Edgar Filing: AMKOR TECHNOLOGY INC

AMKR 9.30.11 10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Quarterly Period Ended September 30, 2011
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number 000-29472

AMKOR TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)



Delaware (State of incorporation)				23-1722724 (I.R.S. Employer Identification Number)

1900 South Price Road

Chandler, AZ 85286

(Address of principal executive offices and zip code)

(480) 821-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of outstanding shares of the registrant’s Common Stock as of October 28, 2011 was 181,153,701.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended September 30, 2011

TABLE OF CONTENTS



		PageNo.

PART I. Financial Information
Item 1.	Financial Statements (unaudited)	2
	Consolidated Statements of Income - Three and Nine Months Ended September 30, 2011 and 2010	2
	Consolidated Balance Sheets - September 30, 2011 and December 31, 2010	3
	Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2011 and 2010	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	35

PART II. Other Information
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 6.	Exhibits	49
Signatures		50

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AMKOR TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
	(In thousands, except per share data)
Net sales	$	740,007		$	793,971		$	2,092,590		$	2,188,874
Cost of sales	617,768			605,713			1,713,848			1,684,461
Gross profit	122,239			188,258			378,742			504,413
Operating expenses:
Selling, general and administrative	65,011			57,735			190,853			180,387
Research and development	13,233			12,669			37,921			36,437
Total operating expenses	78,244			70,404			228,774			216,824
Operating income	43,995			117,854			149,968			287,589
Other expense (income):
Interest expense	17,594			19,614			55,992			66,393
Interest expense, related party	3,492			3,812			8,902			11,437
Interest income	(648		)	(695		)	(1,788		)	(2,275		)
Foreign currency (gain) loss	(3,005		)	8,456			1,658			9,010
Loss on debt retirement, net	—			235			15,531			18,042
Equity in earnings of unconsolidated affiliate	(3,034		)	(2,174		)	(6,641		)	(4,883		)
Other income, net	(226		)	(85		)	(695		)	(475		)
Total other expense, net	14,173			29,163			72,959			97,249
Income before income taxes	29,822			88,691			77,009			190,340
Income tax expense	2,499			10,321			9,475			8,954
Net income	27,323			78,370			67,534			181,386
Net loss (income) attributable to noncontrolling interests	44			(350		)	(576		)	(19		)
Net income attributable to Amkor	$	27,367		$	78,020		$	66,958		$	181,367
Net income attributable to Amkor per common share:
Basic	$	0.14		$	0.42		$	0.34		$	0.99
Diluted	$	0.11		$	0.30		$	0.28		$	0.70
Shares used in computing per common share amounts:
Basic	195,364			183,340			195,510			183,280
Diluted	278,068			282,495			278,529			282,523

The accompanying notes are an integral part of these statements.

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Table of Contents

AMKOR TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)



	September 30, 2011			December 31, 2010
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	483,390		$	404,998
Restricted cash	19,719			17,782
Accounts receivable:
Trade, net of allowances	351,636			392,327
Other	22,326			17,970
Inventories	224,046			191,072
Other current assets	35,332			37,918
Total current assets	1,136,449			1,062,067
Property, plant and equipment, net	1,614,786			1,537,226
Intangibles, net	9,725			13,524
Investments	36,883			28,215
Restricted cash	2,178			1,945
Other assets	89,366			93,845
Total assets	$	2,889,387		$	2,736,822
LIABILITIES AND EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt	$	100,322		$	150,081
Trade accounts payable	470,146			443,333
Accrued expenses	204,807			178,794
Total current liabilities	775,275			772,208
Long-term debt	1,000,638			964,219
Long-term debt, related party	225,000			250,000
Pension and severance obligations	118,492			103,543
Other non-current liabilities	6,454			10,171
Total liabilities	2,125,859			2,100,141
Commitments and contingencies (see Note 16)
Equity:
Amkor stockholders’ equity:
Preferred stock, $0.001 par value, 10,000 shares authorized, designated Series A, none issued
Common stock, $0.001 par value, 500,000 shares authorized, 197,292 and 183,467 shares issued, and 186,256 and 183,420 shares outstanding, in 2011 and 2010, respectively	197			183
Additional paid-in capital	1,610,274			1,504,927
Accumulated deficit	(823,312		)	(890,270		)
Accumulated other comprehensive income	19,024			15,457
Treasury stock, at cost, 11,036 and 47 shares in 2011 and 2010, respectively	(49,899		)	(284		)
Total Amkor stockholders’ equity:	756,284			630,013
Noncontrolling interests in subsidiaries	7,244			6,668
Total equity	763,528			636,681
Total liabilities and equity	$	2,889,387		$	2,736,822

The accompanying notes are an integral part of these statements.

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AMKOR TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	For the Nine Months Ended September 30,
	2011			2010
	(In thousands)
Cash flows from operating activities:
Net income	$	67,534		$	181,386
Depreciation and amortization	249,543			237,225
Loss on debt retirement, net	10,557			10,562
Other operating activities and non-cash items	1,537			(707		)
Changes in assets and liabilities	46,621			(61,504		)
Net cash provided by operating activities	375,792			366,962
Cash flows from investing activities:
Purchases of property, plant and equipment	(324,349		)	(276,672		)
Proceeds from the sale of property, plant and equipment	15,333			2,399
Financing lease payment from unconsolidated affiliate	7,741			10,087
Other investing activities	(5,654		)	(10,781		)
Net cash used in investing activities	(306,929		)	(274,967		)
Cash flows from financing activities:
Borrowings under revolving credit facilities	26,567			18,261
Payments under revolving credit facilities	(21,567		)	(49,253		)
Proceeds from issuance of long-term debt	348,236			611,007
Proceeds from issuance of long-term debt, related party	75,000			—
Payments of long-term debt, net of certain redemption premiums and discounts	(373,655		)	(643,793		)
Payments for debt issuance costs	(5,875		)	(7,737		)
Payments for repurchase of common stock	(41,543		)	—
Proceeds from the issuance of stock through share-based compensation plans	933			881
Payments of tax withholding for restricted shares	(793		)	—
Net cash provided by (used in) financing activities	7,303			(70,634		)
Effect of exchange rate fluctuations on cash and cash equivalents	2,226			731
Net increase in cash and cash equivalents	78,392			22,092
Cash and cash equivalents, beginning of period	404,998			395,406
Cash and cash equivalents, end of period	$	483,390		$	417,498
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	43,515		$	56,813
Income taxes	$	15,245		$	4,971
Non cash investing and financing activities:
Common stock issuance for conversion of related party 6.25% convertible subordinated notes due December 2013	$	100,000		$	—

The accompanying notes are an integral part of these statements.

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Interim Financial Statements

Basis of Presentation. The Consolidated Financial Statements and related disclosures as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010, are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The December 31, 2010, Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In our opinion, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the results for the interim periods. These financial statements should be read in conjunction with the financial statements included in our Annual Report for the year ended December 31, 2010, filed on Form 10-K with the SEC on February 24, 2011. The results of operations for the three and nine months ended September 30, 2011, are not necessarily indicative of the results to be expected for the full year. Unless the context otherwise requires, all references to “Amkor,” “we,” “us,” “our” or the “company” are to Amkor Technology, Inc. and our subsidiaries.

The U.S. dollar is our reporting currency and the functional currency for the majority of our foreign subsidiaries. For our subsidiaries and affiliate in Japan, the local currency is the functional currency.

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

Treasury Stock. Treasury stock is acquired by us when outstanding shares are repurchased or otherwise acquired by us, including when outstanding shares are withheld to satisfy tax withholding obligations in connection with certain restricted share awards under our equity incentive plans. The repurchased shares and the withheld shares are accounted for as treasury stock at cost. See Notes 3 and 14 for more information.

2. New Accounting Standards

Recently Adopted Standards

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements, which amended Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements, to require additional disclosures related to activity within Level 3 of the fair value hierarchy. This ASU is effective for reporting periods beginning after December 15, 2010. Our adoption of ASU 2010-06 on January 1, 2011, did not have an impact on our financial statements.

In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements, which supersedes certain guidance in ASC 605-25, Revenue Recognition — Multiple Element Arrangements. This topic requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. This ASU is effective for annual reporting periods beginning after June 15, 2010. Our adoption of ASU 2009-13 on January 1, 2011, did not have an impact on our financial statements.

Recently Issued Standards

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820). This ASU updates certain requirements for measuring fair value and disclosure regarding fair value measurement. This ASU is effective for reporting periods beginning after December 15, 2011. Early adoption is not permitted. We are currently evaluating the impact, if any, that the adoption of ASU 2011-04 will have on our financial statements.

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220). This ASU eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This ASU is effective for reporting periods beginning after December 15, 2011. Early adoption is permitted and full retrospective application is required. We are currently evaluating the impact that the adoption of ASU 2011-05 will have on our financial statements.

3. Share-Based Compensation Plans

All of our share-based compensation to employees is measured at fair value and expensed over the service period (generally the vesting period). The following table presents share-based compensation expense attributable to stock options and restricted shares. There is no deferred income tax benefit.



