FIN 48 liabilities, we are unable to reasonably
estimate the amount and period of ultimate settlement with the
various taxing authorities. As management would expect cash
outflows with respect to FIN 48 liabilities to occur over
an indeterminate number of future years, it is unlikely that any
payment of existing liabilities would have a material adverse
affect on our liquidity in any future period.
32
Off-Balance
Sheet Arrangements
We had no off-balance sheet guarantees or other off-balance
sheet arrangements as of June 30, 2007. Operating lease
commitments are included in the contractual obligation table
above.
Contingencies,
Indemnifications and Guarantees
Details about the companys contingencies, indemnifications
and guarantees are available in Note 14 accompanying the
unaudited Consolidated Financial Statements included within
Part I, Item 1 of this quarterly report. As for our
contingencies related to our patent litigation, securities
litigation, and other litigation and legal matters, if an
unfavorable ruling were to occur, there exists the possibility
of a material adverse impact on our results of operations in the
period in which the ruling occurs. The estimate of the potential
impact from the legal proceedings, discussed in Note 14
accompanying the unaudited Consolidated Financial Statements, on
our financial position, results of operations, or cash flows,
could change in the future.
Critical
Accounting Policies
Our critical accounting policies are disclosed in our Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2006. During the six
months ended June 30, 2007, there have been no significant
changes in our critical accounting policies.
New
Accounting Pronouncements
For information regarding recent accounting pronouncements, see
Note 1 to the unaudited Consolidated Financial Statements
included within Part I, Item 1 of this quarterly
report.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market
Risk Sensitivity
We are exposed to market risks, primarily related to foreign
currency and interest rate fluctuations. In the normal course of
business, we employ established policies and procedures to
manage the exposure to fluctuations in foreign currency values
and changes in interest rates. Our use of derivative
instruments, including forward exchange contracts, has been
historically insignificant, and it is expected that our use of
derivative instruments will continue to be minimal.
Foreign
Currency Risks
Our primary exposures to foreign currency fluctuations are
associated with transactions and related assets and liabilities
denominated in Chinese renminbi, Japanese yen, Korean won,
Philippine pesos, Singapore dollar, and Taiwanese dollar. The
objective in managing these foreign currency exposures is to
minimize the risk through minimizing the level of activity and
financial instruments denominated in those currencies. Our
foreign currency financial instruments primarily consist of
cash, trade receivables, investments, deferred taxes, trade
payables, accrued expenses and debt.
For an entity with various financial instruments denominated in
a foreign currency in a net asset position, an increase in the
exchange rate would result in less net assets when converted to
U.S. dollars. Conversely, for an entity with various
financial instruments denominated in a foreign currency in a net
liability position, a decrease in the exchange rate would result
in more net liabilities when converted to U.S. dollars.
Changes period over period are caused by changes in our net
asset or net liability position and changes in currency exchange
rates. Based on our portfolio of foreign currency based
financial instruments at June 30, 2007 and
December 31, 2006, a 20% increase
33
(decrease) in the foreign currency to U.S. dollar spot
exchange rate would result in the following foreign currency
risk for our entities in a net asset (liability) position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chart of Foreign Currency Risk
|
|
|
|
Chinese
|
|
|
Japanese
|
|
|
Korean
|
|
|
Philippine
|
|
|
Singapore
|
|
|
Taiwanese
|
|
|
|
Renminbi
|
|
|
Yen
|
|
|
Won
|
|
|
Peso
|
|
|
Dollar
|
|
|
Dollar
|
|
|
|
(In thousands)
|
|
|
As of June 30, 2007
|
|
$
|
(1,585
|
)
|
|
$
|
1,934
|
|
|
$
|
(1,378
|
)
|
|
$
|
(9,423
|
)
|
|
$
|
(458
|
)
|
|
$
|
(10,110
|
)
|
As of December 31, 2006
|
|
|
(2,178
|
)
|
|
|
2,048
|
|
|
|
(4,750
|
)
|
|
|
(3,734
|
)
|
|
|
(992
|
)
|
|
|
(10,861
|
)
|
In addition, at June 30, 2007 and December 31, 2006,
we had other foreign currency denominated liabilities, including
denominations of the Euro, Swiss franc and Great Britain pound,
whereby a 20% decrease in the related exchange rates would
result in an aggregate of less than $0.1 million of
additional foreign currency risk.
Interest
Rate Risks
We have interest rate risk with respect to our long-term debt.
As of June 30, 2007, we had a total of
$1,812.7 million of debt of which 80.4% was fixed rate debt
and 19.6% was variable rate debt. Our variable rate debt
principally relates to our foreign borrowings and any amounts
outstanding under our $100.0 million revolving line of
credit, of which no amounts were drawn as of June 30, 2007
but which had been reduced by $0.2 million related to
outstanding letters of credit at that date. The fixed rate debt
consists of senior notes, senior subordinated notes and
subordinated notes. In April 2007, our second lien term loan was
refinanced with a new term loan which is also a variable
interest rate debt. As of December 31, 2006, we had a total
of $2,005.3 million of debt of which 80.9% was fixed rate
debt and 19.1% was variable rate debt. Changes in interest rates
have different impacts on our fixed and variable rate portions
of our debt portfolio. A change in interest rates on the fixed
portion of the debt portfolio impacts the fair value of the
instrument but has no impact on interest incurred or cash flows.
A change in interest rates on the variable portion of the debt
portfolio impacts the interest incurred and cash flows but does
not impact the fair value of the instrument. The fair value of
the convertible notes is also impacted by changes in the market
price of our common stock.
The table below presents the interest rates, maturities and fair
value of our fixed and variable rate debt as of June 30,
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Long term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt
|
|
$
|
1,667
|
|
|
$
|
91,539
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
438,993
|
|
|
$
|
925,000
|
|
|
$
|
1,457,199
|
|
|
$
|
1,618,135
|
|
Average interest rate
|
|
|
4.9
|
%
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
5.1
|
%
|
|
|
8.2
|
%
|
|
|
7.4
|
%
|
|
|
|
|
Variable rate debt
|
|
$
|
32,659
|
|
|
$
|
62,569
|
|
|
$
|
54,686
|
|
|
$
|
54,728
|
|
|
$
|
43,548
|
|
|
$
|
107,320
|
|
|
$
|
355,510
|
|
|
$
|
355,510
|
|
Average interest rate
|
|
|
5.6
|
%
|
|
|
5.8
|
%
|
|
|
6.2
|
%
|
|
|
6.2
|
%
|
|
|
6.7
|
%
|
|
|
6.7
|
%
|
|
|
6.3
|
%
|
|
|
|
|
Equity
Price Risks
We have convertible notes that are convertible into our common
stock. We currently intend to repay our remaining convertible
notes upon maturity, unless converted, repurchased or
refinanced. If investors were to decide to convert their notes
to common stock, our future earnings would benefit from a
reduction in interest expense and our common stock outstanding
would be increased. If we paid a premium to induce such
conversion, our earnings could include an additional charge.
