Amkor Technology, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; financial statements are unaudited. Amkor provides outsourced semiconductor packaging and test services.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $686.5 million | $687.6 million | $1,341.5 million | $1,352.6 million |
| Gross profit / margin | $89.3 million / 13.0% | $129.8 million / 18.9% | $194.3 million / 14.5% | $256.5 million / 19.0% |
| Operating income / margin | $22.0 million / 3.2% | $56.0 million / 8.1% | $56.3 million / 4.2% | $106.0 million / 7.8% |
| Net income attributable to Amkor | $0.6 million | $14.5 million | $12.4 million | $39.6 million |
| Net income per diluted share | Displayed as $0.00 | $0.07 | $0.07 | $0.17 |
Q2 pretax loss was $3.0 million, offset by a $3.9 million income tax benefit. For the six-month period, pretax income was $11.9 million and the income tax benefit was $0.5 million.
- Cash flow: Six-month operating cash flow was $142.5 million, versus $233.9 million a year earlier. Purchases of property, plant and equipment were $232.7 million; reported free cash flow, defined by Amkor as operating cash flow less those purchases, was negative $90.2 million, compared with positive $9.3 million.
- Liquidity and debt: June 30 cash and cash equivalents were $351.2 million, down from $434.6 million at year-end 2011. Total debt was $1.380 billion, including $69.4 million current; $149.7 million was available under the $150 million revolving facility. The company reported compliance with debt covenants.
- Capital returns and obligations: Amkor repurchased 7.1 million shares for approximately $33.2 million in Q2; $133.4 million remained authorized. Korean severance obligations totaled $110.9 million.
Changes versus the prior comparable period
- Q2 sales were nearly flat year over year, while six-month sales declined 0.8%. Packaging sales fell 0.3% in Q2 and 1.5% for six months; test sales rose 0.9% and 4.9%, respectively.
- Q2 gross margin fell 5.9 percentage points to 13.0%; six-month margin fell 4.5 points to 14.5%. The principal unusual driver was the Tessera arbitration accrual. Higher depreciation and manufacturing overhead also weighed on margins.
- Q2 SG&A declined 12.7%, while R&D rose 10.4%. Six-month other expense was lower than in 2011, primarily because 2011 included a $15.5 million loss on debt retirement; higher interest expense partly offset that improvement.
- Six-month operating cash flow decreased by $91.4 million. Cash also declined amid substantial capital spending and share repurchases.
Outlook, management commentary, risks and unusual items
- Management expects approximately $500 million of capital additions for 2012, primarily to support anticipated smartphone and tablet packaging and test demand. Capital additions were $273.4 million in the first half. This is investment guidance, not a revenue or earnings forecast.
- Management stated that cash, expected operating cash flow and borrowing availability should fund working capital, capital expenditures and debt service for at least the next twelve months. It cautioned that subsequent liquidity depends on business performance, spending, debt refinancing and the final Tessera payment.
- Amkor’s planned Incheon, Korea facility remains subject to uncertainty: the company described a non-binding plan for approximately $350 million of spending over three to four years, with construction expected to start in 2014 and operations targeted for late 2015 or 2016. A longer-term investment could reach $1 billion over ten years.
- Tessera: Following a July 5, 2012 interim arbitration order, Amkor recorded a $34 million Q2 charge—$30 million in cost of sales and $4 million in interest expense—estimated as the low end of the possible loss range. Tessera publicly said it would seek more than $125 million. The final amount remained unresolved, could exceed the accrual, and payment was not expected before Q4 2012. Tessera also filed a separate patent complaint seeking injunctive relief and damages; Amkor said it would contest the claims.
- Other items and risks: Amkor reduced its Japan workforce by about 120 employees and recorded $7.2 million of separation and related pension charges in the first half. Key risks include semiconductor cyclicality, customer and end-market concentration, utilization and pricing pressure, substantial capital needs and debt, foreign-exchange exposure, tax-holiday expirations, and intellectual-property litigation. One customer represented 20.4% of first-half sales.
Important facts for investors to verify
- Progress and final exposure in the Tessera arbitrations and related court case, including whether the $34 million accrual is sufficient and when cash payment is due.
- Whether expected smartphone and tablet demand supports planned capital spending, and the effect of new capacity, depreciation and utilization on margins and free cash flow.
- Cash generation, debt maturities and refinancing needs, including the $391.0 million scheduled for 2014 and the $745.0 million due thereafter.
- Customer concentration and demand trends across packaging, test, communications, consumer, networking, and auto and industrial markets.
- Execution, timing, cost and funding of the proposed Incheon project, as well as the effect of expiring tax holidays and Korean severance obligations.