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2011		2010		2011		2010
	(In thousands)
Stock options	$	497	$	591	$	1,550	$	1,850
Restricted shares	532		149		2,497		883
Total share-based compensation expense	$	1,029	$	740	$	4,047	$	2,733

The following table presents share-based compensation expense as included in the Consolidated Statements of Income:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2011		2010		2011		2010
	(In thousands)
Cost of sales	$	7	$	7	$	13	$	20
Selling, general and administrative	890		638		3,510		2,379
Research and development	132		95		524		334
Total share-based compensation expense	$	1,029	$	740	$	4,047	$	2,733

Stock Options

The following table summarizes our stock option activity for the nine months ended September 30, 2011:



	Number of Shares (In thousands)		Weighted Average Exercise Price Per Share		Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (In thousands)
Outstanding at December 31, 2010	7,843		$	10.26
Granted	120		6.46
Exercised	(187	)	4.99
Forfeited or expired	(1,545	)	11.63
Outstanding at September 30, 2011	6,231		$	10.00	3.10	$	109
Fully vested and expected to vest at September 30, 2011	6,195		$	10.01	3.07	$	109
Exercisable at September 30, 2011	5,678		$	10.17	2.69	$	109

There were no options granted during the three months ended September 30, 2011 and 2010. The following assumptions were used in the Black-Scholes option pricing model to calculate weighted average fair values of the options granted for the nine months ended September 30, 2011 and 2010.

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)



	For the Nine Months Ended September 30,
	2011			2010
Expected life (in years)	6.2			6.0
Risk-free interest rate	2.4		%	3.0		%
Volatility	67		%	71		%
Dividend yield	—			—
Weighted average grant date fair value per option granted	$	4.06		$	5.00

The intrinsic value of options exercised for the three and nine months ended September 30, 2011, was less than $0.1 million and $0.4 million, respectively. The intrinsic value of options exercised for the three and nine months ended September 30, 2010, was $0.1 million and $0.2 million, respectively. For the nine months ended September 30, 2011 and 2010, cash received for stock option exercises was $0.9 million and $0.9 million, respectively. No tax benefits were realized. The related cash receipts are included in financing activities in the accompanying Condensed Consolidated Statements of Cash Flows. Total unrecognized compensation expense from stock options, including a forfeiture estimate, was approximately $1.8 million as of September 30, 2011, which is expected to be recognized over a weighted-average period of 1.4 years beginning October 1, 2011. To the extent the actual forfeiture rate is different than what we have anticipated, share-based compensation related to these awards will be different from our expectations.

Restricted Shares

The following table summarizes our restricted share activity for the nine months ended September 30, 2011:



	Number of Shares (In thousands)		Weighted Average Grant-Date Fair Value (Per share)
Nonvested at December 31, 2010	372		$	5.96
Awards granted	809		7.70
Awards vested	(306	)	6.81
Awards forfeited	(116	)	7.18
Nonvested at September 30, 2011	759		$	7.29

Awards vested include 150,000 shares granted to retirement eligible recipients whose restricted shares are treated for accounting and tax purposes as if vested when they meet the retirement eligible date. The fair value of these shares upon vesting during 2011 was $1.1 million.

The valuation of restricted shares is determined based on the fair market value of the underlying shares on the date of grant and amortized on a straight-line basis over the four-year vesting period. The unrecognized compensation cost, including a forfeiture estimate, was $3.9 million as of September 30, 2011, which is expected to be recognized over a weighted average period of approximately 2.7 years beginning October 1, 2011. To the extent that the actual forfeiture rate is different than what we have anticipated, the share-based compensation expense related to these awards will be different from our expectations.

4. Income Taxes

Our income tax expense of $9.5 million for the nine months ended September 30, 2011, primarily reflects $4.7 million of expense related to income taxes at certain of our foreign operations, $1.6 million of foreign withholding taxes, $2.9 million of deferred taxes on undistributed earnings from our investment in J-Devices and $0.3 million of state income taxes. Our income tax expense reflects income taxed in foreign jurisdictions where we benefit from tax holidays. At September 30, 2011, we had U.S. net operating loss carryforwards totaling $393.7 million, which expire at various times through 2031. Additionally, at September 30, 2011, we had $78.5 million of non-U.S. net operating loss carryforwards, the majority of which will expire at various times through 2021.

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

We maintain a valuation allowance on all of our U.S. net deferred tax assets, including our net operating loss carryforwards. We also have valuation allowances on deferred tax assets in certain foreign jurisdictions. Such valuation allowances are released as the related tax benefits are realized on our tax returns or when sufficient net positive evidence exists to conclude it is more likely than not that the deferred tax assets will be realized.

Our gross unrecognized tax benefits decreased from $10.5 million at December 31, 2010, to $9.6 million as of September 30, 2011, primarily due to a $1.0 million settlement of an uncertain tax position offset by a $0.1 million increase in the reserve resulting from the evaluation of new information obtained during the nine months ended September 30, 2011. At September 30, 2011, substantially all of our unrecognized tax benefits would reduce our effective tax rate, if recognized. We are seeking rulings from local taxing authorities to confirm the availability of unrecognized tax benefits related to revenue attribution and eligibility for certain tax incentives. The rulings are currently expected within the next twelve months, at which time our unrecognized tax benefits may be reduced by up to $7.9 million. Our unrecognized tax benefits are subject to change as examinations of tax years are completed. Tax return examinations involve uncertainties, and there can be no assurances that the outcome of examinations will be favorable.

5. Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income attributable to Amkor common shareholders by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding includes restricted shares held by retirement eligible recipients and excludes treasury stock. Unvested share-based compensation awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of earnings per share pursuant to the two-class method. As discussed in Note 3, we grant restricted shares which entitle recipients to voting and nonforfeitable dividend rights from the date of grant. As a result, we have applied the two-class method to determine earnings per share.

Diluted EPS is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares include outstanding stock options, unvested restricted shares and convertible debt. The following table summarizes the computation of basic and diluted EPS:

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
	(In thousands, except per share data)
Net income attributable to Amkor	$	27,367		$	78,020		$	66,958		$	181,367
Income allocated to participating securities	(106		)	(159		)	(259		)	(369		)
Net income available to Amkor common stockholders	27,261			77,861			66,699			180,998
Adjustment for dilutive securities on net income:
Net income allocated to participating securities in basic calculation	106						259
Interest on 2.5% convertible notes, due 2011, net of tax	—			329			—			988
Interest on 6.25% convertible notes, due 2013, net of tax	—			1,592			—			4,777
Interest on 6.0% convertible notes, due 2014, net of tax	4,026			4,026			12,077			12,077
Net income attributable to Amkor — diluted	$	31,393		$	83,808		$	79,035		$	198,840

Weighted average shares outstanding — basic	195,364			183,340			195,510			183,280
Effect of dilutive securities:
Stock options	46			161			213			276
Unvested restricted shares	—			66			148			39
2.5% convertible notes, due 2011	—			2,919			—			2,919
6.25% convertible notes, due 2013	—			13,351			—			13,351
6.0% convertible notes, due 2014	82,658			82,658			82,658			82,658
Weighted average shares outstanding — diluted	278,068			282,495			278,529			282,523
Net income attributable to Amkor per common share:
Basic	$	0.14		$	0.42		$	0.34		$	0.99
Diluted	0.11			0.30			0.28			0.70

The following table summarizes the potential shares of common stock that were excluded from diluted EPS, because the effect of including these potential shares was antidilutive:



	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2011	2010	2011	2010
	(In thousands, except per share data)
Stock options and restricted share awards	6,122	6,900	5,158	6,819
2.5% convertible notes, due 2011	—	—	1,459	—
6.25% convertible notes, due 2013	—	—	929	—
Total potentially dilutive shares	6,122	6,900	7,546	6,819

6. Equity and Comprehensive Income

The following table reflects the changes in equity and comprehensive income attributable to both Amkor and the noncontrolling interests:

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)



	Attributable to Amkor			Attributable to Noncontrolling Interests		Total
	(In thousands)
Equity at December 31, 2010	$	630,013		$	6,668	$	636,681
Comprehensive income:
Net income	66,958			576		67,534
Other comprehensive income:
Pension liability adjustment, net of tax	(1,127		)	—		(1,127		)
Adjustments to unrealized components of defined benefit pension plan, net of tax	348			—		348
Cumulative translation adjustment	4,346			—		4,346
Total other comprehensive income	3,567			—		3,567
Comprehensive income	70,525			576		71,101
Treasury stock acquired through surrender of shares for tax withholding	(793		)	—		(793		)
Issuance of stock through employee share-based compensation plans	933			—		933
Share-based compensation expense	4,047			—		4,047
Repurchase of common stock	(48,938		)	—		(48,938		)
Conversion of debt to common stock	100,497			—		100,497
Equity at September 30, 2011	$	756,284		$	7,244	$	763,528