Further, the trading price of our common stock has been and is
likely to continue to be highly volatile and could be subject to
wide fluctuations. Such fluctuations could impact our decision
or ability to utilize the equity markets as a potential source
of our funding needs in the future.
34
|
|
Item 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
periodic reports to the Securities and Exchange Commission
(SEC) is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and
communicated to our management, including the Chief Executive
Officer and the Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure, based on
the definition of disclosure controls and procedures
in
Rule 13a-15(e)
and
Rule 15d-15(e)
under the Securities Exchange Act of 1934. In
designing and evaluating the disclosure controls and procedures,
management recognizes that any disclosure controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management necessarily is required to
apply its judgment in evaluating the cost-benefit relationship
of possible disclosure controls and procedures.
We carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and
procedures as of June 30, 2007. Based on the foregoing, our
Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures were
effective as of June 30, 2007.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during our most recent quarter that have
materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
In July 2007 we implemented, as planned, several significant
modules of our new enterprise resource planning
(ERP) system at our largest subsidiary which has
materially affected our business processes and internal control
over financial reporting beginning in the third quarter of 2007.
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
Information about legal proceedings is set forth in Note 14
to the Consolidated Financial Statements included in this
quarterly report.
RISK
FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
The factors discussed below are cautionary statements that
identify important factors that could cause actual results to
differ materially from those anticipated by the forward-looking
statements contained in this report. For more information
regarding the forward-looking statements contained in this
report, see the introductory paragraph to Part I,
Item 2 of this quarterly report. You should carefully
consider the risks and uncertainties described below, together
with all of the other information included in this report, in
considering our business and prospects. The risks and
uncertainties described below are not the only ones facing
Amkor. Additional risks and uncertainties not presently known to
us also may impair our business operations. The occurrence of
any of the following risks could affect our business, financial
condition or results of operations.
The
matters relating to the Special Committees review of our
historical stock option granting practices and the restatement
of our consolidated financial statements has resulted in
expanded litigation and regulatory proceedings against us and
may result in future litigation, which could have a material
adverse effect on us.
On July 24, 2006, we established a Special Committee,
consisting of independent members of the Board of Directors, to
conduct a review of our historical stock option granting
practices during the period from our initial
35
public offering on May 1, 1998 through June 30, 2006.
As previously disclosed, the Special Committee identified a
number of occasions on which the measurement date used for
financial accounting and reporting purposes for stock options
granted to certain of our employees was different from the
actual grant date. To correct these accounting errors, we
amended our Annual Report on
Form 10-K
for the year ended December 31, 2005 and our Quarterly
Report on
Form 10-Q
for the three months ended March 31, 2006, to restate our
financial information from 1998 through March 31, 2006. The
review of our historical stock option granting practices,
related activities and the resulting restatements, required us
to incur substantial expenses for legal, accounting, tax and
other professional services and diverted our managements
attention from our business and could in the future adversely
affect our business, financial condition, results of operations
and cash flows.
Our historical stock option granting practices and the
restatement of our prior financial statements have exposed us to
greater risks associated with litigation and regulatory
proceedings. As described in Note 14 to our consolidated
financial statements, the complaints in several of our existing
litigation matters were subsequently amended to include
allegations relating to stock option grants. In addition, the
scope of the existing SEC investigation that began in August
2005 has been expanded to include an investigation into our
historical stock option grant practices. We cannot assure you
that this litigation, the SEC investigation or any future
litigation or regulatory action will result in the same
conclusions reached by the Special Committee. The conduct and
resolution of these matters will be time consuming, expensive
and distracting from the conduct of our business. Furthermore,
if we are subject to adverse findings in any of these matters,
we could be required to pay damages or penalties or have other
remedies imposed upon us which could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
As a result of our delayed filing of
Form 10-Q
for the quarter ended June 30, 2006, we will be ineligible
to register our securities on
Form S-3
for sale by us or resale by others until we have timely filed
all periodic reports under the Securities Exchange Act of 1934
for one year from the date the
Form 10-Q
for the quarter ended June 30, 2006 was due. We may use
Form S-1
to raise capital or complete acquisitions, which could increase
transaction costs and adversely impact our ability to raise
capital or complete acquisitions of other companies in a timely
manner.
Pending
SEC Investigation The Pending SEC Investigation
Could Adversely Affect Our Business and the Trading Price of Our
Securities.
In August 2005, the SEC issued a formal order of investigation
regarding certain activities with respect to Amkor securities.
We previously announced that the primary focus of the
investigation appears to be activities during the period from
June 2003 to July 2004. We believe that the investigation in
part relates to transactions in Amkors securities by
certain individuals, and that the investigation may in part
relate to whether tipping with respect to trading in Amkor
securities occurred. The matters at issue involve activities
with respect to Amkor securities during the subject period by
certain insiders or former insiders and persons or entities
associated with them, including activities by or on behalf of
certain current and former members of the Board of Directors and
Amkors Chief Executive Officer. We have learned that our
former general counsel, whose employment with us terminated in
March of 2005, has been indicted by the United States
Attorneys Office for the Eastern District of Pennsylvania
for violation of the securities laws. The indictment alleges
that the former general counsel traded in Amkor securities on
the basis of material non-public information. We have also
learned that the SEC has filed a civil action against our former
general counsel based on substantially the same allegations as
contained in the indictment.
In July 2006, the Board of Directors established a Special
Committee to review Amkors historical stock option
practices and informed the SEC of these efforts. The SEC
subsequently informed us that it is expanding the scope of its
investigation and has requested that Amkor provide documentation
related to these matters. We have cooperated fully with the SEC
on the formal investigation and the informal inquiry that
preceded it. We cannot predict the outcome of the investigation.
In the event that the investigation leads to SEC action against
any current or former officer or director of Amkor, or Amkor
itself, our business (including our ability to complete
financing transactions) or the trading price of our securities
may be adversely impacted. In addition, if the SEC investigation
continues for a prolonged period of time, it may have the same
impact regardless of the ultimate outcome of the investigation.
Additionally, we have voluntarily provided information to the
Department of Justice relating to our historical stock option
practices.
