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AMKOR TECHNOLOGY INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, and we are focusing on the following strategies to achieve these goals: leveraging our investment in services for advanced technologies, improving utilization of existing assets and growing our scale and scope through selective strategic investments. We are an industry leader in developing and commercializing cost-effective advanced packaging and test technologies. These advanced technology solutions provide increased value to our customers while typically generating gross margins above the corporate average. This is particularly true in the mobile device market, where growth has outpaced the industry rate. Advanced packages are now the preferred choice in both the high-end and the mid-range segments of the smartphone market, which together account for a high portion of mobile phone semiconductor value. The demand for advanced packages is also being driven by second-wave mobile device customers, who are transitioning out of wirebond into wafer-level and flip-chip packages. 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 recover our capital investment over one to two years. Then, we focus on developing a second wave of customers to fill the capacity that becomes available when leading edge customers transition to newer packaging and test equipment and platforms. For example, we are currently engaged in improving our sales to Chinese and Taiwanese fabless chip companies, who dominate the mid-tier and entry-level segments of the mobile device market where much of the growth is occurring. In addition, we are seeking out new customers in the analog area for our mainstream wirebond technologies and expanding our share of the automotive market where semiconductor content continues to grow. These efforts to enlarge our customer base will continue through the remainder of 2014 and beyond as we target these and other customers to grow our revenue and improve the overall utilization of our assets. From time to time, we also see attractive opportunities to grow our customer base and expand markets. For example, in 2009 we invested in J-Devices Corporation, a joint venture to provide semiconductor packaging and test services in Japan. In 2013, we increased our investment in J-Devices to 60%. In July 2013, we acquired Toshiba's power discrete semiconductor packaging and test business in Malaysia. The financial results of this entity have been included in our Consolidated Financial Statements from the date of acquisition. In addition to adding a new revenue stream from our existing customer, Toshiba, we are attracting other power discrete customers. We believe that growth through selective joint ventures, acquisitions and other strategic investments can help diversify our revenue streams, improve our profits and continue our technological leadership. We expect to continue to evaluate similar opportunities. Our IDM customers include: Intel Corporation; Micron Technology, Inc.; STMicroelectronics N.V.; Texas Instruments Incorporated and Toshiba Corporation. Our fabless customers include: Altera Corporation; Broadcom Corporation; LSI Corporation and Qualcomm Incorporated. Our contract foundry customers include: GlobalFoundries Inc. and Taiwan Semiconductor Manufacturing Company Limited. Our business is affected by market conditions in the semiconductor industry generally, which is cyclical and impacted by broad economic factors, such as world-wide gross domestic product and consumer spending. Historical trends indicate there has been a strong correlation between world-wide gross domestic product levels, consumer spending and semiconductor industry cycles. The semiconductor industry has experienced significant and sometimes prolonged cyclical downturns in the past. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery. Our net sales, gross profit, operating income, cash flows, liquidity and capital resources have historically fluctuated significantly from quarter to quarter as a result of many factors, including the seasonality of our business, the cyclical nature of the semiconductor industry and other factors discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q. We operate in a capital intensive industry and have a significant level of debt. Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures, which are generally made in advance of the related revenues and without firm customer commitments. We fund our operations, - 22--------------------------------------------------------------------------------- Table of Contents including capital expenditures and debt service requirements, with cash flows from operations, existing cash and cash equivalents, borrowings under available credit facilities and proceeds from any additional financing. Maintaining an appropriate level of liquidity is important to our business and depends on, among other things, the performance of our business, our capital expenditure levels and our ability to repay debt out of our operating cash flows or proceeds from debt or equity financings. Financial Highlights On June 30, 2014, we completed the sale of our Japanese subsidiary to J-Devices, our 60% owned equity-method joint venture in Japan. Our financial results for the three months ended September 30, 2013, included approximately $19 million of net sales of the divested entity. Our results