AMKOR TECHNOLOGY, INC. This section includes comparisons of certain 2020 financial information to the same information for 2019. For discussion of 2019 results in comparison with 2018 results refer to "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission onFebruary 19, 2020 .
Overview
Amkor is one of the world's leading providers of outsourced semiconductor packaging and test services. Our financial goals are sales growth and improved profitability. To achieve these goals, we are focused on generating increased value from our investments in advanced technologies, improving utilization of existing assets, executing our balanced growth strategy and selectively growing our scale and scope through strategic investments. We are an industry leader in developing and commercializing advanced packaging and test technologies. We believe these advanced technology solutions provide substantial value to our customers, particularly in the mobile communications market, where growth generally outpaces the overall semiconductor industry. Advanced packages are now the preferred choice in both the high-end and the mid-range segments of the smartphone market, which together account for a high portion of mobile phone semiconductor value. The demand for advanced packages is also being driven by second-wave mobile device customers, who are transitioning out of wirebond into wafer-level and flip-chip packages. Interest in advanced packages for automotive applications is growing as well, largely due to new, data-intensive applications, which require increased pin count and performance. We believe that our technology leadership and this technology transition create significant growth opportunities for us. We typically look for opportunities in the advanced packaging and test area where we can generate reasonably quick returns on investments made for customers seeking leading edge technologies. We also focus on developing a second wave of customers to fill the capacity that becomes available when leading edge customers transition to newer packaging and test equipment and platforms. In addition, we are seeking to add new customers and to deepen our engagement with existing customers. This includes an expanded emphasis on the automotive end market where semiconductor content continues to grow and in the analog area for our mainstream wirebond technologies. From time to time, we identify attractive opportunities to grow our customer base and expand the markets we serve through joint ventures, acquisitions and other strategic investments. For example, inMay 2017 we acquired Nanium, which has strengthened our position in the market for wafer-level fan-out packaging. We believe that taking advantage of these opportunities helps to diversify our revenue streams, improve our profits, broaden our portfolio of services and maintain our technological leadership. As a supplier in the semiconductor industry, our business is cyclical and impacted by broad economic factors. Historical trends indicate there has been a strong correlation between worldwide gross domestic product levels, consumer spending and semiconductor industry cycles. The semiconductor industry has experienced significant and sometimes prolonged cyclical upturns and downturns in the past. We cannot predict the timing, strength or duration of any correction, economic slowdown or subsequent economic recovery. While customer demand for our services was, overall, quite strong throughout 2020, particularly in the communications and consumer end markets, demand in automotive and industrial was lower through most of the year due to the Covid-19 pandemic. We made many adjustments to our operations during 2020 to navigate through the onset of the pandemic, and through these efforts we were able to continue serving customers and grow the business in a challenging environment. 36
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The full potential effect of the Covid-19 pandemic is unknown, and there is significant uncertainty related to the ultimate impact that the Covid-19 pandemic will have on the global economy, our business, results of operations and financial condition. See Part I, Item 1A, including, "The Covid-19 Outbreak Has Impacted and May Continue to Impact the Supply Chain and Consumer Demand for Our Customers' Products and Services, Which May Adversely Affect Our Business, Results of Operations, and Financial Condition" and "Dependence on the Highly Cyclical Semiconductor Industry - Our Packaging and Test Services Are Used inVolatile Industries and Industry Downturns, and Declines in Global Economic and Financial Conditions Could Harm Our Performance." We operate in a capital intensive industry. Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures, which are generally made in advance of the related revenues and without firm customer commitments. We fund our operations, including capital expenditures and debt service requirements, with cash flows from operations, existing cash and cash equivalents, short-term investments, borrowings under available credit facilities and proceeds from any additional financing. Maintaining an appropriate level of liquidity is important to our business and depends on, among other considerations, the performance of our business, our capital expenditure levels, our ability to repay debt out of our operating cash flows or proceeds from debt or equity financings and our investment strategy. As ofDecember 31, 2020 , we had cash and cash equivalents and short-term investments of$698.0 million and$133.8 million , respectively. Our net sales, gross profit, operating income, cash flows, liquidity and capital resources have historically fluctuated significantly from quarter to quarter as a result of many factors, including the seasonality of our business, the cyclical nature of the semiconductor industry and other factors discussed in Part 1, Item 1A of this Annual Report on Form 10-K. 2020 Financial Summary Our net sales increased$997.9 million or 24.6% to$5,050.6 million in 2020 from$4,052.7 million in 2019. The increase was generally attributable to higher sales of advanced products in the communications, consumer and computing end markets, partially offset by a decline in the automotive and industrial end market. Gross profit increased$251.4 million in 2020 compared to 2019, primarily due to the increase in net sales, partially offset by changes in the mix of products sold toward products with higher material content.