	Attributable to Amkor			Attributable to Noncontrolling Interests		Total
	(In thousands)
Equity at December 31, 2009	$	383,209		$	6,492	$	389,701
Comprehensive income:
Net income	181,367			19		181,386
Other comprehensive income:
Adjustments to unrealized components of defined benefit pension plan, net of tax	223			—		223
Cumulative translation adjustment	6,245			—		6,245
Total other comprehensive income	6,468			—		6,468
Comprehensive income	187,835			19		187,854
Treasury stock acquired through surrender of shares for tax withholding	(274		)	—		(274		)
Issuance of stock through employee share-based compensation plans	989			—		989
Share-based compensation expense	2,733			—		2,733
Equity at September 30, 2010	$	574,492		$	6,511	$	581,003

7. Inventories

Inventories consist of the following:



	September 30, 2011		December 31, 2010
	(In thousands)
Raw materials and purchased components	$	172,462	$	145,043
Work-in-process	51,584		46,029
Total inventories	$	224,046	$	191,072

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

8. Property, Plant and Equipment

Property, plant and equipment consist of the following:



	September 30, 2011			December 31, 2010
	(In thousands)
Land	$	106,338		$	106,338
Land use rights	19,945			19,945
Buildings and improvements	869,165			838,237
Machinery and equipment	2,964,363			2,749,445
Software and computer equipment	183,599			176,376
Furniture, fixtures and other equipment	20,635			20,611
Construction in progress	16,780			50,610
	4,180,825			3,961,562
Less accumulated depreciation and amortization	(2,566,039		)	(2,424,336		)
Total property, plant and equipment, net	$	1,614,786		$	1,537,226

The following table reconciles our activity related to property, plant and equipment additions as reflected on the Consolidated Balance Sheets to property, plant and equipment purchases as presented on the Condensed Consolidated Statements of Cash Flows:



	For the Nine Months Ended September 30,
	2011			2010
	(In thousands)
Property, plant and equipment additions	$	325,350		$	402,354
Net change in related accounts payable and deposits	(1,001		)	(125,682		)
Purchases of property, plant and equipment	$	324,349		$	276,672

9. Intangible Assets

Acquired intangibles as of September 30, 2011, consist of the following:



	Gross		Accumulated Amortization			Net
	(In thousands)
Patents and technology rights	$	35,581	$	(31,680	)	$	3,901
Customer relationships	16,940		(11,116		)	5,824
Total intangibles	$	52,521	$	(42,796	)	$	9,725

Acquired intangibles as of December 31, 2010, consist of the following:



	Gross		Accumulated Amortization			Net
	(In thousands)
Patents and technology rights	$	52,587	$	(47,864	)	$	4,723
Customer relationships	16,940		(8,139		)	8,801
Total intangibles	$	69,527	$	(56,003	)	$	13,524

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Amortization of identifiable intangible assets for the three months ended September 30, 2011 and 2010 was $1.3 million and $1.8 million, respectively. Amortization of identifiable intangible assets for the nine months ended September 30, 2011 and 2010 was $3.9 million and $4.2 million, respectively. Based on the amortizing assets recognized in our balance sheet at September 30, 2011, amortization for each of the next five years is estimated as follows:



	(In thousands)
2011 Remaining	$	1,165
2012	3,729
2013	3,479
2014	727
2015	346
Thereafter	279
Total amortization	$	9,725

10. Investments

Investments consist of the following:



	September 30, 2011				December 31, 2010
	Carrying Value (In thousands)		Ownership Percentage		Carrying Value (In thousands)		Ownership Percentage
Investment in unconsolidated affiliate	$	36,883	30.0	%	$	28,215	30.0	%

J-Devices Corporation

On October 30, 2009, Amkor and Toshiba Corporation (“Toshiba”) invested in Nakaya Microdevices Corporation (“NMD”) and formed a joint venture to provide semiconductor assembly and final testing services in Japan. As a result of the transaction, NMD is now owned 60% by the existing shareholders of NMD, 30% by Amkor and 10% by Toshiba and has changed its name to J-Devices. J-Devices is a variable interest entity, but as we are not the primary beneficiary, the investment is accounted for under the equity method as an unconsolidated affiliate.

Our investment includes our 30% equity interest and call options to acquire additional equity interests. The call options, at our discretion, permit us to acquire new or outstanding J-Devices' shares until our maximum ownership ratio is 60%, 66% and 80% beginning in 2012, 2014 and 2015, respectively. In 2014 and beyond, Toshiba has, at its discretion, a put option which allows Toshiba to sell shares to us if we have exercised any of our call options. The exercise price for all options is determined using a contractual pricing formula based primarily upon the financial position of J-Devices at the time of exercise.

Under the equity method of accounting, we recognize our 30% proportionate share of J-Devices' net income or loss, which includes J-Devices' income taxes in Japan, during each accounting period as a change in our investment in unconsolidated affiliate. For the three and nine months ended September 30, 2011, our equity in earnings in J-Devices, net of J-Devices' income taxes in Japan, was $3.0 million and $6.6 million, respectively. For the three and nine months ended September 30, 2010, our equity in earnings in J-Devices, net of J-Devices' income taxes in Japan, was $2.2 million and $4.9 million, respectively.

In addition, as a change in our investment in unconsolidated affiliate, we record equity method adjustments for the amortization of a basis difference as our carrying value exceeded our equity in the net assets of J-Devices at the date of investment as well as other adjustments required by the equity method.

In conjunction with entering into the joint venture, one of our existing subsidiaries in Japan purchased assembly and test equipment from Toshiba and leased the equipment to J-Devices under an agreement which is accounted for as a direct financing lease. In October 2011, J-Devices purchased approximately $4 million of this leased assembly and test equipment from our subsidiary. For the three and nine months ended September 30, 2011, we recognized $0.2 million and $0.6 million respectively, in interest income. For the three and nine months ended September 30, 2010, we recognized $0.2 million and $0.8 million, respectively, in interest income. Our lease receivables, net consist of the following:

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)



	September 30, 2011		December 31, 2010
	(In thousands)
Current (Other accounts receivable)	$	13,293	$	12,327
Non-current (Other assets)	14,088		22,795
Total lease receivable, net	$	27,381	$	35,122

11. Accrued Expenses

Accrued expenses consist of the following:



	September 30, 2011		December 31, 2010
	(In thousands)
Payroll and benefits	$	70,198	$	69,903
Customer advances and deferred revenue	40,977		34,164
Accrued interest	28,933		12,332
Accrued severance plan obligations (Note 13)	6,886		6,131
Income taxes payable	5,591		10,422
Other accrued expenses	52,222		45,842
Total accrued expenses	$	204,807	$	178,794

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

12. Debt

Following is a summary of short-term borrowings and long-term debt:



	September 30, 2011			December 31, 2010
	(In thousands)
Debt of Amkor Technology, Inc.
Senior secured credit facilities:
$100 million revolving credit facility, LIBOR plus 2.25%-2.75%, due April 2015	$	—		$	—
Senior notes:
9.25% Senior notes, due June 2016	—			264,283
7.375% Senior notes, due May 2018	345,000			345,000
6.625% Senior notes, due June 2021, $75 million related party	400,000			—
Senior subordinated notes:
2.5% Convertible senior subordinated notes, due May 2011	—			42,579
6.0% Convertible senior subordinated notes, due April 2014, $150 million related party	250,000			250,000
Subordinated notes:
6.25% Convertible subordinated notes, due December 2013, related party	—			100,000
Debt of subsidiaries:
Working capital facility, LIBOR plus 1.7%, due January 2011	—			15,000
Working capital facility, LIBOR plus 2.8%, due January 2012 and April 2012	20,000			—
KRW 50 billion revolving credit facility, CD base interest rate plus 2.20%, due June 2012	—			—
Term loan, TIBOR plus 0.65%, due July 2011	—			2,680
Term loan, TIBOR plus 0.8%, due September 2012	12,532			19,848
Term loan, bank funding rate-linked base rate plus 1.99%, due May 2013	108,000			123,000
Term loan, bank base rate plus 0.5%, due April 2014	117,854			149,996
Term loan, bank base rate plus 2.96%, due July 2014	18,917			—
Term loan, 90-day primary commercial paper rate plus 0.835%, due April 2015	49,338			51,042
Term loan, bank funding rate-linked base rate plus 1.7%, due March 2016	4,319			—
Secured equipment and property financing	—			872
	1,325,960			1,364,300
Less: Short-term borrowings and current portion of long-term debt	(100,322		)	(150,081		)
Long-term debt (including related party)	$	1,225,638		$	1,214,219

There have been no borrowings under our senior secured revolving credit facility as of September 30, 2011; however, we have utilized $0.4 million of the available letter of credit sub-limit of $25.0 million. The borrowing base for the revolving credit facility is based on the amount of our eligible accounts receivable, which exceeded $100.0 million as of September 30, 2011. 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 June 2011, we used the net proceeds from the issuance of the 6.625% Senior Notes due 2021 (the “2021 Notes”), discussed below, to fund the tender offer and call for redemption of the entire $264.3 million aggregate principal amount of our outstanding 9.25% Senior Notes due 2016 (the “2016 Notes”), to refinance the entire $42.6 million of our 2.50% Convertible Senior Subordinated Notes due May 2011, to pay related fees, expenses and accrued interest and for general corporate purposes. We purchased $156.7 million of the 2016 Notes in the tender offer and $107.6 million in the call. We recorded a $12.8 million loss on extinguishment related to the premiums and fees paid for the tender (approximately $7.8 million) and call (approximately $5.0 million) of the 2016 Notes and a $2.7 million charge for the write-off of the associated unamortized deferred debt issuance costs.