for the three months ended September 30, 2014 did not include any net sales of the divested entity. The results of the divested entity subsequent to June 30, 2014 are included in J-Devices' financial results and our corresponding equity in earnings of J-Devices. Our net sales increased $44.8 million or 5.8% to $812.8 million for the three months ended September 30, 2014, from $768.0 million for the three months ended September 30, 2013. The increase in net sales for the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily related to an increase in mobile communications driven by the launch of new mobile devices and growth in our automotive business. Gross margin for the three months ended September 30, 2014, increased to 18.8% from 18.4% for the three months ended September 30, 2013, as the 2013 period was negatively impacted by a $10.0 million charge to cost of sales for our pending patent litigation. Gross margin for the current period was favorably affected by increased sales of advanced packaging and test services and adversely affected by weakness in wirebond services. Our investment in infrastructure ahead of originally expected higher levels of demand and foreign currency losses at various Asian subsidiaries due to unfavorable exchange rate movements negatively impacted our gross margin for the three months ended September 30, 2014. Our capital expenditures totaled $442.3 million for the nine months ended September 30, 2014, compared to $402.0 million for the nine months ended September 30, 2013. Our spending was primarily focused on investments in advanced packaging and test equipment supporting mobile communications and construction of our new factory and research and development center in Korea. Net cash provided by operating activities was $405.7 million for the nine months ended September 30, 2014, compared to $375.2 million for the nine months ended September 30, 2013. The increase is primarily attributable to revenue growth and improved profitability, partially offset by an increase in working capital. 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 For the Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Materials 37.5 % 39.0 % 37.2 % 41.0 % Labor 14.1 % 14.1 % 14.2 % 14.3 % Other manufacturing costs 29.6 % 27.2 % 29.6 % 26.3 % Patent license litigation - % 1.3 % - % 0.5 % Gross margin 18.8 % 18.4 % 19.0 % 17.9 % Operating income 9.2 % 7.6 % 8.0 % 7.2 % Income before taxes and equity in earnings of unconsolidated affiliate 7.4 % 4.6 % 5.4 % 3.2 % Net income attributable to Amkor 5.8 % 3.3 % 5.2 % 3.1 % - 23--------------------------------------------------------------------------------- Table of Contents Net Sales For the Three Months Ended For the Nine Months Ended September 30, September 30, 2014 2013 Change 2014 2013 Change (In thousands, except percentages) Net sales $ 812,824 $ 767,987 $ 44,837 5.8 % $ 2,276,327 $ 2,201,575 $ 74,752 3.4 % The increase in net sales for the three months ended September 30, 2014, compared to the three months ended September 30, 2013, was primarily related to an increase in mobile communications driven by the launch of new mobile devices and growth in our automotive business. The increase in net sales for the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, was primarily driven by incremental business from our newly acquired power discrete business in Malaysia, strong demand for wafer services and NAND memory supporting mobile communications, the ramp of a fingerprint sensor product to high volume and growth in our automotive business. These increases were partially offset by lower net sales for other services related to mobile communications. Gross Margin For the Three Months Ended For the Nine Months Ended September 30, September 30, 2014 2013 Change 2014 2013 Change (In thousands, except percentages) Gross profit $ 153,217 $ 141,008 $ 12,209 $ 432,751 $ 394,340 $ 38,411 Gross margin 18.8 % 18.4 % 0.4 % 19.0 % 17.9 % 1.1 % 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. Gross margin for the three and nine months ended September 30, 2013 was negatively impacted by a $10.0 million charge to cost of sales for our pending patent litigation. Gross margin for the three months ended September 30, 2014, was favorably affected by increased sales of advanced packaging and test services and adversely affected by weakness in wirebond services. Our investment in infrastructure ahead of originally expected higher levels of demand and foreign currency losses at various Asian subsidiaries due to unfavorable exchange rate movements negatively impacted our gross margin for the three months ended September 30, 2014. Gross margin for the nine months ended September 30, 2014, increased compared to the nine months ended September 30, 2013, as a result of strength in wirebond services, particularly for NAND flash memory and the automotive end market, offset by lower sales of advanced packaging and test services due to a slower first half of 2014 for mobile devices. Selling, General and Administrative Expenses For the Three Months Ended For the Nine Months Ended September 30, September 30, 2014 2013 Change 2014 2013 Change (In thousands, except percentages) Selling, general and administrative $ 61,600 $ 64,347 $ (2,747 ) (4.3 )% $ 191,698 $ 189,524 $ 2,174 1.1 % Selling, general and administrative expenses for the three months ended September 30, 2014, decreased compared to the three