36
Fluctuations
in Operating Results and Cash Flows Our Operating
Results and Cash Flows Have Varied and May Vary Significantly as
a Result of Factors That We Cannot Control.
Many factors could materially and adversely affect our net
sales, gross profit, operating results and cash flows, or lead
to significant variability of quarterly or annual operating
results. Our profitability and ability to generate cash from
operations is principally dependent upon demand for
semiconductors, the utilization of our capacity, semiconductor
package mix, the average selling price of our services and our
ability to control our costs including labor, material, overhead
and financing costs.
Our operating results and cash flows have varied significantly
from period to period. Our net sales, gross margins, operating
income and cash flows have historically fluctuated significantly
as a result of many of the following factors, for which we have
little or no control over and which we expect to continue to
impact our business:
|
|
|
|
|
Fluctuation in demand for semiconductors and conditions in the
semiconductor industry;
|
|
|
|
changes in our capacity utilization;
|
|
|
|
changes in average selling prices;
|
|
|
|
changes in the mix of semiconductor packages;
|
|
|
|
evolving package and test technology;
|
|
|
|
absence of backlog and the short-term nature of our
customers commitments and the impact of these factors on
the timing and volume of orders relative to our production
capacity;
|
|
|
|
changes in costs, availability and delivery times of raw
materials and components;
|
|
|
|
changes in labor costs to perform our services;
|
|
|
|
the timing of expenditures in anticipation of future orders;
|
|
|
|
changes in effective tax rates;
|
|
|
|
the availability and cost of financing;
|
|
|
|
intellectual property transactions and disputes;
|
|
|
|
high leverage and restrictive covenants;
|
|
|
|
warranty and product liability claims;
|
|
|
|
costs associated with litigation judgments and settlements;
|
|
|
|
international events or environmental or natural events, such as
earthquakes, that impact our operations;
|
|
|
|
difficulties integrating acquisitions; and
|
|
|
|
our ability to attract qualified employees to support our
geographic expansion.
|
We have historically been unable to accurately predict the
impact of these factors upon our results for a particular
period. These factors, as well as the factors set forth below
which have not significantly impacted our recent historical
results, may impair our future business operations and may
materially and adversely affect our net sales, gross profit,
operating results and cash flows, or lead to significant
variability of quarterly or annual operating results:
|
|
|
|
|
loss of key personnel or the shortage of available skilled
workers;
|
|
|
|
rescheduling and cancellation of large orders; and
|
|
|
|
fluctuations in our manufacturing yields.
|
37
Dependence
on the Highly Cyclical Semiconductor and Electronic Products
Industries We Operate in Volatile Industries, and
Industry Downturns Harm Our Performance.
Our business is tied to market conditions in the semiconductor
industry, which is cyclical by nature. The semiconductor
industry has experienced significant, and sometimes prolonged,
downturns. Because our business is, and will continue to be,
dependent on the requirements of semiconductor companies for
subcontracted packaging and test services, any downturn in the
semiconductor industry or any other industry that uses a
significant number of semiconductor devices, such as consumer
electronic products, telecommunication devices, or computing
devices could have a material adverse effect on our business and
operating results. If industry conditions deteriorate, we could
suffer significant losses, as we have in the past, which could
materially impact our business, results of operations and
financial condition.
High
Fixed Costs Due to Our High Percentage of Fixed
Costs, We Will Be Unable to Maintain Our Gross Margin at Past
Levels if We Are Unable to Achieve Relatively High Capacity
Utilization Rates.
Our operations are characterized by relatively high fixed costs.
Our profitability depends in part not only on pricing levels for
our products and services, but also on the utilization rates for
our testing and packaging equipment, commonly referred to as
capacity utilization rates. In particular, increases
or decreases in our capacity utilization rates can significantly
affect gross margins since the unit cost of packaging and test
services generally decreases as fixed costs are allocated over a
larger number of units. In periods of low demand, we experience
relatively low capacity utilization rates in our operations,
which lead to reduced margins during that period. From time to
time we have experienced lower than optimum utilization rates in
our operations due to a decline in worldwide demand for our
packaging and test services. This can lead to significantly
reduced margins during that period. Although our capacity
utilization rates at times have been strong, we cannot assure
you that we will be able to achieve or maintain relatively high
capacity utilization rates, and if we fail to do so, our gross
margins may decrease. If our gross margins decrease, our results
of operations and financial condition could be materially
adversely affected.
In addition, our fixed operating costs have increased in part as
a result of our efforts to expand our capacity through
significant capital additions in connection with the opening of
a wafer bump facility in Singapore in 2006. In the event that
forecasted customer demand for which we have made and, on a more
limited basis, expect to make advance capital additions does not
materialize, our sales may not adequately cover our substantial
fixed costs resulting in reduced profit levels or causing
significant losses, both of which may adversely impact our
liquidity, results of operations and financial condition.
Additionally, we could suffer significant losses if current
industry conditions deteriorate, which could materially impact
our business including our liquidity.
Guidance
Our Failure to Meet Our Guidance or Analyst Projections Could
Adversely Impact the Trading Prices of Our
Securities.
We periodically provide guidance to investors with respect to
certain financial information for future periods. Securities
analysts also periodically publish their own projections with
respect to our future operating results. As discussed above
under Fluctuations in Operating Results and Cash
Flows Our Operating Results and Cash Flows Have
Varied and May Vary Significantly as a Result of Factors That We
Cannot Control, our operating results and cash flow vary
significantly and are difficult to accurately predict. To the
extent we fail to meet or exceed our own guidance or the analyst
projections for any reason, the trading prices of our securities
may be adversely impacted. Moreover, even if we do meet or
exceed that guidance or those projections, the analysts and
investors may not react favorably, and the trading prices of our
securities may be adversely impacted.
Declining
Average Selling Prices The Semiconductor Industry
Places Downward Pressure on the Prices of Our
Products.
Prices for packaging and test services have generally declined
over time. Historically, we have been able to partially offset
the effect of price declines by successfully developing and
marketing new packages with higher prices, such as advanced
leadframe and laminate packages, by negotiating lower prices
with our material vendors, recovering material cost increases
from our customers, and by driving engineering and technological
changes in our
38
packaging and test processes which resulted in reduced
manufacturing costs. We expect general downward pressure on
average selling prices for our packaging and test services in
the future. If we are unable to offset a decline in average
selling prices, including developing and marketing new packages
with higher prices, reducing our purchasing costs, recovering
more of our material cost increases from our customers and
reducing our manufacturing costs, our future operating results
will suffer.
Decisions
by Our IDM Customers to Curtail Outsourcing May Adversely Affect
Our Business.