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Both charges are included in loss on debt retirement, net in our Consolidated Statement of Income for the nine months ended September 30, 2011.

In May 2011, we issued $400.0 million of the 2021 Notes. The 2021 Notes were issued at par and are senior unsecured obligations. Interest is payable semi-annually on June 1 and December 1 of each year at a rate of 6.625%, commencing on December 1, 2011. As a result of an agreement we entered into with the initial purchasers of the 2021 Notes, we filed a registration statement which became effective in September 2011, to exchange the 2021 Notes for freely tradable 2021 Notes issued by us. In connection with the issuance of the 2021 Notes, Mr. James J. Kim, our Executive Chairman of the Board of Directors and our largest stockholder, and 915 Investments, LP, an affiliate of Mr. James J. Kim (collectively, the “Kim Purchasers”) agreed to purchase $75.0 million aggregate principal amount of the 2021 Notes. In addition, we entered into a letter agreement with the Kim Purchasers pursuant to which we agreed to register the resale of the 2021 Notes held by the Kim Purchasers on a shelf registration statement upon request of the Kim Purchasers at any time after May 20, 2012. We incurred $5.9 million of debt issuance costs associated with the 2021 Notes in the nine months ended September 30, 2011.

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 Mr. James J. Kim, our Executive Chairman of the Board of Directors, and certain Kim family members. Following a call for redemption of the entire $100.0 million aggregate principal amount of the December 2013 Notes, holders of all $100.0 million of the outstanding December 2013 Notes converted their notes into an aggregate of 13,351,131 shares of our common stock in January 2011. There was no gain or loss recorded as a result of the conversion. Forfeited accrued interest of $0.9 million and unamortized deferred debt costs of $0.4 million were included in the net carrying amount of the debt recorded to our capital accounts upon conversion.

In January 2009, Amkor Assembly & Test (Shanghai) Co, Ltd. (“AATS”), a Chinese subsidiary, entered into a $50.0 million working capital facility agreement with a Chinese bank maturing in January 2011. The facility was collateralized with certain real property and buildings in China. Principal amounts borrowed were required to be repaid within twelve months of the drawdown date and could be prepaid at any time without penalty. In January 2011, the outstanding balance of $15.0 million was repaid at maturity and AATS entered into a new $50.0 million working capital facility agreement with the same Chinese bank maturing in January 2013. The new facility bears interest at LIBOR plus 2.8% (3.23% as of September 30, 2011), which is payable in semi-annual payments. All other terms and conditions are consistent with the prior facility. At September 30, 2011, $20.0 million was outstanding under the facility. The working capital facility contains certain affirmative and negative covenants, which could restrict our operations. If we were to default on our obligations under any of these facilities, we would not be permitted to draw additional amounts, and the lenders could accelerate our obligation to pay all outstanding amounts.

In June 2011, Amkor Technology Korea, Inc., a Korean subsidiary ("ATK") entered into a KRW 50.0 billion (approximately $46 million at inception) revolving credit facility with a Korean bank with a term of 12 months. The loan bears interest at the CD base interest rate (as quoted by Korea Financial Investment Association) plus 2.20%. Principal is payable upon maturity and interest is paid monthly. The loan is collateralized with certain land, buildings and equipment located at our ATK facilities. There is no outstanding balance under this revolving credit facility as of September 30, 2011.

In July 2011, ATK entered into a $50.0 million three-year secured term loan facility with a Korean bank (the “ATK Loan”). As of September 30, 2011, we had drawn $18.9 million under the ATK Loan which bears interest at LIBOR plus 2.96% (3.25% as of September 30, 2011). As amended in October 2011, future draws on the ATK Loan will bear interest at LIBOR plus a bank determined spread throughout the three-year term. The ATK Loan is due in full upon maturity in July 2014. The ATK Loan is secured by substantially all of the land, factories and equipment located at our ATK facilities. The proceeds from the term loan will be used to fund future capital expenditures.

In April 2010, Amkor Technology Taiwan Ltd, a Taiwanese subsidiary, entered into a 1.5 billion Taiwan dollar (approximately $47 million at inception) term loan with a Taiwanese bank due April 2015. The term loan accrues interest at the 90-day commercial paper rate plus 0.835%. The interest rate at September 30, 2011, was 2.40%. The term loan is collateralized with certain land, buildings and equipment in Taiwan. In March 2011, we amended the principal repayment schedule. As a result, semiannual principal payments of 150 million Taiwan dollars (approximately $4.7 million at inception) will begin in April 2012 and the remaining 600 million Taiwan dollars (approximately $18.9 million at inception) will be due on the final maturity date.

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

In September 2011, ATK entered into a $50.0 million four and a half-year secured term loan facility with a Korean bank due in March 2016. As of September 30, 2011, we had drawn $4.3 million, with the remainder to be drawn throughout the four and half-year term. The loan bears interest at the bank funding rate-linked base rate plus 1.7% (5.07% as of September 30, 2011). Principal is payable on a quarterly basis for three years after a one and a half year grace period. The loan is secured by substantially all of the land, factories and equipment located at our ATK facilities. The proceeds from the term loan will be used to fund future capital expenditures.

Our secured bank debt agreements and the indentures governing our outstanding notes contain a number of affirmative and negative covenants which could restrict our operations. We were in compliance with all of our covenants as of September 30, 2011.

13. Pension and Severance Plans

Foreign Pension Plans

Our Philippine, Taiwanese and Japanese subsidiaries sponsor defined benefit pension plans that cover substantially all of their respective employees who are not covered by statutory plans. Charges to expense are based upon actuarial analyses. The components of net periodic pension cost for these defined benefit plans are as follows:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
	(In thousands)
Components of net periodic pension cost:
Service cost	$	1,694		$	1,499		$	4,964		$	4,403
Interest cost	937			944			2,767			2,786
Expected return on plan assets	(897		)	(591		)	(2,659		)	(1,744		)
Amortization of transitional obligation	1			3			5			9
Amortization of prior service cost	67			72			223			212
Recognized actuarial loss	21			7			66			20
Net periodic pension cost	1,823			1,934			5,366			5,686
Curtailments	769			—			769			—
Settlements	168			—			168			—
Total pension expense	$	2,760		$	1,934		$	6,303		$	5,686

During the nine months ended September 30, 2011, we recognized curtailment and settlement losses of $0.9 million resulting from the remeasurement of our Philippine defined benefit plan due to reductions in workforce at that location (See Note 19).

For the three and nine months ended September 30, 2011, we contributed $3.2 million and $3.4 million to the pension plans, respectively. We expect to contribute approximately $0.2 million to the pension plans during the remainder of 2011. For the three and nine months ended September 30, 2010, we contributed $0.1 million and $7.6 million to the pension plans, respectively.

Korean Severance Plan

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 employment, based on their length of service, seniority and average monthly wages 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.

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The provision recorded for severance benefits for the three months ended September 30, 2011 and 2010 was $8.1 million and $6.4 million, respectively. The provision recorded for severance benefits for the nine months ended September 30, 2011 and 2010 was $21.6 million and $17.0 million, respectively. The balance recorded in non-current pension and severance obligations for accrued severance at our Korean subsidiary was $93.9 million and $82.5 million at September 30, 2011 and December 31, 2010, respectively. Total pension and severance obligations at September 30, 2011 and December 31, 2010 were $100.8 million and $88.6 million, respectively.

14. Treasury Stock

Stock Repurchase Programs

On August 30, 2011, our Board of Directors authorized the repurchase of up to $150.0 million of our common stock, exclusive of any fees, commissions or other expenses. The purchase of stock under this program may be made in the open market or through privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, price, applicable legal requirements and other factors. The stock repurchase program will be funded with available cash and may be suspended or discontinued at any time. All shares repurchased are recorded as treasury stock at cost.

During the period from the commencement of the the stock repurchase program on August 30, 2011 through September 30, 2011, we purchased 10.9 million shares of common stock for an aggregate purchase price of $48.7 million, net of $0.2 million of commissions, for an average price of $4.47. At September 30, 2011, approximately $101.3 million was available to repurchase common stock pursuant to the stock repurchase program. At September 30, 2011, $7.4 million of the $48.7 million amount repurchased remained unpaid and is recorded in accrued expenses.