months ended September 30, 2013. The decrease resulted from lower employee incentive compensation costs partially offset by the incremental costs from our newly acquired power discrete business in Malaysia. Selling, general and - 24--------------------------------------------------------------------------------- Table of Contents administrative expenses for the nine months ended September 30, 2014, increased compared to the nine months ended September 30, 2013. The increase was attributable to incremental costs from our newly acquired power discrete business in Malaysia, partially offset by lower professional fees associated with acquisitions and investments. Research and Development For the Three Months Ended For the Nine Months Ended September 30, September 30, 2014 2013 Change 2014 2013 Change (In thousands, except percentages) Research and development $ 16,437 $ 18,647 $ (2,210 ) (11.9 )% $ 59,561 $ 47,261 $ 12,300 26.0 % Research and development activities are focused on developing new packaging and test services and improving the efficiency and capabilities of our existing production processes. Areas of focus include 2.5D and 3D packaging, including embedded die, silicon interposers and through silicon via technologies, fine pitch copper pillar packaging and wafer-level processing. The decrease in research and development expenses for the three months ended September 30, 2014, was driven by 20 nanometer chipset design wins moving into production. The increase in research and development expenses for the nine months ended September 30, 2014, was primarily attributable to the development activities related to 20 nanometer chipsets with strategic customers that moved into production during the period, increased depreciation expense from research and development investments and higher employee compensation costs. Other Income and Expense For the Three Months Ended For the Nine Months Ended September 30, September 30, 2014 2013 Change 2014 2013 Change (In thousands, except percentages) Interest expense, including related party $ 25,023 $ 27,347 $ (2,324 ) (8.5 )% $ 73,766 $ 79,848 $ (6,082 ) (7.6 )% Other (income) expense, net (9,626 ) (4,328 ) (5,298 ) >(100)% (15,289 ) 6,326 (21,615 ) >(100)% Total other expense, net $ 15,397 $ 23,019 $ (7,622 ) (33.1 )% $ 58,477 $ 86,174 $ (27,697 ) (32.1 )% Interest expense for the three and nine months ended September 30, 2014, decreased as a result of capitalized interest related to the construction of our new factory and research and development center in Korea and the April 2014 conversion of $56.3 million of our 6.0% Convertible senior subordinated notes for shares of our common stock. Additionally, for the nine months ended September 30, 2014, the decrease in interest expense was also attributable to the June 2013 exchange of $193.7 million of our 6.0% Convertible senior subordinated notes for shares of our common stock, offset by an increase in our senior notes. Other (income) expense, net for the three and nine months ended September 30, 2014, increased primarily as a result of foreign currency gains at various Asian subsidiaries due to favorable exchange rate movements. Other (income) expense, net for the nine months ended September 30, 2014, included a $9.2 million net gain on the sale of a subsidiary to J-Devices. Other (income) expense, net for the nine months ended September 30, 2013, included a charge of $11.6 million related to the June 2013 cash payment we made to holders of the convertible notes. Income Tax Expense For the Three Months Ended For the Nine Months Ended September 30, September 30, 2014 2013 Change 2014 2013 Change (In thousands, except percentages)Income tax expense $ 14,985 $ 12,170 $ 2,815 23.1 % $ 32,425 $ 5,961 $ 26,464 >100% - 25--------------------------------------------------------------------------------- Table of Contents Generally, our effective tax rate is below the U.S. federal tax rate of 35% because we have experienced losses in the U.S. and our income is taxed in foreign jurisdictions where we benefit from tax holidays or tax rates lower than the U.S. statutory rate. Our income tax expense for the three and nine months ended September 30, 2014, was attributable to income tax on profits earned in certain foreign jurisdictions and foreign withholding taxes. During the nine months ended September 30, 2013, we recorded discrete income tax benefits of $9.2 million for the reversal of a deferred tax liability associated with the undistributed earnings of our investment in J-Devices and $6.6 million for the release of a valuation allowance on deferred tax assets with respect to our operations in one foreign jurisdiction. During the three months ended September 30, 2013, we also recorded $2.8 million of income tax expense for the revaluation of certain deferred taxes resulting from the approval of a tax incentive in Korea and $2.8 million of income tax expense for an addition to our unrecognized tax benefits related to the characterization of a deduction in a foreign jurisdiction. During 2014 and 2013, our subsidiaries in Korea, Malaysia, the Philippines and Taiwan operated under tax holidays which will continue to expire in whole or in part at various dates through 2022. We expect our effective tax rate to increase as the tax holidays expire as income earned in these jurisdictions will then be subject to higher statutory income tax rates. Equity in Earnings