Historically, we have been dependent on the trend in outsourcing
of packaging and test services by integrated device
manufacturers (IDM). Our IDM customers continually
evaluate the outsourced services against their own in-house
packaging and test services. As a result, at any time, and for a
variety of reasons, IDMs may decide to shift some or all of
their outsourced packaging and test services to internally
sourced capacity.
The reasons IDMs may shift their internal capacity include:
|
|
|
|
|
their desire to realize higher utilization of their existing
test and packaging capacity, especially during downturns in the
semiconductor industry;
|
|
|
|
their unwillingness to disclose proprietary technology;
|
|
|
|
their possession of more advanced packaging and test
technologies; and
|
|
|
|
the guaranteed availability of their own packaging and test
capacity.
|
Furthermore, to the extent we continue to limit capacity
commitments for certain customers, these customers may begin to
increase their level of in-house packaging and test
capabilities, which could adversely impact our sales and
profitability and make it more difficult for us to regain their
business when we have available capacity. Any shift or a
slowdown in this trend of outsourcing packaging and test
services is likely to adversely affect our business, financial
condition and results of operations.
In a downturn in the semiconductor industry, IDMs may be
especially likely to respond by shifting some outsourced
packaging and test services to internally serviced capacity on a
short term basis. This would have a material adverse effect on
our business, financial condition and results of operations,
especially during a prolonged industry downturn.
High
Leverage and Restrictive Covenants Our Substantial
Indebtedness Could Adversely Affect Our Financial Condition and
Prevent Us from Fulfilling Our Obligations.
We now have, and for the foreseeable future will continue to
have, a significant amount of indebtedness. As of June 30,
2007, our total debt balance was $1,812.7 million, of which
$159.3 million was classified as a current liability. In
addition, despite current debt levels, the terms of the
indentures governing our indebtedness allow us or our
subsidiaries to incur more debt, subject to certain limitations.
If new debt is added to our consolidated debt level, the related
risks that we now face could intensify.
Covenants in the agreements governing our existing debt, and
debt we may incur in the future, may materially restrict our
operations, including our ability to incur debt, pay dividends,
make certain investments and payments, and encumber or dispose
of assets. The agreements also impose affirmative covenants on
us including financial reporting obligations. In addition,
financial covenants contained in agreements relating to our
existing and future debt could lead to a default in the event
our results of operations do not meet our plans and we are
unable to amend such financial covenants. Bondholder groups may
be aggressive and may attempt to call defaults for technical
violations of covenants that have little or nothing to do with
our financial performance in an effort to extract consent fees
from us or to force a refinancing. A default and acceleration
under one debt instrument may also trigger cross-acceleration
under our other debt instruments. A default or event of default
under one or more of our revolving credit facilities would also
preclude us from borrowing additional funds under such
facilities. An event of default under any debt instrument, if
not cured or waived, could have a material adverse effect on us.
For example, on August 11, 2006, we received a letter dated
August 10, 2006 from U.S. Bank National Association
(US Bank) as trustee for the holders of our
5% Convertible Subordinated Notes due 2007,
39
10.5% Senior Subordinated Notes due 2009, 9.25% Senior
Notes due 2008, 9.25% Senior Notes due 2016,
6.25% Convertible Subordinated Notes Due 2013,
7.75% Senior Notes due 2013 and 2.5% Convertible
Senior Subordinated Notes due 2011 stating that US Bank, as
trustee, had not received our financial statements for the
quarter ended June 30, 2006, and that we have 60 days
from the date of the letter to file our Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 30, 2006 or it will be
considered an Event of Default under the indentures
governing each of the above-listed notes. On the same day, we
received a letter from Wells Fargo Bank National Association
(Wells Fargo), as trustee for our 7.125% Senior
Notes due 2011, stating that we failed to file our Quarterly
Report on
Form 10-Q
for the fiscal quarter ended June 30, 2006, demanding that
we immediately file such quarterly report and indicating that
unless we file a
Form 10-Q
within 60 days after the date of such letter, it will ripen
into an Event of Default under the indenture
governing our 7.125% Senior Notes due 2011.
We cured the alleged defaults described in the US Bank and Wells
Fargo letters by filing our Quarterly Report for the quarter
ended June 30, 2006 within the 60 day period and
avoided the occurrence of an alleged Event of
Default. However, had we not filed our Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006 within the requisite
period, the bondholders may have been able to accelerate all
outstanding amounts under the above listed notes and trigger
acceleration under our other debt agreements, which could have
resulted in a material adverse effect.
Our substantial indebtedness could:
|
|
|
|
|
Make it more difficult for us to satisfy our obligations with
respect to our indebtedness;
|
|
|
|
increase our vulnerability to general adverse economic and
industry conditions;
|
|
|
|
limit our ability to fund future working capital, capital
expenditures, research and development and other general
corporate requirements;
|
|
|
|
require us to dedicate a substantial portion of our cash flow
from operations to service payments on our debt;
|
|
|
|
limit our flexibility to react to changes in our business and
the industry in which we operate;
|
|
|
|
Place us at a competitive disadvantage to any of our competitors
that have less debt; and
|
|
|
|
limit, along with the financial and other restrictive covenants
in our indebtedness, among other things, our ability to borrow
additional funds.
|
History
of Losses.
Although we achieved net income and positive operating cash flow
in 2006 and the first half of 2007, we have had net losses in
four of the previous five years and negative operating cash flow
in several previous quarters. There is no assurance that we will
be able to sustain our current profitability or avoid net losses
in the future.
Ability
to Fund Liquidity Needs.
We operate in a capital intensive industry. Servicing our
current and future customers requires that we incur significant
operating expenses and continue to make significant capital
expenditures, which are generally made in advance of the related
revenues and without any firm customer commitments. During 2006,
we had capital additions of $299 million and in 2007 we
currently anticipate making capital additions of approximately
$275 million to $300 million, which estimate is
subject to adjustment based on business conditions. In addition,
we have a significant level of debt, with $1,812.7 million
outstanding at June 30, 2007, $159.3 million of which
is current. The terms of such debt require significant scheduled
principal payments in the coming years, including
$34.3 million due during the remainder of 2007,
$154.1 million due in 2008, $54.7 million due in 2009,
$54.7 million due in 2010, $482.6 million due in 2011
and $1,032.3 million due thereafter. The interest payments
required on our debt are also substantial. For example, in the
six months ended June 30, 2007, we paid $71.1 million
of interest. (See Part I, Item 2
Managements Discussion and Analysis of Financial
Condition and Results of Operations Capital
Additions and Contractual Obligations for a summary of
principal and interest payments.) The source of funds to fund
our operations, including making capital expenditures and
servicing principal and interest obligations with respect to our
debt, are cash flows from our operations, current cash and cash
equivalents,
40
borrowings under available debt facilities, or proceeds from any
additional debt or equity financing. As of June 30, 2007,
we had cash and cash equivalents of $238.4 million and
$99.8 million available under our senior secured revolving
credit facility.
