Amkor Technology, Inc. — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011. Amkor provides outsourced semiconductor packaging and test services, primarily through operations in Asia. Packaging generated 89.8% of 2011 net sales; test generated 10.2%.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net sales | $2,776.4 million | $2,939.5 million | -5.5% |
| Gross profit / margin | $490.6 million / 17.7% | $663.8 million / 22.6% | Margin down 4.9 percentage points |
| Operating income / margin | $193.7 million / 7.0% | $373.8 million / 12.7% | -48.2% |
| Net income attributable to Amkor | $91.8 million | $232.0 million | -60.4% |
| Diluted EPS | $0.39 | $0.91 | Down from $0.91 |
| Cash from operations | $516.8 million | $542.6 million | -4.8% |
| Capital expenditures paid | $466.7 million | $445.7 million | +4.7% |
| Free cash flow* | $50.1 million | $96.9 million | Down $46.8 million |
Balance sheet at year-end: Cash and cash equivalents were $434.6 million; working capital was $354.6 million; total assets were $2,773.0 million; and total debt was $1,346.7 million, including $59.4 million current. Stockholders’ equity was $693.3 million. The company reported $99.7 million available under its $100 million revolving facility.
Fourth quarter: Net sales were $683.8 million versus $750.6 million in Q4 2010 (-8.9%). Gross profit was $111.8 million versus $159.3 million; operating income was $43.7 million versus $86.2 million; and net income attributable to Amkor was $24.9 million versus $50.6 million. Diluted EPS was $0.11 versus $0.20.
*Company-defined, non-GAAP measure: cash from operations less purchases of property, plant and equipment.
Material changes versus prior comparable period
- Packaging sales declined 5.9% to $2,493.3 million, mainly due to weaker consumer, networking and computing demand. Test sales declined 2.1% to $282.9 million.
- Packaging unit volume fell to 8.1 billion from 9.8 billion, primarily reflecting lower leadframe demand. Communications demand for smartphones and tablets partly offset weakness elsewhere.
- Gross margin contracted as wirebond demand weakened and wirebond capacity was underutilized while customers shifted toward flip chip. Higher gold costs, Asian currency appreciation, increased depreciation and Philippine workforce-reduction charges also weighed on margins.
- Net interest expense decreased, but earnings also reflected a $15.5 million net loss on debt retirement. Amkor issued $400 million of 6.625% senior notes due 2021 and used proceeds in part to redeem $264.3 million of 9.25% notes and refinance other debt.
- Amkor repurchased 28.6 million shares for approximately $128.9 million during 2011. The January 2011 conversion of $100 million of related-party convertible notes issued 13.4 million shares.
Outlook, risks and unusual items
- Management expected approximately $300 million of capital additions in 2012 for projects already planned; actual spending could differ materially. The company reported $453.0 million of 2011 capital additions.
- Management believed cash from operations, existing cash and revolving-facility availability would fund working capital, capital expenditures and debt service for at least the next 12 months. It cautioned that longer-term liquidity depends on operating performance, investment needs, and the ability to repay or refinance debt.
- Scheduled debt principal payments include $59.4 million in 2012, $138.9 million in 2013 and $378.4 million in 2014; $745.0 million is due thereafter. The company reported compliance with debt covenants at year-end. Debt agreements restrict dividends and certain other actions.
- Management cited semiconductor cyclicality, pricing pressure, high fixed costs, customer concentration, capacity utilization, supplier availability and commodity prices, foreign exchange, international operations, and natural disasters as material risks. Two customers represented 17% and 11% of consolidated sales, respectively, in 2011; the top ten accounted for approximately 61%.
- In the Tessera arbitration, the company disputed a claim for more than $400 million in additional royalties; the outcome was uncertain and an adverse decision could materially affect results and liquidity. Amkor also appealed an adverse ITC determination in its patent litigation with Carsem. The filing states the possible range of loss in these matters was not reasonably estimable.
- Other notable items: 2011 Philippine workforce reductions generated $8.3 million of termination and related charges; a further foreign-location reduction begun in December was expected to generate approximately $6 million in charges in Q1 2012. Korean severance obligations were $106.5 million. Tax holidays in several countries expire at various dates through 2017, which may raise the effective tax rate.
- The independent auditor issued an unqualified opinion and concluded internal control over financial reporting was effective as of December 31, 2011. Management noted ongoing company-wide ERP implementation and related control-change risks.
Most important facts for investors to verify
- Whether utilization and margins recover as demand shifts from wirebond to flip chip, and whether Amkor can redeploy underused capacity.
- Customer exposure and order trends, especially for the two customers exceeding 10% of 2011 sales and the Toshiba-linked operations.
- Cash generation against planned capital spending, debt maturities, interest obligations and share repurchases.
- Developments and potential financial exposure in the Tessera and Carsem proceedings.
- Effects of tax-holiday expirations, Korean severance funding choices, currency movements and the planned 2012 workforce actions.