of J-Devices For the Three Months Ended For the Nine Months Ended September 30, September 30, 2014 2013 Change 2014 2013 Change (In thousands, except percentages) Equity in earnings of J-Devices $ 3,372 $ 3,179 $ 193 6.1 % 29,169 4,679 24,490 >100% In April 2013, we increased our ownership interest in J-Devices from 30% to 60%. Additionally, in June 2013, J-Devices acquired three packaging and test facilities from Renesas and, in June 2014, J-Devices acquired our Japanese subsidiary. Our equity in earnings of J-Devices for the nine months ended September 30, 2014, includes $8.8 million of additional equity in earnings resulting from the gain on J-Devices' purchase of our subsidiary and $8.1 million from the settlement of a take or pay arrangement under a manufacturing services agreement. Liquidity and Capital Resources We assess our liquidity based on our current expectations regarding sales, operating expenses, capital spending and debt service requirements. Based on this assessment, we believe that our cash flow from operating activities, together with existing cash and cash equivalents and availability under our revolving credit facilities, will be sufficient to fund our working capital, capital expenditure and debt service requirements for at least the next twelve months. Our liquidity is affected by, among other things, volatility in the global economy and credit markets, the performance of our business, our capital expenditure levels, other uses of our cash including the final amount of payments due in our pending patent license litigation, any purchases of stock under our stock repurchase program, any acquisitions or investments in joint ventures and our ability to either repay debt out of operating cash flow or refinance it at or prior to maturity with the proceeds of debt or equity offerings. There can be no assurance that we will generate the necessary net income or operating cash flows, or be able to borrow sufficient funds, to meet the funding needs of our business beyond the next twelve months due to a variety of factors, including the cyclical nature of the semiconductor industry and other factors discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q. Our primary source of cash and the source of funds for our operations are cash flows from operations, current cash and cash equivalents, borrowings under available debt facilities and proceeds from any additional debt or equity financings. As of September 30, 2014, we had cash and cash equivalents of $485.6 million. Included in our cash balance as of September 30, 2014, is $287.6 million held offshore by our foreign subsidiaries. If we were to distribute this offshore cash to the U.S. as dividends from our foreign subsidiaries, we would incur foreign withholding taxes; however, we would not incur a significant amount of U.S. federal income taxes, due to the availability of tax loss carryovers and foreign tax credits. As of September 30, 2014, we had availability of $149.6 million under our $150.0 million first lien senior secured revolving credit facility. Our foreign subsidiaries had $65.0 million available to be drawn under secured revolving credit facilities for general corporate purposes, general working capital purposes and capital expenditures and $220.0 million available to - 26--------------------------------------------------------------------------------- Table of Contents be borrowed under secured term loan credit facilities for general working capital purposes, capital expenditures and repayment of inter-company debt. As of September 30, 2014 we had $1,536.0 million of debt. Our scheduled principal repayments on debt include $5.0 million due in 2014, $5.0 million due in 2015, $70.0 million due in 2016, $110.0 million due in 2017, $345.0 million due in 2018 and $995.0 million due thereafter. In April 2014, holders of our 6.0% Convertible senior subordinated notes due April 2014 converted the remaining outstanding principal amount of $56.4 million into 18.6 million shares of our common stock, and we repaid $60.0 million of a foreign secured term loan credit facility maturing in July 2017. We were in compliance with all of our debt covenants at September 30, 2014, and we expect to remain in compliance with these covenants for at least the next twelve months. We utilize 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. For the nine months ended September 30, 2014 and 2013, we sold accounts receivable totaling $226.8 million and $59.8 million, respectively, for a discount, plus fees, of $1.0 million and $0.4 million, respectively. At September 30, 2014 and December 31, 2013, there were $68.6 million and $96.0 million, respectively, of receivables, which had been sold to financial institutions under these arrangements, that were outstanding on those dates. In order to reduce leverage and future cash interest payments, we may from time to time repurchase our outstanding notes for cash or exchange shares of our common stock for our outstanding notes. Any such transaction may be made in the open market, through privately negotiated transactions or otherwise and is subject to the terms of our indentures and other debt agreements, market conditions and other factors. Certain debt agreements have restrictions on dividend payments and the repurchase of stock and subordinated securities. These restrictions are determined by calculations based upon cumulative net