We assess our liquidity based on our current expectations
regarding sales, operating expenses, capital spending and debt
service requirements. Based on this assessment, we believe that
our cash flow from operating activities together with existing
cash and cash equivalents and availability under our senior
secured revolving credit facility will be sufficient to fund our
working capital, capital expenditure and debt service
requirements through June 30, 2008. Thereafter, our
liquidity will continue to be affected by, among other things,
the performance of our business, our capital expenditure levels
and our ability to repay debt out of our operating cash flow or
refinance the debt with the proceeds of debt or equity offerings
at or prior to maturity. If our performance or access to the
capital markets differs materially from our expectations, our
liquidity may be adversely impacted.
If we fail to generate the necessary net income or operating
cash flows to meet the funding needs of our business beyond
June 30, 2008 due to a variety of factors, including the
cyclical nature of the semiconductor industry and the other
factors discussed in this Risk Factors section, our
liquidity would be adversely affected. We would consider taking
a variety of actions, including: attempting to reduce our high
fixed costs (for example, closing facilities and reducing the
size of our work force), curtailing or reducing planned capital
additions, raising additional equity, borrowing additional
funds, refinancing existing indebtedness or taking other
actions. There can be no assurance, however, that we will be
able to successfully take any of these actions, including
adjusting our expenses sufficiently or in a timely manner, or
raising additional equity, or increasing borrowings or
completing refinancings on any terms or on terms that are
acceptable to us. Our inability to take these actions as and
when necessary would materially adversely affect our liquidity,
results of operations and financial condition.
Absence
of Backlog The Lack of Contractually Committed
Customer Demand May Adversely Affect Our Sales.
Our packaging and test business does not typically operate with
any material backlog. Our quarterly net sales from packaging and
test services are substantially dependent upon our
customers demand in that quarter. None of our customers
have committed to purchase any significant amount of packaging
or test services or to provide us with binding forecasts of
demand for packaging and test services for any future period, in
any material amount. In addition, our customers often reduce,
cancel or delay their purchases of packaging and test services
for a variety of reasons including industry-wide,
customer-specific and Amkor-related reasons. Recently, our
customers demand for our services has been stable;
however, we cannot predict if this demand trend will continue.
Because a large portion of our costs is fixed and our expense
levels are based in part on our expectations of future revenues,
we may not be able to adjust costs in a timely manner to
compensate for any sales shortfall. If we are unable to do so,
it would adversely affect our margins, operating results, cash
flows and financial condition. If customer demand does not
materialize as anticipated, our net sales, margins, operating
results, cash flows and financial condition will be materially
and adversely affected.
Risks
Associated With International Operations We Depend
on Our Factories and Operations in China, Japan, Korea, the
Philippines, Singapore and Taiwan. Many of Our Customers
and Vendors Operations Are Also Located Outside of the
U.S.
We provide packaging and test services through our factories and
other operations located in the China, Japan, Korea, the
Philippines, Singapore and Taiwan. Moreover, many of our
customers and vendors operations are located outside
the U.S. The following are some of the risks inherent in
doing business internationally:
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|
|
|
|
regulatory limitations imposed by foreign governments;
|
|
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fluctuations in currency exchange rates;
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political, military and terrorist risks;
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disruptions or delays in shipments caused by customs brokers or
government agencies;
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unexpected changes in regulatory requirements, tariffs, customs,
duties and other trade barriers;
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41
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difficulties in staffing and managing foreign
operations; and
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potentially adverse tax consequences resulting from changes in
tax laws.
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Our
Management Information Systems May Prove Inadequate
We Face Risks in Connection With Our Current Project to Install
a New Enterprise Resource Planning System For Our
Business.
We depend on our management information systems for many aspects
of our business. Some of our key software has been developed by
our own programmers and this software may not be easily
integrated with other software and systems. We are implementing
a new enterprise resource planning system to replace many of our
existing systems at significant locations. We face risks in
connection with our current project to install a new enterprise
resource system for our business. These risks include:
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we may face delays in the design and implementation of that
system;
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the cost of the system may exceed our plans and
expectations; and
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such system may damage our ability to process transactions or
harm our control environment.
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Our business will be materially and adversely affected if our
management information systems are disrupted or if we are unable
to improve, upgrade, integrate or expand upon our systems,
particularly in light of our intention to implement a new
enterprise resource planning system.
Difficulties
Expanding and Evolving Our Operational Capabilities
We Face Challenges as We Integrate New and Diverse Operations
and Try to Attract Qualified Employees to Support Our
Operations.
We have experienced, and expect to continue to experience,
growth in the scope and complexity of our operations. For
example, each business we have acquired had, at the time of
acquisition, multiple systems for managing its own production,
sales, inventory and other operations. Migrating these
businesses to our systems typically is a slow, expensive process
requiring us to divert significant amounts of resources from
multiple aspects of our operations. This growth has strained our
managerial, financial, plant operations and other resources.
Future expansions may result in inefficiencies as we integrate
new operations and manage geographically diverse operations. Our
success depends to a significant extent upon the continued
service of our key senior management and technical personnel,
any of whom may be difficult to replace. Competition for
qualified employees is intense, and our business could be
adversely affected by the loss of the services of any of our
existing key personnel, including senior management, as a result
of competition or for any other reason. We evaluate our
management team and engage in long-term succession planning in
order to ensure orderly replacement of key personnel. We cannot
assure you that we will be successful in these efforts or in
hiring and properly training sufficient numbers of qualified
personnel and in effectively managing our growth. Our inability
to attract, retain, motivate and train qualified new personnel
could have a material adverse effect on our business.
Dependence
on Materials and Equipment Suppliers Our Business
May Suffer If The Cost, Quality or Supply of Materials or
Equipment Changes Adversely.
We obtain from various vendors the materials and equipment
required for the packaging and test services performed by our
factories. We source most of our materials, including critical
materials such as leadframes, laminate substrates and gold wire,
from a limited group of suppliers. Furthermore, we purchase the
majority of our materials on a purchase order basis. From time
to time, we enter into supply agreements, generally up to one
year in duration, to guarantee supply to meet projected demand.
Our business may be harmed if we cannot obtain materials and
other supplies from our vendors in a timely manner, in
sufficient quantities, in acceptable quality or at competitive
prices.