Shares for Tax Withholding

During the three and nine months ended September 30, 2011, we withheld 3,000 and 54,000 shares, respectively, from restricted shares that vested during the respective period to satisfy tax withholding obligations. Minimum tax withholding obligations that arose on the vesting of restricted shares were insignificant for the three months ended September 30, 2011 and $0.4 million for the nine months ended September 30, 2011. These shares are reflected as treasury stock at cost.

15. Fair Value Measurements

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

Assets and Liabilities that are Measured at Fair Value on a Recurring basis

Our financial assets and liabilities recorded at fair value on a recurring basis include cash and cash equivalents and restricted cash. Cash and cash equivalents and restricted cash are invested in U.S. money market funds and various U.S. and foreign bank operating and time deposit accounts, which are due on demand or carry a maturity date of less than three months when purchased. No restrictions have been imposed on us regarding withdrawal of balances with respect to our cash and cash equivalents as a result of liquidity or other credit market issues affecting the money market funds we invest in or the counterparty financial institutions holding our deposits. Money market funds and restricted cash are valued using quoted market prices in active markets for identical assets as summarized in the following table as of September 30, 2011:

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
Cash equivalent money market funds	$	248,898	$	—	$	—	$	248,898
Restricted cash	19,719		—		—		19,719

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

We measure certain assets and liabilities, including property, plant and equipment, intangible assets and an equity investment, at fair value on a nonrecurring basis. Such measurements are generally obtained from third party appraisal reports. Impairment losses on property, plant and equipment included in cost of sales for the three months ended September 30, 2011 and 2010, were $1.4 million and $0.1 million, respectively. Impairment losses on property, plant and equipment included in cost of sales for the nine months ended September 30, 2011 and 2010, were $2.5 million and $1.4 million, respectively.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

We measure the fair value of our debt on a quarterly basis for disclosure purposes. The following table presents the financial instruments that are not recorded at fair value but which require fair value disclosure as of September 30, 2011 and December 31, 2010:



	September 30, 2011		December 31, 2010
	(In thousands)
Carrying value of debt	$	1,325,960	$	1,364,300
Fair value of debt	$	1,460,858	$	1,806,231

The estimated fair value of the debt is based primarily on quoted market prices reported on the respective balance sheet dates for our senior and senior subordinated notes. The estimated fair value for the debt of our subsidiaries is based on market based assumptions including current borrowing rates for similar types of borrowing arrangements adjusted for duration, optionality and risk profile.

16. Commitments and Contingencies

We have a $100.0 million senior secured revolving credit facility that matures in April 2015. The facility has a letter of credit sub-facility of $25.0 million. As of September 30, 2011, we have $0.4 million of standby letters of credit outstanding and have an additional $24.6 million available for letters of credit. Such standby letters of credit are used in the ordinary course of our business and are collateralized by our cash balances.

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

Legal Proceedings

We are involved in claims and legal proceedings and 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 business, liquidity, results of operations, financial condition or cash flows. Except as indicated below, we currently believe that the ultimate outcome of these claims and proceedings, individually and in the aggregate, will not have a material adverse impact to us. Our evaluation of the potential impact of these claims and legal proceedings on our business, liquidity, results of operations, financial condition or cash flows could change in the future. Attorney fees related to legal matters are expensed as incurred. We have not recorded any accrual for contingent liabilities associated with the legal proceedings described below, except where noted otherwise, based on our belief that liabilities, while possible, are not probable. Further, except where

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

noted otherwise, any possible range of loss cannot be reasonably estimated at this time.

Arbitration Proceedings with Tessera, Inc.

On March 2, 2006, Tessera, Inc. ("Tessera") filed a request for arbitration with the International Court of Arbitration of the International Chamber of Commerce (the “ICC”), captioned Tessera, Inc. v. Amkor Technology, Inc. The subject matter of the arbitration was a license agreement (“License Agreement”) entered into between Tessera and our predecessor in 1996.

On October 27, 2008, the arbitration panel in that proceeding issued an interim order in this matter. While the panel found that most of the packages accused by Tessera were not subject to the patent royalty provisions of the License Agreement, the panel did find that past royalties were due to Tessera as damages for some infringing packages. The panel also denied Tessera's request to terminate the License Agreement.

On January 9, 2009, the panel issued the final damage award in this matter awarding Tessera $60.6 million in damages for past royalties due under the License Agreement. The award was for the period March 2, 2002 through December 1, 2008. The final award, plus interest, and the royalties through December 2008 amounting to $64.7 million was expensed in 2008 and paid when due in February 2009.

Following Tessera's favorable decision in the U.S International Trade Commission (the “ITC”) in May 2009 against some of our customers, Tessera began making repeated statements to customers and others claiming that we were in breach of the royalty provisions of the License Agreement. We informed Tessera that we believed we were in full compliance with the License Agreement and of our intent to continue making the royalty payments when due in accordance with the terms of the License Agreement.

On August 7, 2009, we filed a request for arbitration in the ICC against Tessera, captioned Amkor Technology, Inc. v. Tessera, Inc. (the “Arbitration”). We instituted this action in order to obtain declaratory relief confirming that we are a licensee in good standing under our 1996 License Agreement with Tessera and that the License Agreement remains in effect. We also included a claim seeking damages and injunctive relief regarding Tessera's tortious interference with our contractual relations and prospective economic advantage, including Tessera's false and misleading statements questioning our status as a licensee under the License Agreement.

On November 2, 2009, Tessera filed an answer to our request for arbitration and counterclaims in the ICC. In the answer and counterclaims, Tessera denied Amkor's claims. Tessera also alleged breach of contract, seeking termination of the License Agreement and asserting that Amkor owes Tessera additional royalties under the License Agreement, including royalties for use of thirteen U.S. and six foreign patents that Tessera did not assert in the previous arbitration. Tessera has since dropped its claims on five of those patents. Tessera also alleged that Amkor tortiously interfered with Tessera's prospective business relationships and seeks damages. On February 17, 2011, Tessera sent Amkor a notice of termination of the License Agreement.

We filed our response to Tessera's answer on January 15, 2010, denying Tessera's claims and filed a motion with the panel seeking priority consideration and phased early determination of issues from the previous arbitration decision, including the proper method for calculating royalties under the License Agreement for periods subsequent to December 1, 2008. On March 28, 2010, the panel granted our request for priority consideration and phased early determination.

The first hearing regarding the issues from the previous arbitration was held in December 2010, and in July 2011, the Panel issued its decision in the first phase of the Arbitration. The Panel found that we do not owe any of the approximately $18 million of additional royalties claimed by Tessera for packages assembled by us for customers who had been involved in proceedings with Tessera before the ITC. The Panel also did not grant Tessera's request to terminate the License Agreement in the first phase of the arbitration and deferred making any determination regarding termination until the full Arbitration is completed.

Our request for a declaration confirming that we are in compliance with the License Agreement and that our royalty calculations from the previous arbitration were correct was denied. The Panel found that we had materially breached the License Agreement by not paying the full amount of royalties due and by failing to satisfy the audit provisions of the License Agreement. The final amount of royalties and interest owed relating to the first phase of the Arbitration was approximately $0.5 million, which is included in accrued expenses as of September 30, 2011.

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The hearing on Tessera's assertion of infringement on additional patents (now ten U.S. and four foreign patents) and the payment of additional royalties under the License Agreement relating to the additional asserted patents was held in August 2011. Prior to the hearing, Tessera and Amkor agreed to dismiss their respective claims for tortious interference. Post-hearing oral argument is currently scheduled for November 2011. Tessera initially claimed that the amount in dispute in the Arbitration was approximately $100 million and is now claiming more than $400 million of royalties under the License Agreement for the additional patents. We believe this amount is speculative and strongly dispute these claims. However, the outcome of this matter is uncertain, and an adverse decision could have a material adverse effect on our results of operations, cash flows and financial condition.

In connection with the Arbitration, we deposited $17.0 million in an escrow account, which is classified as restricted cash in current assets at September 30, 2011. This amount represented our good faith estimate of the disputed amount of royalties that we expected Tessera to allege that we owed on packages assembled by us for one of our customers involved in proceedings with Tessera before the ITC related to the patents at issue in the prior arbitration. As a result of the Panel's decision in the first phase of the Arbitration, we expect that the funds held in escrow will be returned to us.

In May 2011, Tessera filed a new request for arbitration against Amkor seeking undisclosed damages and a declaration that the License Agreement has been terminated. Amkor disputes that Tessera has a right to terminate the License Agreement or that the License Agreement has been terminated. We believe that Tessera's claims in this new arbitration are without merit.

Amkor Technology, Inc. v. Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc.

On November 17, 2003, we filed a complaint against Carsem (M) Sdn Bhd, Carsem Semiconductor Sdn Bhd, and Carsem Inc. (collectively “Carsem”) with the ITC in Washington, D.C., alleging infringement of our United States Patent Nos. 6,433,277; 6,455,356 and 6,630,728 (collectively the “Amkor Patents”) and seeking, under Section 337 of the Tariff Act of 1930, an exclusion order barring the importation by Carsem of infringing products. We allege that by making, using, selling, offering for sale or importing into the U.S. the Carsem Dual and Quad Flat No-Lead Packages, Carsem has infringed on one or more of our MicroLeadFrame packaging technology claims in the Amkor Patents.