income. We have never paid a dividend to our stockholders, and we do not have any present plans for doing so. Amkor Technology, Inc. also guarantees certain debt of our subsidiaries. We sponsor an accrued severance plan for our subsidiary in Korea, which under existing tax laws in Korea, limits our ability to currently deduct related severance expenses accrued under that plan. The purpose of these limitations is to encourage companies to migrate to a defined contribution or defined benefit plan. If we retain our existing severance plan, the deduction for severance expenses will be limited to severance payments made to retired employees, which results in a larger current income tax liability in Korea. If we decide to adopt a new plan, we would be required to fund a significant portion of the existing liability, which would provide a current tax deduction upon funding. Our Korean severance liability was $150.4 million as of September 30, 2014. We expect to use cash on hand, proceeds from borrowings under our existing lines of credit or other sources to make any payments that become due in connection with our pending patent license litigation. We refer you to Note 18 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of the pending litigation relating to Amkor's license agreement with Tessera. 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 any firm customer commitments. Our Board of Directors previously authorized the repurchase of up to $300.0 million of our common stock, exclusive of any fees, commissions or other expenses. At September 30, 2014, 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, price, applicable legal requirements and other factors. We have not purchased any stock under the plan since 2012. - 27--------------------------------------------------------------------------------- Table of Contents Investments We make significant capital expenditures in order to service the demand of our customers. During the nine months ended September 30, 2014, our capital expenditures totaled $442.3 million. Our spending was primarily focused on investments in packaging and test equipment supporting mobile communications. In September 2014, we started the construction of our new factory and research and development center in Korea. We plan to spend approximately $350 million for the construction of the facility through completion in 2016. There can be no assurance that the new facility will be completed, or that the actual scope, costs, timeline or benefits of the project will be consistent with our current expectations. We expect that our 2014 capital expenditures will be approximately $675 million, which includes approximately $35 million primarily for the deposit for the construction of our new factory and research and development center in Korea. The increase in trade payables of $261.3 million from December 31, 2013, included $190.2 million related to payables for capital investments. Our capital expenditures will primarily support customer demand for packaging and test services related to mobile communications. Ultimately, the amount of our 2014 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. We expect to exercise our option to increase our ownership in J-Devices from 60% to 66% in the fourth quarter of 2014. We also expect to exercise our option to further increase our ownership to 80% in the fourth quarter of 2015, subject to market and other conditions at the time of exercise. If we exercise our 80% option, certain governance restrictions of our shareholders' agreement will lapse, and we will begin consolidating the financial results of J-Devices at that time. We may consolidate sooner if the other J-Devices' investors agree to terminate these governance restrictions. The exercise price for all options is payable in cash and is determined using a formula based upon the net book value and a multiple of earnings before interest, taxes, depreciation and amortization of J-Devices. In addition, we are subject to risks associated with our capital expenditures, including those discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q under the caption "Capital Expenditures - We Make Substantial Investments in Equipment and Facilities To Support the Demand Of Our Customers, Which May Adversely Affect Our Business If the Demand Of Our Customers Does Not Develop As We Expect or Is Adversely Affected." Contractual Obligations The following table summarizes our contractual obligations at September 30, 2014, and the effect such obligations are expected to have on our liquidity and cash flow in future periods: Payments Due for Year Ending December 31, 2014 - Total Remaining 2015 2016 2017 2018 Thereafter (In thousands) Total debt $ 1,530,000 $ 5,000 $ 5,000 $ 70,000 $ 110,000 $ 345,000 $ 995,000 Scheduled interest payment obligations (1) 601,071 45,127 94,871 93,454 89,378 75,442 202,799 Purchase obligations (2) 323,403 51,546 157,323 100,961 2,460 4,924 6,189 Operating lease obligations 57,225 4,447 14,463 7,039 6,362 6,050 18,864 Severance obligations (3) 150,357 2,797 10,322 9,514 8,775 8,105 110,844 Total contractual obligations $ 2,662,056 $ 108,917 $ 281,979 $ 280,968 $ 216,975 $ 439,521 $ 1,333,696 (1) Scheduled interest payment obligations were calculated using stated coupon rates for fixed rate debt and interest rates applicable at September 30, 2014, for variable rate debt. (2) Represents off-balance sheet