We need to purchase new test and packaging equipment if we
decide to expand our operations (sometimes in anticipation of
expected market demand), to manufacture some new types of
packaging, perform some different testing or to replace
equipment that breaks down or wears out. From time to time,
increased demand for new equipment may cause lead times to
extend beyond those normally required by equipment vendors. For
example, in the past, increased demand for equipment caused some
equipment suppliers to only partially satisfy our equipment
42
orders in the normal lead time frame or increase prices during
market upturns for the semiconductor industry. The
unavailability of equipment or failures to deliver equipment
could delay implementation of our future expansion plans and
impair our ability to meet customer orders. If we are unable to
implement our future expansion plans or meet customer orders, we
could lose potential and existing customers. Generally, we do
not enter into binding, long-term equipment purchase agreements
and we acquire our equipment on a purchase order basis, which
exposes us to substantial risks. For example, changes in foreign
currency exchange rates could result in increased prices for
equipment purchased by us, which could have a material adverse
effect on our results of operations.
We are a large buyer of gold and other commodity materials
including substrates and copper. The price of gold and other
commodities used in our business fluctuate. Historically, we
have been able to partially offset the effect of commodity price
increases through price adjustments to some customers and
changes in our product designs. Significant price increases may
adversely impact our gross margin in future quarters to the
extent we are unable to pass along past or future commodity
price increases to our customers.
Loss
of Customers The Loss of Certain Customers May Have
a Significant Adverse Effect on the Operations and Financial
Results.
The loss of a large customer or disruption of our strategic
partnerships or other commercial arrangements may result in a
decline in our sales and profitability. Although we have over
300 customers, we have derived and expect to continue to derive
a large portion of our revenues from a small group of customers
during any particular period due in part to the concentration of
market share in the semiconductor industry. Our five largest
customers together accounted for approximately 30.1%, 27.9% and
25.2% of our net sales in the first half of 2007, and the fiscal
years 2006 and 2005, respectively. No customer accounts for more
than 10% of our net sales.
The demand for our services from each customer is directly
dependent upon that customers level of business activity,
which could vary significantly from year to year. The loss of a
large customer may adversely affect our sales and profitability.
Our key customers typically operate in the cyclical
semiconductor business and, in the past, order levels have
varied significantly from period to period based on a number of
factors. Our business is likely to remain subject to this
variability in order levels, and we cannot assure you that these
key customers or any other customers will continue to place
orders with us in the future at the same levels as in past
periods. The loss of one or more of our significant customers,
or reduced orders by any one of them, and our inability to
replace these customers or make up for such orders could reduce
our profitability. For example, our facility in Iwate, Japan, is
primarily dedicated to a single customer, Toshiba Corporation.
If we were to lose Toshiba as a customer or if it were to
materially reduce its business with us, it could be difficult
for us to find one or more new customers to utilize the
capacity, which could have a material adverse effect on our
operations and financial results.
Capital
Additions We Believe We Need To Make Substantial
Capital Additions, Which May Adversely Affect Our Business If
Our Business Does Not Develop As We Expect.
We believe that our business requires us to make significant
capital additions in order to capitalize on what we believe is
an overall trend to outsource packaging and test services. The
amount of capital additions will depend on several factors,
including the performance of our business, our assessment of
future industry and customer demand, our capacity utilization
levels and availability, our liquidity position and the
availability of financing. Our ongoing capital addition
requirements may strain our cash and short-term asset balances,
and we expect that depreciation expense and factory operating
expenses associated with our recent capital additions to
increase production capacity will put downward pressure on our
gross margin, at least over the near term.
Furthermore, if we cannot generate or borrow additional funds to
pay for capital additions as well as research and development
activities, our growth prospects and future profitability may be
adversely affected. Our ability to obtain external financing in
the future is subject to a variety of uncertainties, including:
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our future financial condition, results of operations and cash
flows;
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general market conditions for financing activities by
semiconductor companies; and
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economic, political and other global conditions.
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43
The lead time needed to order, install and put into service
various capital additions is often significant, and as a result
we often need to commit to capital additions in advance of our
receipt of firm orders or advance deposits based on our view of
anticipated future demand with only very limited visibility.
Although we seek to limit our exposure in this regard, in the
past we have from time to time expended significant capital for
additions for which the anticipated demand did not materialize
for a variety of reasons, many of which were outside of our
control. To the extent this occurs in the future, our margins,
liquidity, results of operations and financial condition could
be materially adversely affected.
Impairment
Charges Any Impairment Charges Required Under
GAAP May Have a Material Adverse Effect on Our Net
Income.
Under GAAP, we review our long-lived assets for impairment when
events or changes in circumstances indicate the carrying value
may not be recoverable. In addition, goodwill and other
intangible assets with indefinite lives are tested for
impairment at least annually. We may be required in the future
to record a significant charge to earnings in our financial
statements during the period in which any impairment of our
long-lived assets is determined. Such charges have a significant
adverse impact on our results of operations and financial
condition.
Increased
Litigation Incident to Our Business Our Business May
Suffer as a Result of Our Involvement in Various
Lawsuits.
We are currently a party to various legal proceedings, including
those described in Note 14 to the Consolidated Financial
Statements included in the quarterly report. For example, we are
engaged in an arbitration proceeding entitled Tessera,
Inc. v. Amkor Technology, Inc. We were also named as a
party in a purported securities class action suit entitled
Nathan Weiss et al. v. Amkor Technology, Inc. et al.
(and several similar cases which have now been
consolidated), and in purported shareholder derivative lawsuits
entitled Scimeca v. Kim, et al., Khan v. Kim, et
al. and Feldgus v. Kim, et al. If an unfavorable ruling
or outcome were to occur in arbitration or litigation, there
exists the possibility of a material adverse impact on our
results of operations, financial condition or cash flows. An
unfavorable ruling or outcome could also have a negative impact
on the trading price of our securities. The estimate of the
potential impact from the legal proceedings referred to in this
annual report on our financial condition, results of operations
or cash flows could change in the future.
We
Could Suffer Adverse Tax and Other Financial Consequences if
Taxing Authorities Do Not Agree with Our Interpretation of
Applicable Tax Laws.
Our corporate structure and operations are based, in part, on
interpretations of various tax laws, including withholding tax
and other relevant laws of applicable taxing jurisdictions. From
time to time, the taxing authorities of the relevant
jurisdictions may conduct examinations of our income tax returns
and other regulatory filings. We cannot assure you that the
taxing authorities will agree with our interpretations. To the
extent they do not agree, we may seek to enter into settlements
with the taxing authorities which require significant payments
or otherwise adversely affect our results of operations or
financial condition. We may also appeal the taxing
authorities determinations to the appropriate governmental
authorities, but we can not be sure we will prevail. If we do
not prevail, we may have to make significant payments or
otherwise record charges (or reduce tax assets) that adversely
affect our results of operations or financial condition.