On November 18, 2003, we also filed a complaint in the U.S. District Court for the Northern District of California, alleging infringement of the Amkor Patents and seeking an injunction enjoining Carsem from further infringing the Amkor Patents, compensatory damages and treble damages due to willful infringement plus interest, costs and attorney's fees. This District Court action has been stayed pending resolution of the ITC case.

The ITC Administrative Law Judge (“ALJ”) conducted an evidentiary hearing during July and August of 2004 in Washington D.C. and, on November 18, 2004, issued an Initial Determination that Carsem infringed some of our patent claims relating to our MicroLeadFrame package technology, that some of our 21 asserted patent claims are valid, that we have a domestic industry in our patents and that all of our asserted patent claims are enforceable. However, the ALJ did not find a statutory violation of Section 337 of the Tariff Act.

We filed a petition in November 2004 to have the ALJ's ruling reviewed by the full ITC. On March 31, 2005, the ITC ordered a new claims construction related to various disputed claim terms and remanded the case to the ALJ for further proceedings. On November 9, 2005, the ALJ issued an Initial Determination on remand finding that Carsem infringed some of our patent claims and that Carsem had violated Section 337 of the Tariff Act.

On remand, the ITC had also authorized the ALJ to reopen the record on certain discovery issues related to a subpoena of documents from a third party. An order by the U.S. District Court for the District of Columbia enforcing the subpoena became final on January 9, 2009, and the third party produced documents pursuant to the subpoena.

On July 1, 2009, the ITC remanded the investigation for a second time to the ALJ to reopen the record to admit into evidence documents and related discovery obtained from the enforcement of the above-referenced third-party subpoena.

Following a two-day hearing, on October 30, 2009, the ALJ issued an Initial Determination reaffirming his prior ruling that the Carsem Dual and Quad Flat No-Lead Packages infringe some of Amkor's patent claims relating to MicroLeadFrame package technology, that all of Amkor's asserted patent claims are valid and that Carsem violated Section 337 of the Tariff Act.

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

On December 16, 2009, the ITC ordered a review of the ALJ's Initial Determination. On February 18, 2010, the Commission reversed a finding by the ALJ on the issue of whether a certain invention constitutes prior art to Amkor's asserted patents. The ITC remanded the investigation to the ALJ to make further findings in light of the ITC's ruling. On March 22, 2010, the ALJ issued a Supplemental Initial Determination. Although the ALJ's ruling did not disturb the prior finding that Carsem Dual and Quad Flat No-Lead Packages infringe some of Amkor's patent claims relating to MicroLeadFrame technology, the ALJ found that some of Amkor's patent claims are invalid and, as a result, the ALJ did not find a statutory violation of the Tariff Act. On July 20, 2010, the ITC issued a Notice of Commission Final Determination, in which the ITC determined that there is no violation of Section 337 of the Tariff Act and terminated the investigation. We have appealed the ITC's ruling to the U.S. Court of Appeals for the Federal Circuit.

17. Related Party Transactions

We purchase leadframe inventory from Acqutek Semiconductor & Technology Co., Ltd. ("Acqutek") under arms-length transactions at terms consistent with our non-related party vendors. James J. Kim, our Executive Chairman of the Board of Directors, owned approximately 16.2% of Acqutek at December 31, 2010. In July 2011, James J. Kim sold all of his shares in Acqutek, and no longer holds any interest in the company. As a result, Acqutek will no longer be considered a related party. Purchases of inventory from Acqutek for the three months ended September 30, 2011 and 2010, were $1.1 million and $1.9 million, respectively. Purchases of inventory from Acqutek for the nine months ended September 30, 2011 and 2010, were $3.7 million and $8.4 million, respectively. Amounts due to Acqutek at September 30, 2011 and December 31, 2010, were $0.7 million and $1.2 million, respectively.

18. Business Segments

We have two reportable segments, packaging and test. Packaging and test are integral steps in the process of manufacturing semiconductor devices, and our customers will engage with us for both packaging and test services, or just packaging or test services.

The accounting policies for segment reporting are the same as those for our Consolidated Financial Statements as a whole. We evaluate our operating segments based on gross profit and gross property, plant and equipment. We do not specifically identify and allocate total assets by operating segment. Summarized financial information concerning reportable segments is shown in the following table. The “other” column reflects other corporate adjustments to net sales and gross profit and the property, plant and equipment of our sales and corporate offices.



	Packaging		Test	Other		Total
	(In thousands)
Three Months Ended September 30, 2011
Net sales	$	667,301	72,655	51		$	740,007
Gross profit	$	104,654	17,909	(324	)	$	122,239
Three Months Ended September 30, 2010
Net sales	$	712,397	81,526	48		$	793,971
Gross profit	$	158,361	29,738	159		$	188,258
Nine Months Ended September 30, 2011
Net sales	$	1,877,470	214,997	123		$	2,092,590
Gross profit	$	325,339	54,058	(655	)	$	378,742
Nine Months Ended September 30, 2010
Net sales	$	1,970,921	217,717	236		$	2,188,874
Gross profit	$	440,402	64,241	(230	)	$	504,413
Gross Property, Plant and Equipment
September 30, 2011	$	3,171,129	861,621	148,075		$	4,180,825
December 31, 2010	$	3,018,216	800,125	143,221		$	3,961,562

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

19. Exit Activities and Reductions in Force

As part of our ongoing efforts to improve our manufacturing operations and manage costs, we regularly evaluate our staffing levels and facility requirements compared to business needs. The following table summarizes our exit activities and reduction in force initiatives associated with these efforts. “Charges” represents the initial charge related to the exit activity. “Cash Payments” consists of the utilization of “Charges.” “Non-cash Amounts” consists of asset impairments and pension plan curtailments and settlements.



	Employee Separation Costs			Contractual Obligations		Asset Impairments		Total
	(In thousands)
Accrual at December 31, 2010	$	670		$	—	$	—	$	670
Charges	4,811			—		—		4,811
Cash Payments	(4,518		)	—		—		(4,518		)
Non-cash Amounts	(936		)	—		—		(936		)
Accrual at September 30, 2011	$	27		$	—	$	—	$	27



	Employee Separation Costs			Contractual Obligations			Asset Impairments			Total
	(In thousands)
Accrual at December 31, 2009	$	3,938		$	2,813		$	—		$	6,751
Charges	2,466			41			282			2,789
Cash Payments	(3,274		)	(2,854		)	—			(6,128		)
Non-cash Amounts	—			—			(282		)	(282		)
Accrual at September 30, 2010	$	3,130		$	—		$	—		$	3,130

Philippines Manufacturing Operations

During the three months ended September 30, 2011, we reduced our workforce by approximately 500 employees at our manufacturing operations in the Philippines. We recorded $4.8 million in charges for one-time termination benefits including $0.9 million in curtailment and settlement charges, of which $4.4 million and $0.4 million were charged to cost of sales and selling, general and administrative expenses, respectively. All amounts were paid prior to September 30, 2011.

Singapore Manufacturing Operations

In June 2009, we communicated to our employees the decision to wind-down and exit our manufacturing operations in Singapore. We completed our exit as of December 31, 2010. This wind-down affected approximately 600 employees and enabled us to improve our cost structure by consolidating factories. The majority of the machinery and equipment was relocated to, and utilized in, other factories. In June 2011, we sold the facility in Singapore for $13.3 million in cash, net of goods and services tax, and recorded a gain of less than $0.1 million, with no net tax effect.

The liability for one-time involuntary termination benefits for employees that provided service beyond a minimum retention period was recognized over the service period. During the three and nine months ended September 30, 2011, charges for termination benefits were not significant. During the three months ended September 30, 2010, we recorded charges for termination benefits of $0.4 million, of which $0.3 million and $0.1 million were recorded in cost of sales and selling, general and administrative expenses, respectively. During the nine months ended September 30, 2010, we recorded charges for termination benefits of $2.5 million, of which $1.7 million and $0.8 million were recorded in cost of sales and selling, general and administrative expenses, respectively.

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AMKOR TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Contractual obligation costs, asset impairments and other costs are included in costs of goods sold. In January 2010, we made a final payment related to the early termination of our lease of one of our facilities that was vacated and relief from our existing $1.1 million asset retirement obligation related to the leased property. Asset impairments of $0.3 million during the nine months ended September 30, 2010, relate to non-transferable machinery and equipment. All amounts accrued at September 30, 2011 are classified in current liabilities.

