Business context and reporting period
Amkor Technology, Inc. provides outsourced semiconductor packaging and test services. This unaudited Form 10-Q covers the three months ended March 31, 2012, compared with the same period in 2011.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $655.0 million | $665.0 million |
| Gross profit / margin | $105.0 million / 16.0% | $126.7 million / 19.1% |
| Operating income | $34.3 million | $50.0 million |
| Net income attributable to Amkor | $11.8 million; diluted EPS $0.06 | $25.1 million; diluted EPS $0.10 |
| Cash from operating activities | $56.1 million | $120.2 million |
| Capital additions | $123.9 million | $105.0 million |
Free cash flow, defined by the company as operating cash flow less property, plant and equipment purchases, was negative $65.0 million, versus positive $6.3 million a year earlier. Cash and cash equivalents were $381.1 million at March 31, down from $434.6 million at year-end 2011. Total debt was $1.355 billion, including $53.0 million current; the $100 million revolving facility was undrawn, with $99.7 million available. Current assets were $992.4 million and current liabilities $650.8 million.
Material changes and management commentary
- Sales fell 1.5%. Packaging sales declined 2.7% to $581.5 million, while test sales increased 9.5% to $73.5 million.
- Gross margin declined 3.1 percentage points, primarily due to weaker packaging demand and utilization, Japan restructuring, higher depreciation, and increased gold costs. Test margin improved to 24.1% from 23.1%; packaging margin fell to 15.0% from 18.6%.
- Operating cash flow decreased by $64.1 million, reflecting lower gross profit and an unfavorable working-capital impact, particularly increased receivables. Capital spending exceeded operating cash flow.
- SG&A declined 11.3% to $57.3 million; R&D increased 10.7% to $13.4 million. Other expense, net, declined to $19.4 million from $20.9 million.
- Management expected approximately $550 million of 2012 capital additions, principally to support smartphone and tablet-related packaging and test demand. Q1 additions were $123.9 million.
- Management believed cash, operating cash flows and available credit would fund working capital, capital spending and debt service for at least the next 12 months. It cautioned that longer-term liquidity depends on business performance, industry conditions, capital needs and access to refinancing.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management cited semiconductor cyclicality, limited customer-order visibility, utilization, pricing, customer concentration and materials costs as sources of volatility.
- Amkor recorded $7.2 million of charges for workforce reductions of approximately 120 employees at Japanese manufacturing operations, including pension curtailment and settlement effects.
- In April 2012, a foreign tax authority accepted a ruling request; Amkor expected to recognize a $4.0 million tax benefit in Q2 2012. Tax holidays in several operating jurisdictions are scheduled to expire in whole or part through 2017, which could increase the effective tax rate.
- The Tessera arbitration remains a significant uncertainty. Tessera claims more than $400 million in additional royalties; Amkor disputes the claim and says the amount is speculative. The outcome is uncertain and an adverse decision could materially affect results, financial condition and cash flows. No accrual was recorded for this claim.
- Amkor reported $1.355 billion of debt and $107.4 million of Korean severance obligations. Debt covenants were met at quarter-end. Scheduled debt principal includes $381.4 million due in 2014 and $745.0 million thereafter.
- Other risks include concentrated customer exposure (one customer represented 20.7% of Q1 sales and another 10.3%), foreign-exchange exposure, and operational and supply-chain risks. A hypothetical 10% adverse currency movement was estimated to reduce operating income by $19.4 million.
Important facts for investors to verify
- Whether packaging demand and factory utilization recover, and whether the lower gross margin persists.
- Receivables, operating cash generation and the funding of the planned $550 million in 2012 capital additions.
- Debt maturity and refinancing needs, including the 2014 maturity concentration, and continued covenant compliance.
- Developments and potential exposure in the Tessera arbitration, including whether any liability becomes estimable or probable.
- Customer concentration, tax-holiday expirations and the timing and realization of the expected $4.0 million Q2 tax benefit.