In 2020, our capital expenditures totaled
Net cash provided by operating activities was$770.0 million for the year endedDecember 31, 2020 , compared to$563.9 million for the year endedDecember 31, 2019 . This increase was primarily due to higher net sales, higher operating profit, and changes in working capital. InOctober 2020 , our Board of Directors approved the initiation of a regular quarterly cash dividend on our common stock. The initial quarterly dividend was$0.04 per share. 37 -------------------------------------------------------------------------------- Table of Contents Results of Operations
The following table sets forth certain operating data as a percentage of net sales for the periods indicated:
For the Year Ended December 31
2020 2019 2018
Net sales 100.0 % 100.0 % 100.0 %
Materials 45.5 % 40.0 % 38.7 %
Labor 13.4 % 16.0 % 16.1 %
Other manufacturing costs 23.3 % 28.0 % 28.7 %
Gross margin 17.8 % 16.0 % 16.5 %
Operating income 9.1 % 5.8 % 6.0 %
Net income attributable to Amkor 6.7 % 3.0 % 2.9 %
Net Sales
Change
2020 2019 2018 2020 over 2019 2019 over 2018
(In thousands, except percentages)
Net sales $ 5,050,589 $ 4,052,650 $ 4,316,466 $ 997,939 24.6 % $ (263,816) (6.1) %
The increase in net sales in 2020 compared to 2019 was due to higher sales of
advanced products in the communications, consumer and computing end markets,
partially offset by a decline in the automotive and industrial end market. The
communications end market benefited from the recovery in the smartphone market
from the prior year inventory correction. Sales increased in the consumer end
market due to the introduction of a new high-volume consumer product. Increased
demand, driven by work-from-home arrangements, drove higher sales in the
computing end market. The automotive and industrial market experienced decreased
demand and supply chain disruptions due to the Covid-19 pandemic.
Gross Profit and Gross Margin
Change
2020 2019 2018 2020 over 2019 2019 over 2018
(In thousands, except percentages)
Gross profit $ 900,814 $ 649,439 $ 710,565 $ 251,375 $ (61,126)
Gross margin 17.8 % 16.0 % 16.5 % 1.8 % (0.5) %
Our cost of sales consists principally of materials, labor, depreciation and
manufacturing overhead. Since a substantial portion of the costs at our
factories is fixed, there tends to be a strong relationship between our revenue
levels and gross margin. Accordingly, relatively modest increases or decreases
in revenue can have a significant effect on margin and on labor and other
manufacturing costs as a percentage of revenue, depending upon product mix,
utilization and seasonality.
Gross profit and gross margin for 2020 increased compared to 2019, primarily due
to the increase in net sales, partially offset by changes in the mix of products
sold toward products with higher material content.
Selling, General and Administrative Expenses
Change
2020 2019 2018 2020 over 2019 2019 over 2018
(In thousands, except percentages)
Selling, general and
administrative $ 302,842 $ 278,631 $ 295,239 $ 24,211 8.7 % $ (16,608) (5.6) %
38-------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses increased in 2020 compared to 2019 primarily due to costs incurred for our factory consolidation efforts inJapan and increased employee compensation costs. These increases were partially offset by our efforts to control expenses, particularly travel and professional fees. In addition, we had a gain from a sale of real estate in 2019 which lowered our expenses in that period. Research and Development Change 2020 2019 2018 2020 over 2019 2019 over 2018
(In thousands, except percentages)
Research and development
2.2 % $ (19,544) (12.4) %
Research and development activities are focused on developing new packaging and
test services and improving the efficiency and capabilities of our existing
production processes. The costs related to our technology and product
development projects are included in research and development expense until the
project moves into production. Once production begins, the costs related to
production become part of the cost of sales, including ongoing depreciation for
the equipment previously held for research and development activities.