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains forward-looking statements within the meaning of the federal securities laws, including but not limited to statements regarding: (1) the migration of wirebond products to flipchip products, (2) the amount, timing and focus of our expected capital investments, (3) our ability to fund our operating activities for the next twelve months, (4) the effect of capacity utilization rates on our gross margin, (5) the expiration of tax holidays in jurisdictions in which we operate and expectations regarding our effective tax rate, (6) the release of valuation allowances related to taxes in the future, (7) the expected use of future cash flows, if any, for the expansion of our business, capital expenditures, the repayment of debt and the repurchase of common stock, (8) our ongoing evaluation of staffing levels, (9) our repurchase or repayment of outstanding debt or the conversion of debt in the future, (10) payment of dividends, (11) compliance with our covenants, (12) expected contributions to defined benefit pension plans, (13) liability for unrecognized tax benefits, (14) the effect of foreign currency exchange rate exposure on our financial results, (15) the volatility of the trading price of our common stock, (16) changes to our internal controls related to implementation of a new enterprise resource planning (“ERP”) system and (17) other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intend” or the negative of these terms or other comparable terminology. Because such statements include risks and uncertainties, actual results may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the following discussion as well as in Part II, Item 1A “Risk Factors” of this Quarterly Report. The following discussion provides information and analysis of our results of operations for the three and nine months ended September 30, 2011 and our liquidity and capital resources. You should read the following discussion in conjunction with Item 1 “Financial Statements” in this Quarterly Report as well as other reports we file with the Securities and Exchange Commission (“SEC”).

Overview

Amkor is one of the world's leading providers of outsourced semiconductor packaging and test services. Packaging and test are integral steps in the process of manufacturing semiconductor devices. The semiconductor manufacturing process begins with the fabrication of tiny transistor elements into complex patterns of electronic circuitry on silicon wafers, thereby creating large numbers of individual semiconductor devices or integrated circuits on each wafer (generally referred to as “chips” or “die”). The majority of wafers are tested and cut into pieces called chips. The chips are attached through wire bonding to a substrate or leadframe, or to a substrate in the case of flip chip interconnect, and then encased in a protective material. For a wafer-level package, the electrical interconnections are created directly on the surface of the wafer without a substrate or leadframe. The packages are then tested using sophisticated equipment to ensure that each packaged chip meets its design and performance specifications.

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

Our customers include, among others: Altera Corporation; Broadcom Corporation; Infineon Technologies, AG; International Business Machines Corporation (“IBM”); LSI Corporation; Qualcomm Incorporated; Sony Corporation; ST Microelectronics, Pte.; Texas Instruments, Inc. and Toshiba Corporation. The outsourced semiconductor packaging and test market is very competitive. We also compete with the internal semiconductor packaging and test capabilities of many of our customers.

Our net sales for the three months ended September 30, 2011, were $740.0 million compared to $794.0 million for the three months ended September 30, 2010. The decrease was driven primarily by weakness in demand for our leadframe and ball grid array packaging solutions, as well as our test services. The decrease is primarily due to the continuing migration of wirebond products to flipchip and the decreased demand in many of our end markets as a result of uncertainty in the macroeconomic environment. Leadframe package sales and test services decreased due to weakness in the auto, industrial, computing and consumer end markets, while ball grid array package sales decreased due primarily to weakness in the consumer and networking end markets.

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Gross margin of 16.5% for the three months ended September 30, 2011, was down from 23.7% for the three months ended September 30, 2010. Gross margin in the three months ended September 30, 2011, decreased from the prior year period primarily due to lower utilization of our packaging and test assets, the negative impact of foreign currency exchange rate movements, the increased cost of gold used in many of our wirebond packages, price erosion and restructuring activities at our Philippine manufacturing operations. The migration of wirebond products to flipchip has created underutilized wirebond capacity faster than we have been able to redeploy these assets, which has been one of the primary contributors to our 2011 decrease in utilization.

Our net income for the three months ended September 30, 2011, was $27.4 million, or $0.11 per diluted share, compared to net income of $78.0 million, or $0.30 per diluted share, for the three months ended September 30, 2010. The decrease was primarily attributable to the decrease in gross profit and higher professional service fees. Partially offsetting these reductions in net income were favorable foreign currency exchange rate movements affecting balance sheet items denominated in foreign currencies and lower income tax expense.

Our capital additions totaled $123.4 million for the three months ended September 30, 2011, compared to $171.5 million for the three months ended September 30, 2010. Our spending was focused primarily on new capacity for flip chip assembly and test services in support of communications. We expect our capital additions for the full year 2011 will be approximately $425 million to $450 million. Our expected capital additions for the remainder of 2011 primarily support smartphones and tablets, leadframe efficiency improvements through high-density matrix packaging, as well as research and development initiatives including next generation interconnect technologies such as wafer-level fan out and Through Silicon Via.

As part of our continued focus on generating cash flow and driving greater factory and administrative efficiencies, we reduced employee and contractor headcount at our manufacturing operations in the Philippines. These reductions resulted in charges for one-time termination benefits of $3.9 million and $0.9 million of related pension plan curtailment and settlement charges.

On March 11, 2011, operations at our facility in Kitakami, Japan were interrupted by the Tohoku earthquake near Sendai and the aftershocks that followed. Although the facility suffered some minor damage to buildings and equipment, as well as a complete shutdown of power and utilities, the facility recovered quickly and was substantially operational by April 2011. Japan is also a major supplier of semiconductors, silicon wafers, specialty chemicals, substrates, equipment and other supplies to the electronics industry, and the damage caused by the earthquake and subsequent tsunami adversely affected the electronics supply chain and some of our customers located in Japan. We believe our results during the nine months ended September 30, 2011, were impacted by the events in Japan, including, to some extent, by substrate and semiconductor wafer shortages.

Cash provided by operating activities was $375.8 million for the nine months ended September 30, 2011, as compared to cash provided by operating activities of $367.0 million for the nine months ended September 30, 2010. We generated positive free cash flow of $51.4 million for the nine months ended September 30, 2011, which decreased $38.8 million from the prior year comparable period. The decrease in free cash flow was primarily due to lower gross profit and increased purchases of property, plant and equipment, which was partially offset by increased collections on accounts receivable. We define free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. Free cash flow is not defined by U.S. generally accepted accounting principles (“U.S. GAAP”), and a reconciliation of free cash flow to net cash provided by operating activities is set forth under the caption “Cash Flows” below.

We believe our financial position and liquidity are sufficient to fund our operating activities for at least the next twelve months. At September 30, 2011, our cash and cash equivalents totaled approximately $483.4 million with an aggregate of $18.6 million of debt due through the end of 2011. In May 2011, we issued $400.0 million of our 6.625% Senior Notes due 2021. We used the majority of the proceeds of that note issuance to refinance the $42.6 million principal balance outstanding of our 2.5% convertible senior subordinated notes due May 2011 and redeem in full the $264.3 million outstanding principal amount of our 9.25% Senior Notes due 2016.

On August 30, 2011, the Board of Directors authorized the repurchase of up to $150.0 million of our common stock, exclusive of any fees, commissions or other expenses. The purchase of stock under this program may be made in the open market or through privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, price, applicable legal requirements and other factors. The stock repurchase program will be funded with available cash and may be suspended or discontinued at any time. Through September 30, 2011, we had repurchased 10.9 million shares for $48.7 million under this program.

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Results of Operations

The following table sets forth certain operating data as a percentage of net sales for the periods indicated:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2011		2010		2011		2010
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Gross profit	16.5	%	23.7	%	18.1	%	23.0	%
Depreciation and amortization	11.2	%	10.4	%	11.9	%	10.8	%
Operating income	5.9	%	14.8	%	7.2	%	13.1	%
Income before income taxes	4.0	%	11.2	%	3.7	%	8.7	%
Net income attributable to Amkor	3.7	%	9.8	%	3.2	%	8.3	%

Three and Nine Months Ended September 30, 2011 Compared to Three and Nine Months Ended September 30, 2010

Net Sales



	For the Three Months Ended September 30,									For the Nine Months Ended September 30,
	2011		2010		Change					2011		2010		Change
	(In thousands, except percentages)
Net sales	$	740,007	$	793,971	$	(53,964	)	(6.8	)%	$	2,092,590	$	2,188,874	$	(96,284	)	(4.4	)%
Packaging net sales	667,301		712,397		(45,096		)	(6.3	)%	1,877,470		1,970,921		(93,451		)	(4.7	)%
Test net sales	72,655		81,526		(8,871		)	(10.9	)%	214,997		217,717		(2,720		)	(1.2	)%

Net Sales. Net sales in the three and nine months ended September 30, 2011, decreased compared to the three and nine months ended September 30, 2010. Leadframe packaging solutions and test services decreased primarily due to weakness in the auto, industrial, computing, and consumer end markets. Ball grid array packaging solutions decreased due to weakness in the consumer, networking, and computing end markets. These decreases were partially offset by increases in chip scale packaging ("CSP") solutions, such as flip chip CSP, flip chip stacked CSP and fine pitch copper pillar flip chip packaging. This CSP growth was driven by strong demand for communications products supporting smartphones and tablets. For the nine months ended September 30, 2011, net sales were also negatively impacted by the supply chain situation in Japan.