For example, during 2003 the Internal Revenue Service
(IRS) conducted an examination of our
U.S. federal income tax returns relating to years 2000 and
2001, which resulted in a settlement pursuant to which various
adjustments were made, including reductions in our U.S. net
operating loss carryforwards. In addition, during 2005, the IRS
conducted a limited scope examination of our U.S. federal
income tax returns relating to years 2002 and 2003, primarily
reviewing inter-company transfer pricing and cost-sharing issues
carried over from the 2000 and 2001 examination cycle, as a
result of which we agreed to further reductions in our net
operating loss carryforwards. Future examinations by the taxing
authorities in the United States or other jurisdictions may
result in additional adverse tax consequences.
44
Rapid
Technological Change Our Business Will Suffer If We
Cannot Keep Up With Technological Advances in Our
Industry.
The complexity and breadth of semiconductor packaging and test
services are rapidly increasing. As a result, we expect that we
will need to offer more advanced package designs in order to
respond to competitive industry conditions and customer
requirements. Our success depends upon our ability to acquire,
develop and implement new manufacturing processes and package
design technologies and tools. The need to develop and maintain
advanced packaging capabilities and equipment could require
significant research and development and capital expenditures
and acquisitions in future years. In addition, converting to new
package designs or process methodologies could result in delays
in producing new package types, which could adversely affect our
ability to meet customer orders and adversely impact our
business.
Technological advances also typically lead to rapid and
significant price erosion and may make our existing products
less competitive or our existing inventories obsolete. If we
cannot achieve advances in package design or obtain access to
advanced package designs developed by others, our business could
suffer.
Packaging
and Test The Packaging and Test Process Is Complex
and Our Production Yields and Customer Relationships May Suffer
from Defects in the Services We Provide.
Semiconductor packaging and test are complex processes that
require significant technological and process expertise. The
packaging process is complex and involves a number of precise
steps. Defective packages primarily result from:
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contaminants in the manufacturing environment;
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human error;
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equipment malfunction;
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changing processes to address environmental requirements;
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defective raw materials; or
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defective plating services.
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Testing is also complex and involves sophisticated equipment and
software. Similar to most software programs, these software
programs are complex and may contain programming errors or
bugs. The testing equipment is also subject to
malfunction. In addition, the testing process is subject to
operator error by our employees who operate our testing
equipment and related software.
These and other factors have, from time to time, contributed to
lower production yields. They may also do so in the future,
particularly as we expand our capacity or change our processing
steps. In addition, to be competitive we must continue to expand
our offering of packages. Our production yields on new packages
typically are significantly lower than our production yields on
our more established packages.
Our failure to maintain high standards or acceptable production
yields, if significant and prolonged, could result in loss of
customers, increased costs of production, delays, substantial
amounts of returned goods and claims by customers relating
thereto. Any of these problems could have a material adverse
effect on our business, financial condition and results of
operations.
In addition, in line with industry practice, new customers
usually require us to pass a lengthy and rigorous qualification
process that may take several months, at a significant cost to
the customer. If we fail to qualify packages with potential
customers or customers with which we have recently become
qualified, our operating results and financial condition could
be adversely affected.
Competition We Compete Against Established
Competitors in the Packaging and Test Business as Well as
Internal Customer Capabilities.
The subcontracted semiconductor packaging and test market is
very competitive. We face substantial competition from
established packaging and test service providers primarily
located in Asia, including companies
45
with significant processing capacity, financial resources,
research and development operations, marketing and other
capabilities. These companies also have established
relationships with many large semiconductor companies that are
our current or potential customers.
We also face competition from the internal capabilities and
capacity of many of our current and potential IDM customers.
In addition, we may in the future have to compete with a number
of companies that may enter the market and with companies that
may offer new or emerging technologies that compete with our
products and services.
We cannot assure you that we will be able to compete
successfully in the future against our existing or potential
competitors or that our customers will not rely on internal
sources for packaging and test services, or that our business,
financial condition and results of operations will not be
adversely affected by such increased competition.
Environmental
Regulations Future Environmental Regulations Could
Place Additional Burdens on Our Manufacturing
Operations.
The semiconductor packaging process uses chemicals, materials
and gases and generates byproducts that are subject to extensive
governmental regulations. For example, at our foreign facilities
we produce liquid waste when silicon wafers are diced into chips
with the aid of diamond saws, then cooled with running water. In
addition, semiconductor packages have historically utilized
metallic alloys containing lead (Pb) within the interconnect
terminals typically referred to as leads, pins or balls.
Federal, state and local regulations in the U.S., as well as
international environmental regulations, impose various controls
on the storage, handling, discharge and disposal of chemicals
used in our production processes and on the factories we occupy
and are increasingly imposing restrictions on the materials
contained in semiconductor products.
Increasingly, public attention has focused on the environmental
impact of semiconductor operations and the risk to neighbors of
chemical releases from such operations and to the materials
contained in semiconductor products. For example, the European
Unions recently enacted Directives on Waste Electrical and
Electronic Equipment (WEEE), and Restriction of Use
of Certain Hazardous Substances (RoHS) impose strict
restrictions on the use of lead and other hazardous substances
in electrical and electronic equipment. WEEE and RoHS became
effective on July 1, 2006. In response to these directives,
we have implemented changes in a number of our manufacturing
processes in an effort to achieve RoHS compliance across all of
our package types. Complying with existing and future
environmental regulations may impose upon us the need for
additional capital equipment or other process requirements,
restrict our ability to expand our operations, disrupt our
operations, subject us to liability or cause us to curtail our
operations.
Intellectual
Property We May Become Involved in Intellectual
Property Litigation.
We maintain an active program to protect our investment in
technology by augmenting and enforcing our intellectual property
rights. Intellectual property rights that apply to our various
products and services include patents, copyrights, trade secrets
and trademarks. We have filed and obtained a number of patents
in the U.S. and abroad the duration of which varies
depending on the jurisdiction in which the patent is filed.
While our patents are an important element of our intellectual
property strategy and our success as a whole, we are not
materially dependent on any one patent or any one technology. We
expect to continue to file patent applications when appropriate
to protect our proprietary technologies, but we cannot assure
you that we will receive patents from pending or future
applications.