Other Income and Expense
Change
2020 2019 2018 2020 over 2019 2019 over 2018
(In thousands, except percentages)
Interest expense $ 64,168 $ 71,587 $ 78,946 $ (7,419) (10.4) % $ (7,359) (9.3) %
Interest income (5,449) (6,655) (4,133) $ 1,206 (18.1) % $ (2,522) 61.0 %
Foreign currency
(gain) loss, net 9,608 1,944 1,451 7,664 >100% 493 34.0 %
Loss on debt
retirement 3,042 8,536 1,512 (5,494) (64.4) % 7,024 >100%
Other (806) (2,052) (5,447) 1,246 (60.7) % 3,395 (62.3) %
Total other expense,
net $ 70,563 $ 73,360 $ 72,329 $ (2,797) (3.8) % $ 1,031 1.4 %
Interest expense decreased in 2020 compared to 2019, primarily due to the
repayment of higher interest rate debt with the proceeds from our ¥28.5 billion
($260.6 million ) fixed rate term loan agreement in December 2019 and January
2020 . Interest expense has also decreased due to overall decreases in interest
rates in 2020 for our variable interest rate loans.
The changes in foreign currency (gain) loss, net for 2020 compared to 2019 were
due to foreign currency exchange rate movements, mainly the Korean Won, and the
associated impact on our net monetary exposure at our foreign subsidiaries.
Loss on debt retirement in 2019 is primarily due to the early redemption in
Income Tax Expense
Change
2020 2019 2018 2020 over 2019 2019 over 2018
(In thousands, except percentages)
Income tax expense
Income tax expense, which includes foreign withholding taxes and minimum taxes,
reflects the applicable tax rates in effect in the various countries where our
income is earned and is subject to volatility depending on the relative mix of
earnings in each location.
39-------------------------------------------------------------------------------- Table of Contents The effective tax rate in 2020 includes a$20.2 million income tax benefit from the recognition of deferred tax assets we expect to utilize in future years. The effective tax rate in 2018 includes a$22.3 million income tax expense to complete the accounting for the impact of the Tax Act, reducing our estimated net tax benefit of$41.6 million from 2017. During 2020, 2019 and 2018, our subsidiaries inKorea ,Malaysia ,the Philippines , andSingapore operated under various tax holidays. The tax holidays granted to ourMalaysia operations and certain operations inthe Philippines expired during 2018. As these tax holidays expire, income earned in these jurisdictions will be subject to higher statutory income tax rates, which may cause our effective tax rate to increase. See Note 4 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information about our income tax expense. Liquidity We assess our liquidity based on our current expectations regarding sales and operating expenses, capital spending, dividend payments and stock repurchases, debt service requirements and other funding needs. Based on this assessment, we believe that our cash flow from operating activities, together with existing cash and cash equivalents, short-term investments and availability under our credit facilities, will be sufficient to fund our working capital, capital expenditure, dividend payments, debt service and other financial requirements for at least the next twelve months. Our liquidity is affected by, among other factors, volatility in the global economy and credit markets, the performance of our business, our capital expenditure levels, other uses of our cash including any dividends and purchases of stock under any stock repurchase program, any acquisitions or investments in joint ventures and our ability to either repay debt out of operating cash flow or refinance it at or prior to maturity with the proceeds of debt or equity offerings. There can be no assurance that we will generate the necessary net income or operating cash flows, or be able to borrow sufficient funds, to meet the funding needs of our business beyond the next twelve months due to a variety of factors, including the cyclical nature of the semiconductor industry and other factors discussed in Part I, Item 1A of this Annual Report on Form 10-K. Our primary source of cash and the source of funds for our operations are cash flows from operations, current cash and cash equivalents, short-term investments, borrowings under available credit facilities and proceeds from any additional debt or equity financings. We refer you to Note 6 and Note 11 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information on our investments and borrowings, respectively. As ofDecember 31, 2020 , we had cash and cash equivalents and short-term investments of$831.8 million . Included in our cash and short-term investments balances as ofDecember 31, 2020 , is$683.1 million held offshore by our foreign subsidiaries. We have the ability to access cash held offshore by our foreign subsidiaries primarily through the repayment of intercompany debt obligations. Due to the changes in theU.S. tax law under the Tax Act, distributions of cash to theU.S. as dividends generally will not be subject toU.S. federal income tax. We estimate that repatriation of this foreign cash and short-term investments would generate withholding taxes and state income taxes of approximately$40.8 million . For certain accounts receivable, we use non-recourse factoring arrangements with third party financial institutions to manage our working capital and cash flows. Under this program, we sell receivables to a financial institution for cash at a discount to the face amount. Available capacity under these programs is dependent on the level of our trade accounts receivable eligible to be sold, the financial institutions' willingness to purchase such receivables and the limits provided by the financial institutions. These factoring arrangements can be reduced or eliminated at any time due to market conditions and changes in the credit worthiness of customers. For the year endedDecember 31, 2020 and 2019, we sold accounts receivable totaling$499.3 million and$680.4 million , net of discounts and fees of$2.9 million and$4.4 million , respectively. We operate in a capital-intensive industry. Servicing our current and future customers may require that we incur significant operating expenses and make significant investments in equipment and facilities, which are generally made in advance of the related revenues and without firm customer commitments. 