purchase obligations for capital expenditures and long-term supply contracts outstanding at September 30, 2014, including $240.6 million for construction obligations for our new factory and research and development center in Korea. (3) Represents estimated benefit payments for our Korean subsidiary severance plan. - 28--------------------------------------------------------------------------------- Table of Contents In addition to the obligations identified in the table above, other non-current liabilities recorded in our Consolidated Balance Sheets at September 30, 2014, include: • $19.4 million of net foreign pension plan obligations and $2.1 million for employee-related liabilities, for which the timing and actual amount of our future cash flow is uncertain. • $6.6 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 September 30, 2014, we had no off-balance sheet guarantees or other off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, other than our operating lease obligations described above in "Contractual Obligations." Contingencies, Indemnifications and Guarantees We refer you to Note 18 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of our contingencies related to litigation and other legal matters. If an unfavorable ruling were to occur in these matters, there exists the possibility of a material adverse impact on our business, liquidity, results of operations, financial position and cash flows in the period in which the ruling occurs. The potential impact from legal proceedings on our business, liquidity, results of operations, financial position and cash flows could change in the future. Critical Accounting Policies Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013. During the three months ended September 30, 2014, there have been no significant changes in our critical accounting policies as reported in our 2013 Annual Report on Form 10-K. New Accounting Pronouncements For information regarding recent accounting pronouncements, we refer you to Note 2 to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Cash Flows Net cash provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2014 and 2013, were as follows: For the Nine Months Ended September 30, 2014 2013 (In thousands) Operating activities $ 405,668 $ 375,245 Investing activities (456,301 ) (476,908 ) Financing activities (74,285 ) 277,931 Operating activities: Our cash flows provided by operating activities for the nine months ended September 30, 2014, increased by $30.4 million compared to the nine months ended September 30, 2013. The increase is primarily attributable to revenue growth and improved profitability, partially offset by an increase in working capital. - 29--------------------------------------------------------------------------------- Table of Contents Investing activities: Our cash flows used in investing activities are principally for payments for property, plant and equipment. The net cash used in investing activities for the nine months ended September 30, 2014, included cash transferred on the sale of our subsidiary to J-Devices, net of proceeds. The net cash used in investing activities for the nine months ended September 30, 2013, included payments for an investment in J-Devices and our power discrete business in Malaysia, offset by proceeds from the January 2013 sale of office space and land. Financing activities: The net cash used in financing activities for the nine months ended September 30, 2014, was driven by our repayment of borrowings at our subsidiary in Korea and the final payment for our newly acquired power discrete business in Malaysia. The net cash provided by financing activities for the nine months ended September 30, 2013, primarily resulted from the issuance of senior notes and borrowings at our subsidiary in Korea. 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. Free cash flow is not defined by U.S. GAAP. We believe free cash flow to be relevant and useful information to our investors because it provides them with additional information in assessing our liquidity, capital resources and financial operating results. Our management uses free cash flow in evaluating our liquidity, our ability to service debt and our ability to fund capital expenditures. However, free cash flow has certain limitations, including that it does not represent the residual cash flow available for discretionary expenditures since other, non-discretionary expenditures, such as mandatory debt service, are not deducted from the measure. The amount of mandatory versus discretionary expenditures can vary significantly between periods. This measure should be considered in addition to, and not as a substitute for, or superior to, other measures of liquidity or financial performance prepared in accordance with U.S. GAAP, such as net cash provided by operating activities. Furthermore, our definition of free cash flow may not be comparable to similarly titled measures reported by other companies. We had negative free cash flow of $36.6 million for the nine months ended September 30, 2014, primarily due to our investments to support customer demand for packaging and test services related to mobile communications. For the Nine Months Ended September 30, 2014 2013 (In thousands)Net cash provided by operating activities $ 405,668 $ 375,245 Payments for property, plant and equipment (442,308 ) (402,004 ) Free cash flow $ (36,640 ) $ (26,759 ) |