Any patents we do obtain may be challenged, invalidated or
circumvented and may not provide meaningful protection or other
commercial advantage to us. The semiconductor industry is
characterized by frequent claims regarding patent and other
intellectual property rights. If any third party makes an
enforceable infringement claim against us or our customers, we
could be required to:
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discontinue the use of certain processes;
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cease to provide the services at issue;
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pay substantial damages;
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46
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develop non-infringing technologies; or
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acquire licenses to the technology we had allegedly infringed.
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We may need to enforce our patents or other intellectual
property rights or defend ourselves against claimed infringement
of the rights of others through litigation, which could result
in substantial cost and diversion of our resources. Furthermore,
if we fail to obtain necessary licenses, our business could
suffer. We are currently involved in three legal proceedings
involving the acquisition of intellectual property rights, the
enforcement of our existing intellectual property rights or the
enforcement of the intellectual property rights of others. We
refer you to the matters of Tessera, Inc. v. Amkor
Technology, Inc., Amkor Technology, Inc. v.
Motorola, Inc., and Amkor Technology, Inc. v. Carsem, et
al., which are described in more detail in Note 14 to
the Consolidated Financial Statements included in this quarterly
report. Unfavorable outcomes in one or more of these matters
could result in significant liabilities and could have a
material adverse effect on our financial condition, results of
operations or cash flows. An unfavorable ruling or outcome could
also have a negative impact on the trading price of our
securities. The estimate of the potential impact from the legal
proceedings referred to in this report on our financial
condition, results of operations, or cash flows could change in
the future.
Fire,
Flood or Other Calamity With Our Operations
Conducted in a Limited Number of Facilities, a Fire, Flood or
Other Calamity at one of Our Facilities Could Adversely Affect
Us.
We conduct our packaging and test operations at a limited number
of facilities. Significant damage or other impediments to any of
these facilities, whether as a result of fire, weather, disease,
civil strife, industrial strikes, breakdowns of equipment,
difficulties or delays in obtaining materials and equipment,
natural disasters, terrorist incidents, industrial accidents or
other causes could temporarily disrupt or even shut down our
operations, which would have a material adverse effect on our
business, financial condition and results of operations. In the
event of such a disruption or shutdown, we may be unable to
reallocate production to other facilities in a timely or
cost-effective manner (if at all) and may not have sufficient
capacity to service customer demands in our other facilities.
For example, our operations in Asia are vulnerable to regional
typhoons that can bring with them destructive winds and
torrential rains, which could in turn cause plant closures and
transportation interruptions. In addition, some of the processes
that we utilize in our operations place us at risk of fire and
other damage. For example, highly flammable gases are used in
the preparation of wafers holding semiconductor devices for
flip-chip packaging. While we maintain insurance policies for
various types of property, casualty and other risks, we do not
carry insurance for all the above referred risks and with regard
to the insurance we do maintain, we cannot assure you that it
would be sufficient to cover all of our potential losses.
SARS,
Avian Flu and Other Contagious Diseases Any
Recurrence of SARS or Outbreak of Avian Flu or Other Contagious
Disease May Have an Adverse Effect on the Economies and
Financial Markets of Certain Asian Countries and May Adversely
Affect Our Results of Operations.
In the first half of 2003, various countries encountered an
outbreak of severe acute respiratory syndrome, or SARS, which is
a highly contagious form of atypical pneumonia. In addition,
there have been outbreaks of avian flu and other contagious
diseases in various parts of the world. There is no guarantee
that an outbreak of SARS, avian flu or other contagious disease
will not occur again in the future (and maybe with much more
widespread and devastating effects) and that any such future
outbreak of SARS, avian flu or other contagious disease, or the
measures taken by the governments of the affected countries
against such potential outbreaks, will not seriously disrupt our
production operations or those of our suppliers and customers,
including by resulting in quarantines or closures. In the event
of such a facility quarantine or closure, if we were unable to
quickly identify alternate manufacturing facilities, this would
have a material adverse effect on our financial condition and
results of operations, as would the inability of our suppliers
to continue to supply us and our customers continuing to
purchase from us.
Continued
Control By Existing Stockholders Mr. James J.
Kim and Members of His Family Can Substantially Control The
Outcome of All Matters Requiring Stockholder
Approval.
As of June 30, 2007, Mr. James J. Kim, our Chief
Executive Officer and Chairman of the Board, and certain Family
trusts beneficially owned approximately 45% of our outstanding
common stock. This percentage includes beneficial ownership of
the securities underlying our 6.25% convertible subordinated
notes due 2013.
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Mr. James J. Kims family, acting together,
have the ability to effectively determine matters (other than
interested party transactions) submitted for approval by our
stockholders by voting their shares, including the election of
all of the members of our Board of Directors. There is also the
potential, through the election of members of our Board of
Directors, that Mr. Kims family could substantially
influence matters decided upon by the Board of Directors. This
concentration of ownership may also have the effect of impeding
a merger, consolidation, takeover or other business
consolidation involving us, or discouraging a potential acquirer
from making a tender offer for our shares, and could also
negatively affect our stocks market price or decrease any
premium over market price that an acquirer might otherwise pay.
48
The following exhibits are filed as part of this report:
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Exhibit
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Description of
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Number
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Exhibit
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12
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.1
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Computation of Ratio of Earnings
to Fixed Charges
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31
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.1
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Certification of James J. Kim,
Chief Executive Officer of Amkor Technology, Inc., pursuant to
Rule 13a 14(a) under the Securities Exchange
Act of 1934.
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31
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.2
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Certification of Kenneth T. Joyce,
Chief Financial Officer of Amkor Technology, Inc., pursuant to
Rule 13a 14(a) under the Securities Exchange
Act of 1934.
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32
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Certification of Chief Executive
Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereto duly authorized.
AMKOR TECHNOLOGY, INC.
Kenneth T. Joyce
Executive Vice President and
Chief Financial Officer
(Principal Financial, Chief Accounting
Officer and Duly Authorized Officer)
Date: August 3, 2007
50
EXHIBIT INDEX
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Exhibit
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Description of
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Number
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Exhibit
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12
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.1
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Computation of Ratio of Earnings
to Fixed Charges.
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31
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.1
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Certification of James J. Kim,
Chief Executive Officer of Amkor Technology, Inc., pursuant to
Rule 13a 14(a) under the Securities Exchange
Act of 1934.
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31
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.2
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Certification of Kenneth T. Joyce,
Chief Financial Officer of Amkor Technology, Inc., pursuant to
Rule 13a 14(a) under the Securities Exchange
Act of 1934.
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32
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Certification of Chief Executive
Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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