40 -------------------------------------------------------------------------------- Table of Contents The borrowing base under our$250.0 million first lien senior secured revolving credit facility entered into by our subsidiary,Amkor Technology Singapore Holding Pte, Ltd. ("the Singapore Revolver"), is limited to the amount of eligible accounts receivable. As ofDecember 31, 2020 , we had availability of$250.0 million and no outstanding standby letters of credit. We refer you to Note 11 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information. As ofDecember 31, 2020 , our foreign subsidiaries had$316.0 million available to be drawn under revolving credit facilities, including the Singapore Revolver, and$60.1 million available to be borrowed under term loan credit facilities for working capital purposes and capital expenditures. As ofDecember 31, 2020 , we had$1,154.3 million of debt. Our scheduled principal repayments on debt include$149.0 million due in 2021,$182.4 million due in 2022,$170.8 million due in 2023,$81.5 million due in 2024,$27.4 million due in 2025 and$553.3 million due thereafter. We were in compliance with all debt covenants as ofDecember 31, 2020 , and we expect to remain in compliance with these covenants for at least the next twelve months. InDecember 2020 , we borrowed ¥10.9 billion (US$105 million ) under a new term loan agreement dueDecember 2025 . We refer you to Note 11 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information. Certain of our debt agreements have restrictions on dividend payments and the repurchase of stock and subordinated securities. These restrictions are determined in part by our covenant compliance and on calculations based upon cumulative net income or, in the case of our Singapore Revolver, borrowing availability. Dividend payments and stock repurchases are not currently restricted under our debt agreements. The debt ofAmkor Technology, Inc. is structurally subordinated in right of payment to all existing and future debt and other liabilities of our subsidiaries. From time to time,Amkor Technology, Inc. andAmkor Technology Singapore Holding Pte, Ltd. also guarantee certain debt of our subsidiaries. In order to reduce our debt and future cash interest payments, we may from time to time repurchase or redeem our outstanding notes for cash or exchange shares of our common stock for our outstanding notes. Any such transaction may be made in the open market, through privately negotiated transactions or otherwise, and would be subject to the terms of our indentures and other debt agreements, market conditions and other factors. Our subsidiary inKorea maintains an unfunded severance plan that covers certain employees that were employed prior toAugust 1, 2015 . As ofDecember 31, 2020 , the severance liability was$98.0 million . Accrued severance benefits are estimated assuming all eligible employees were to terminate their employment at the balance sheet date. For service periods subsequent toAugust 1, 2015 , employees participate in either a defined benefit pension plan or a defined contribution pension plan. From time to time, we may offer employees the option to convert from the severance plan to the defined contribution plan which would require the company to fund the converted portion of the liability. We refer you to Note 12 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information. InOctober 2020 , our Board of Directors approved the initiation of a regular quarterly cash dividend on our common stock. The first quarterly dividend of$0.04 per share, representing an initial dividend payment of$9.7 million in the aggregate, was paid onJanuary 7, 2021 to stockholders of record as ofDecember 18, 2020 . We currently anticipate that we will continue to pay quarterly cash dividends in the future. However, the payment, amount and timing of future dividends remain within the discretion of our Board of Directors and will depend upon our results of operations, financial condition, cash requirements, debt restrictions and other factors. Our Board of Directors previously authorized the repurchase of up to$300.0 million of our common stock, exclusive of any fees, commissions or other expenses. AtDecember 31, 2020 , approximately$91.6 million was available to repurchase common stock pursuant to the stock repurchase program. The purchase of stock may be made in the open market or through privately negotiated transactions. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will depend upon a variety of factors including economic and market conditions, the cash needs and investment opportunities for the business, the current market price of our stock, applicable legal requirements and other factors. We have not purchased any stock under the program since 2012. 41 -------------------------------------------------------------------------------- Table of Contents Capital Resources We make significant capital expenditures in order to service the demand of our customers, which are primarily focused on investments in advanced packaging and test equipment. In 2020, our capital expenditures totaled$553.0 million or approximately 10.9% of net sales. We expect that our 2021 capital expenditures will be approximately$700 million . Ultimately, the amount of our 2021 capital expenditures will depend on several factors including, among others, the timing and implementation of any capital projects under review, the performance of our business, economic and market conditions, the cash needs and investment opportunities for the business, the need for additional capacity to service anticipated customer demand and the availability of cash flows from operations or financing. In addition, we are subject to risks associated with our capital expenditures, including those discussed in Part I, Item 1A of this Annual Report on Form 10-K under the caption "Capital Expenditures - We Make Substantial Investments in Equipment and Facilities to Support the Demand of Our Customers, Which May Adversely Affect Our Business if the Demand of Our Customers Does Not Develop as We Expect or Is Adversely Affected."
