Amkor Technology, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. Amkor provides outsourced semiconductor packaging and test services. This unaudited report covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $740.0 | $794.0 | $2,092.6 | $2,188.9 |
| Gross profit / margin | $122.2 / 16.5% | $188.3 / 23.7% | $378.7 / 18.1% | $504.4 / 23.0% |
| Operating income / margin | $44.0 / 5.9% | $117.9 / 14.8% | $150.0 / 7.2% | $287.6 / 13.1% |
| Net income attributable to Amkor | $27.4 | $78.0 | $67.0 | $181.4 |
| Diluted EPS | $0.11 | $0.30 | $0.28 | $0.70 |
- Cash flow: Nine-month operating cash flow was $375.8 million, versus $367.0 million. Capital expenditure purchases were $324.3 million, producing company-defined free cash flow of $51.4 million, down from $90.3 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $483.4 million. Total debt was $1,326.0 million, including $100.3 million current debt; $99.6 million was available under the $100 million revolving facility, with no revolver borrowings. The company reported compliance with debt covenants.
- Other financial measures: Q3 interest expense, net, was $20.4 million; nine-month interest expense, net, was $63.1 million. Nine-month tax expense was $9.5 million. Total assets were $2,889.4 million and total equity was $763.5 million.
Material changes versus the prior comparable period
- Q3 sales fell 6.8%; nine-month sales fell 4.4%. Packaging and test sales declined, reflecting weaker demand in several end markets and lower volumes. Communications-related chip-scale packaging, including products supporting smartphones and tablets, partly offset declines.
- Profitability contracted sharply: Q3 gross margin declined 7.2 percentage points, and nine-month gross margin declined 4.9 points. Management cited lower asset utilization, wirebond-to-flip-chip migration, foreign exchange movements, higher gold costs, pricing pressure, and Philippine restructuring.
- Q3 Amkor-attributable net income declined to $27.4 million from $78.0 million. For the nine months, it declined to $67.0 million from $181.4 million. Lower gross profit was the principal pressure; lower net interest expense and foreign currency losses partly offset it.
- Nine-month operating cash flow increased modestly, but free cash flow fell by $38.8 million, primarily due to lower gross profit and higher capital spending, partly offset by improved receivables collections.
Outlook, management commentary, risks, and unusual items
- Outlook: Management expected 2011 capital additions of approximately $425–$450 million, focused chiefly on flip-chip assembly and test capacity, smartphones and tablets, efficiency projects, and advanced packaging research. Management said available cash, operating cash flow, and facility availability should fund operations and requirements for at least the next 12 months; it cautioned that longer-term liquidity depends on business performance and refinancing access.
- Restructuring and disruption: Amkor reduced its Philippine workforce by about 500 employees in Q3, recording $4.8 million of related charges, including pension curtailment and settlement charges. The March 2011 Japan earthquake disrupted one facility and the wider supply chain; the facility was substantially operational by April. The filing also notes October 2011 flooding in Thailand as a potential industry supply-chain risk.
- Debt transactions and repurchases: Amkor issued $400 million of 6.625% senior notes due 2021, primarily to refinance or redeem higher-cost debt, including 9.25% notes. It recorded $15.5 million of nine-month debt-retirement losses. A January conversion of $100 million of related-party 6.25% notes issued 13.35 million common shares. Under a new $150 million repurchase authorization, the company bought 10.9 million shares for $48.7 million through quarter-end.
- Litigation: In the Tessera arbitration, the panel rejected approximately $18 million of claimed royalties in an initial phase but found Amkor had materially breached certain license terms; about $0.5 million was accrued. Tessera later claimed more than $400 million for additional patents, which Amkor strongly disputes. The outcome is uncertain and an adverse decision could materially affect results, cash flows, and financial condition. Amkor expects escrowed $17 million to be returned following the initial-phase decision. The Carsem patent case remained under appeal.
- Other risks and controls: The business is cyclical and exposed to weak demand, utilization, customer concentration, pricing and commodity costs, foreign exchange, substantial debt, and significant Korean severance obligations ($100.8 million). Management identified tax-holiday expirations as a source of potential higher tax rates. Disclosure controls were judged effective; ERP implementation continued, with related control testing to be completed by year-end.
Important facts for investors to verify
- Whether utilization and margins recover as wirebond capacity is redeployed and demand for packaging and test services changes.
- Actual 2011 capital additions versus the $425–$450 million outlook, and the resulting effect on free cash flow and liquidity.
- Progress and potential financial exposure in the Tessera proceedings, including the disputed royalty claims and escrow return.
- Debt maturities, refinancing capacity, covenant compliance, and the assumption that $250 million of 6.0% convertible notes due 2014 will convert rather than be repaid in cash.
- Exposure to customer concentration, currency movements, gold and other input costs, tax-holiday changes, and the Korean severance liability.
- Effects of ERP rollout and any further supply-chain impacts from natural disasters or regional disruptions.