Packaging Net Sales. Packaging net sales in the three months ended September 30, 2011, decreased compared to the three months ended September 30, 2010. The decrease in the three months ended September 30, 2011, was primarily due to weakness in demand for our leadframe and ball grid array packaging solutions. Leadframe package sales decreased due to weakness in demand for auto and industrial products, computer equipment, and consumer electronics, while ball grid array packaging solutions decreased as demand for consumer electronics, networking equipment and computer equipment decreased. Packaging unit volume decreased 0.8 billion units to 2.1 billion units during the three months ended September 30, 2011, compared to 2.9 billion units during the three months ended September 30, 2010, primarily due to a decrease in unit demand for our leadframe packaging solutions and wirebond chip scale package products.

Packaging net sales in the nine months ended September 30, 2011, decreased compared to the nine months ended September 30, 2010. The decrease in the nine months ended September 30, 2011, was primarily due to a decrease in demand for our ball grid array and leadframe packaging solutions, partially offset by growth in our chip scale packaging solutions. Packaging unit volume decreased 1.7 billion units to 6.4 billion units for the nine months ended September 30, 2011, compared to 8.1 billion units in the nine months ended September 30, 2010, primarily due to a decrease in unit demand for our leadframe packaging solutions and wirebond chip scale package products.

Test Net Sales. Test net sales in the three and nine months ended September 30, 2011, decreased compared to the three and nine months ended September 30, 2010. The decrease was primarily attributable to weakness in demand for consumer electronics and computer equipment. The decrease was partially offset by increased demand for smart phones for the nine months ended September 30, 2011.

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Cost of Sales



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2011		2010		Change				2011		2010		Change
	(In thousands, except percentages)
Cost of sales	$	617,768	$	605,713	$	12,055	2.0	%	$	1,713,848	$	1,684,461	$	29,387	1.7	%

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

Material costs as a percentage of net sales increased to 45.5% and 43.8% for the three and nine months ended September 30, 2011 from 43.3% and 42.6% for the three and nine months ended September 30, 2010, respectively. The increase as a percentage of sales was primarily due to the increased cost of gold used in many of our wirebond packages. Material costs in absolute dollars decreased in the three and nine months ended September 30, 2011, primarily due to the decline in net sales as discussed above.

Labor costs as a percentage of net sales increased to 15.2% and 14.8% for the three and nine months ended September 30, 2011, respectively, from 12.2% and 12.6% for the three and nine months ended September 30, 2010, respectively. Labor costs as a percentage of sales, and in absolute dollars, were negatively impacted by foreign currency exchange rate movements as substantially all of our manufacturing operations' workforce is paid in local currencies. Restructuring activities at our Philippine manufacturing operations in the three and nine months ended September 30, 2011, also increased labor costs compared to the three and nine months ended September 30, 2010. In addition, labor costs increased due to higher compensation for our manufacturing operations' workforce during the nine months ended September 30, 2011.

Other manufacturing costs as a percentage of net sales increased to 22.7% and 23.3% for the three and nine months ended September 30, 2011, respectively, from 20.8% and 21.7% for the three and nine months ended September 30, 2010, respectively. Other manufacturing costs as a percentage of sales, and in absolute dollars, were negatively impacted by foreign currency exchange rate movements, partially offset by overhead cost savings from the closure of our Singapore manufacturing operations. In addition, other manufacturing costs also increased due to increased depreciation during the nine months ended September 30, 2011, as a result of our continued investments in property, plant and equipment.

Gross Profit



	For the Three Months Ended September 30,									For the Nine Months Ended September 30,
	2011			2010			Change			2011			2010			Change
	(In thousands, except percentages)
Gross profit	$	122,239		$	188,258		$	(66,019	)	$	378,742		$	504,413		$	(125,671	)
Gross margin	16.5		%	23.7		%	(7.2		)%	18.1		%	23.0		%	(4.9		)%

Gross profit and gross margin for the three and nine months ended September 30, 2011, decreased compared to the three and nine months ended September 30, 2010. The decline in gross profit was primarily due to weakness in demand for some of our packaging solutions and the corresponding lower level of utilization of our manufacturing assets, including assets supporting our leadframe and wirebond chip scale packaging solutions for the three and nine months ended September 30, 2011. The migration of wirebond products to flipchip has created underutilized wirebond capacity faster than we have been able to redeploy these assets, which has been one of the primary contributors to our 2011 decrease in utilization. Gross margin was also negatively impacted by foreign currency exchange rate movements, the increased cost of gold used in many of our wirebond packages, price erosion and the restructuring activities at our Philippine manufacturing operations.



	For the Three Months Ended September 30,									For the Nine Months Ended September 30,
	2011			2010			Change			2011			2010			Change
	(In thousands, except percentages)
Packaging gross profit	$	104,654		$	158,361		$	(53,707	)	$	325,339		$	440,402		$	(115,063	)
Packaging gross margin	15.7		%	22.2		%	(6.5		)%	17.3		%	22.3		%	(5.0		)%

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Packaging Gross Profit. Gross profit and gross margin for packaging sales for the three and nine months ended September 30, 2011, decreased compared to the three and nine months ended September 30, 2010. The decrease in gross profit and margin was primarily attributable to weakness in demand for our leadframe and ball grid array packaging solutions and the corresponding lower level of utilization of our manufacturing assets, including assets supporting our leadframe and wirebond chip scale packaging solutions. The migration of wirebond products to flipchip has created underutilized wirebond capacity faster than we have been able to redeploy these assets, which has been one of the primary contributors to our 2011 decrease in utilization. Packaging gross margin was also negatively impacted by foreign currency exchange rate movements, the increased cost of gold used in many of our wirebond packages, price erosion and the restructuring activities at our Philippine manufacturing operations.



	For the Three Months Ended September 30,									For the Nine Months Ended September 30,
	2011			2010			Change			2011			2010			Change
	(In thousands, except percentages)
Test gross profit	$	17,909		$	29,738		$	(11,829	)	$	54,058		$	64,241		$	(10,183	)
Test gross margin	24.6		%	36.5		%	(11.9		)%	25.1		%	29.5		%	(4.4		)%

Test Gross Profit. Gross profit and gross margin for test sales for the three and nine months ended September 30, 2011, decreased compared to the three and nine months ended September 30, 2010. The decrease in gross profit and margin was primarily driven by lower utilization of our test assets during the three and nine months ended September 30, 2011.

Selling, General and Administrative Expenses



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2011		2010		Change				2011		2010		Change
	(In thousands, except percentages)
Selling, general and administrative	$	65,011	$	57,735	$	7,276	12.6	%	$	190,853	$	180,387	$	10,466	5.8	%

Selling, general and administrative expenses for the three and nine months ended September 30, 2011, increased compared to the three and nine months ended September 30, 2010. The increase was primarily driven by increased professional fees, higher employee compensation and benefits primarily due to merit increases and increased share-based compensation expense. The increase was partially offset by lower depreciation expense. In addition, in the nine months ended September 30, 2010, the increased selling, general and administrative expense was offset by reduced contracted services primarily associated with the implementation of our global ERP information system.

Research and Development



	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2011		2010		Change				2011		2010		Change
	(In thousands, except percentages)
Research and development	$	13,233	$	12,669	$	564	4.5	%	$	37,921	$	36,437	$	1,484	4.1	%

Research and development activities are currently focused on developing new package interconnect solutions and test services. In addition, research and development is focused on improving the efficiency and capabilities of our existing production processes. Our key areas for research and development initiatives include 3D packaging, advanced flip chip packaging, advanced micro-electromechanical system packaging and testing, fine pitch copper pillar bumping and packaging, laminate and leadframe packaging, Through Mold Via and Through Silicon Via technologies, wafer level processing and wafer level fan out technology and manufacturing cost reduction initiatives. Research and development expenses for the three and nine months ended September 30, 2011, remained consistent with the three and nine months ended September 30, 2010, both in dollars and as a percentage of net sales.

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Other Expense, Net



	For the Three Months Ended September 30,											For the Nine Months Ended September 30,
	2011			2010			Change					2011			2010			Change
	(In thousands, except percentages)
Interest expense, net	$	20,438		$	22,731		$	(2,293	)	(10.1	)%	$	63,106		$	75,555		$	(12,449	)	(16.5	)%
Foreign currency (gain) loss	(3,005		)	8,456			(11,461		)	(135.5	)%	1,658			9,010			(7,352		)	(81.6	)%
Loss on debt retirement, net	—			235			(235		)	(100.0	)%	15,531			18,042			(2,511		)	(13.9	)%
Equity in earnings of unconsolidated affiliate	(3,034		)	(2,174		)	(860		)	39.6	%	(6,641		)	(4,883		)	(1,758		)	36.0	%
Other income, net	(226		)	(85		)	(141		)	165.9	%	(695		)	(475		)	(220		)	46.3	%
Total other expense, net	$	14,173		$	29,163		$	(14,990	)	(51.4	)%	$	72,959