Cash Flows
Net cash provided by (used in) operating, investing and financing activities for
each of the three years ended
For the Year Ended December 31
2020 2019 2018
(In thousands)
Operating activities
Operating activities: Our cash flow provided by operating activities for the year endedDecember 31, 2020 increased by$206.2 million compared to the year endedDecember 31, 2019 , primarily due to higher net sales, higher operating profit, and changes in working capital. Investing activities: Our cash flow used in investing activities for the year endedDecember 31, 2020 increased by$176.2 million compared to the year endedDecember 31, 2019 , primarily due to purchases of short-term investments and an increase in payments related to property, plant and equipment. This increase was partially offset by proceeds from sales and maturities of short-term investments and an increase in proceeds received from foreign exchange forward contracts. Payments for property, plant and equipment can fluctuate based on the timing of purchase, receipt and acceptance of equipment. Financing activities: The net cash used in financing activities for the year endedDecember 31, 2020 was primarily due to the net debt repayments inKorea andTaiwan . The net cash provided by financing activities for the year endedDecember 31, 2019 was primarily due to the issuance of the 2027 Notes and net borrowings inJapan , partially offset by the redemption of the 2022 Notes and net repayments inKorea . We provide the following supplemental data to assist our investors and analysts in understanding our liquidity and capital resources. We define free cash flow as net cash provided by operating activities less payments for property, plant and equipment, plus proceeds from the sale of and insurance recovery for property, plant and equipment, if applicable. Free cash flow is not defined byU.S. GAAP. We believe free cash flow to be relevant and useful information to our investors because it provides them with additional information in assessing our liquidity, capital resources and financial operating results. Our management uses free cash flow in evaluating our liquidity, our ability to service debt and our ability to fund capital expenditures. However, free cash flow has certain limitations, including that it does not represent the residual cash flow available for discretionary expenditures since other, non-discretionary expenditures, such as mandatory debt service, are not deducted from the measure. The amount of mandatory versus discretionary expenditures 42 -------------------------------------------------------------------------------- Table of Contents can vary significantly between periods. This measure should be considered in addition to, and not as a substitute for, or superior to, other measures of liquidity or financial performance prepared in accordance withU.S. GAAP, such as net cash provided by operating activities. Furthermore, our definition of free cash flow may not be comparable to similarly titled measures reported by other companies. For the Year Ended December 31 2020 2019 2018 (In thousands) Net cash provided by operating activities$ 770,033 $ 563,850 $ 663,410 Payments for property, plant and equipment (553,021) (472,433) (547,122) Proceeds from sale of and insurance recovery for property, plant and equipment 3,819 11,655 4,212 Free cash flow$ 220,831 $ 103,072 $ 120,500
Contractual Obligations
The following table summarizes our contractual obligations atDecember 31, 2020 , and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
Payments Due for Year Ending
Total 2021 2022 2023 2024 2025 Thereafter
(In thousands)
Total debt $ 1,164,302 $ 149,007 $ 182,373 $ 170,776 $ 81,461 $ 27,400 $ 553,285
Scheduled interest payment
obligations (1) 269,994 44,293 41,855 38,981 37,150 36,231 71,484
Purchase obligations (2) 234,662 224,644 5,145 1,333 1,333 655 1,552
Operating lease obligations
(3) 147,413 55,196 36,850 19,974 10,213 7,925 17,255
Finance lease obligations (3) 27,687 13,409 6,395 3,777 1,063 997 2,046
Severance obligations (4) 98,004 10,837 9,647 8,575 7,622 6,788 54,535
Total contractual obligations
(1)Represents interest payment obligations calculated using stated coupon rates for fixed rate debt and interest rates applicable atDecember 31, 2020 , for variable rate debt. (2)Represents off-balance sheet purchase obligations for capital expenditures, long-term supply contracts and other contractual commitments outstanding atDecember 31, 2020 . (3)Represents future minimum lease payments including interest payments. (4)Represents estimated benefit payments for our Korean subsidiary severance plan. In addition to the obligations identified in the table above, other non-current liabilities recorded in our Consolidated Balance Sheet atDecember 31, 2020 , include: •$72.2 million of foreign pension plan obligations, for which the timing and actual amount of impact on our future cash flow is uncertain. •$33.0 million net liability associated with unrecognized tax benefits. Due to the uncertainty regarding the amount and the timing of any future cash outflows associated with our unrecognized tax benefits, we are unable to reasonably estimate the amount and period of ultimate settlement, if any, with the various taxing authorities. Off-Balance Sheet Arrangements
As of
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Contingencies, Indemnifications and Guarantees
We refer you to Note 17 to our Consolidated Financial Statements in Part II,
Item 8 of this Annual Report on Form 10-K for a discussion of our contingencies
related to litigation and other legal matters.
Critical Accounting Policies and Use of Estimates
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. A summary of our significant
accounting policies used in the preparation of our Consolidated Financial
Statements appears in Note 1 to our Consolidated Financial Statements included
in Part II, Item 8 of this Annual Report on Form 10-K. Our preparation of this
Annual Report on Form 10-K requires us to make estimates and assumptions that
affect the reported amount of assets and liabilities, disclosure of contingent
assets and liabilities at the date of our financial statements and the reported
amounts of revenue and expenses during the reporting period. There can be no
assurance that actual results will not differ from those estimates, including
the impact of Covid-19 and any deterioration in the global business and economic
environment.
We believe the following critical accounting estimates and policies, which have
been reviewed with the Audit Committee of our Board of Directors, affect our
more significant judgments and estimates used in the preparation of our
Consolidated Financial Statements.
Acquisitions. We account for businesses we acquire using the acquisition method
of accounting and record the underlying net assets at their respective
acquisition-date fair values. The accounting for acquisitions requires us to
make significant estimates and assumptions, including those with respect to
future cash flows, discount rates and asset lives, and therefore requires
considerable judgment. These determinations affect the amount of depreciation
and amortization expense recognized in future periods. Our estimates of fair
value are based upon assumptions believed to be reasonable; however, they are
inherently uncertain and unpredictable.
Revenue Recognition. We recognize revenue, net of sales, use, value-added and
other similar taxes, as a performance obligation is satisfied in an amount
reflecting the consideration to which we expect to be entitled. We apply a
five-step approach in determining the amount and timing of revenue to be
recognized: (1) identifying the contract with a customer; (2) identifying the
performance obligations in the contract; (3) determining the transaction price;
(4) allocating the transaction price to the performance obligations in the
contract; and (5) recognizing revenue when the performance obligation is
satisfied. Substantially all of our revenue is recognized as services are
rendered.
Our packaging and test services are our performance obligations to our
customers. Our packaging services include wafer bump, probe and assembly. We
provide packaging and test services to our customers either individually or as
part of a combined offering. In a combined offering, we account for the
individual services separately if they are determined to be distinct. We
determine a service to be distinct if it is separately identifiable from other
services in the combined offering and if a customer can benefit from the unique
service on its own or with other resources that are readily available to the
customer.
The consideration, including variable consideration, is allocated between the
distinct services in a combined offering based upon the stand-alone selling
prices of the individual services. Our services involve a high degree of
specialization which are unique based on the design and purpose of the
customer's wafers. Accordingly, our negotiated pricing reflects the customized
nature of our services and represents a customer-specific stand-alone selling
price. We recognize revenue as services are rendered, which generally occurs
over the course of two to three weeks. Services are generally billed at
completion of each individual packaging or test service or in some instances at
the completion of all services in a combined offering.
We recognize revenue over time as services are rendered because our services
create or enhance the customer's wafer. We utilize an input method (cost
incurred plus estimated margin) to determine the amount of revenue to recognize
for in-process, but incomplete, customer orders at a reporting date. During the
period of providing our services, we generally do not control or take ownership
of customers' wafers, nor do we include the cost of the wafer in our cost
calculations. We believe that a cost-based input method is the most appropriate
manner to measure how we satisfy our performance obligations to customers
because the effort and costs incurred to package and/or test customer wafers are
not linear over the duration of these services.
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Shipping and handling costs are accounted for as a cost to fulfill our
performance obligations to customers. Accordingly, we record customer payments
of shipping and handling costs as a component of net sales, and the costs
incurred for shipping and handling are then charged to cost of sales.
Income Taxes. We operate in and file income tax returns in various U.S. and
non-U.S. jurisdictions which are subject to examination by tax authorities. The
tax returns for years where the statute of limitations remains open in all
jurisdictions in which we do business are subject to change upon examination. We
believe that we have estimated and provided adequate accruals for potential
additional taxes and related interest expense that may ultimately result from
such examinations. We believe that any additional taxes or related interest over
the amounts accrued will not have a material effect on our financial condition,
results of operations or cash flows. However, resolution of these matters
involves uncertainties and there can be no assurance that the outcomes will be
favorable. In addition, changes in the mix of income from our foreign
subsidiaries, expiration of tax holidays or changes in tax laws or regulations
could result in increased tax expense and effective tax rates in the future.
Additionally, we monitor on an ongoing basis our ability to utilize our deferred
tax assets and whether there is a need for a related valuation allowance. In
evaluating our ability to recover our deferred tax assets in the jurisdictions
from which they arise, we consider all available positive and negative evidence,
including scheduled reversals of deferred tax liabilities, projected future
taxable income, tax planning strategies and results of recent operations. For
most of our deferred tax assets, we consider it more likely than not that we
will have sufficient taxable income to allow us to realize these deferred tax
assets. However, in the event taxable income falls short of current
expectations, we may need to establish a valuation allowance against such
deferred tax assets. We have valuation allowances on certain U.S. federal net
operating loss and U.S. foreign tax credit carryforwards expected to expire
unused and select deferred tax assets in certain foreign jurisdictions. Such
valuation allowances are released as the related tax benefits are realized or
when sufficient evidence exists to conclude that it is more likely than not that
the deferred tax assets will be realized.
Valuation of Inventory. We order raw materials based on customers' forecasted
demand. If our customers change their forecasted requirements and we are unable
to cancel our raw materials order or if our vendors require that we order a
minimum quantity that exceeds the current forecasted demand, we will experience
a build-up in raw material inventory. We will either seek to recover the cost of
the materials from our customers or utilize the inventory in production.
However, we may not be successful in recovering the cost from our customers or
be able to use the inventory in production and, accordingly, if we believe that
it is probable that we will not be able to recover such costs, we reduce the
carrying value of our inventory. Additionally, we reduce the carrying value of
our inventories for the cost of inventory we estimate is excess and obsolete
based on the age of our inventories. When a determination is made that the
inventory will not be utilized in production or is not saleable, it is
written-off.
Inventories consist of raw materials and purchased components and are stated at
the lower of cost and net realizable value. Cost is principally determined by
standard cost or the weighted moving average method, both of which approximate
actual cost. For inventory valued using the standard cost method, we review and
set our standard costs as needed, but at a minimum on an annual basis.
Valuation of Long-lived Assets. We review long-lived assets, which include
property, plant and equipment and goodwill, for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Factors we consider important which could trigger an impairment
review include the following:
•significant under-performance relative to expected historical or projected
future operating results;
•significant changes in the manner of our use of the asset;
•significant negative industry or economic trends; and
•our market capitalization relative to net book value.
Recoverability of a long-lived asset group to be held and used in operations is
measured by a comparison of the carrying amount to the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the asset
group. If such asset group is considered to be impaired, the impairment loss is
measured as the amount by which the carrying amount of the asset group exceeds
its fair value. Long-lived assets to be disposed of are carried at the lower of
cost or fair value less the costs of disposal.
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Table of Contents We review goodwill for impairment annually during the fourth quarter of each year and whenever events or changes in circumstances indicate that an impairment may exist. Impairment losses are recorded when the carrying amount of the reporting unit exceeds its fair value.
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