Amkor Technology, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Financial statements are unaudited. Amkor provides semiconductor packaging and test services.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $794.0m | $616.2m | $2,188.9m | $1,511.5m |
| Gross profit / margin | $188.3m / 23.7% | $154.6m / 25.1% | $504.4m / 23.0% | $305.0m / 20.2% |
| Operating income / margin | $117.9m / 14.8% | $87.8m / 14.2% | $287.6m / 13.1% | $115.5m / 7.6% |
| Net income attributable to Amkor | $78.0m | $80.9m | $181.4m | $68.0m |
| Diluted EPS | $0.30 | $0.31 | $0.70 | $0.32 |
- Cash flow: Nine-month operating cash flow was $367.0m, versus $156.8m. Capital expenditure purchases were $276.7m, versus $111.9m; company-defined free cash flow was $90.3m, versus $44.9m.
- Cash and liquidity: Cash and cash equivalents were $417.5m at September 30, up from $395.4m at year-end 2009. Amkor reported $99.5m available under its $100m revolving facility, with no borrowings outstanding.
- Debt: Total debt was $1,380.0m, including $144.9m current; debt was $1,434.2m at December 31, 2009. Debt maturities included $19.6m through year-end 2010 and $148.6m in 2011. The company reported compliance with debt covenants.
- Balance sheet: Current assets were $1,136.1m and current liabilities $901.4m. Trade receivables rose to $450.1m from $328.3m, and inventories to $203.9m from $155.2m.
Material changes versus prior periods
- Q3 sales grew 28.9% year over year; nine-month sales grew 44.8%. Management attributed the gains to semiconductor-industry recovery and stronger consumer demand. Q3 units increased to 2.9bn from 2.3bn; nine-month units rose to 8.1bn from 5.2bn.
- Q3 gross margin fell to 23.7% from 25.1%, despite higher gross profit. Higher-material-content packaging mix and increased gold costs weighed on margin; utilization and manufacturing efficiencies provided offsets. Nine-month gross margin improved to 23.0% from 20.2%, partly reflecting improved utilization and 2009 restructuring charges.
- Q3 net income attributable to Amkor declined despite higher sales and operating income. The prior-year quarter included a $28.1m Korean deferred-tax valuation-allowance release, while Q3 2010 had $10.3m of tax expense.
- Nine-month other expense included $18.0m of net debt-retirement costs and $9.0m of foreign-currency losses; the comparable 2009 period included a $15.7m net gain on debt retirement. Reduced interest expense partly offset these items.
- Debt transactions included issuing $345m of 7.375% senior notes due 2018, redeeming the 2011 and 2013 senior notes, and using a Korean term loan to tender for $125.7m of 2016 notes. The revolving facility was extended to April 2015 with lower borrowing margins.
Outlook, commentary, risks and contingencies
- Management expected approximately $480m of 2010 capital additions; $402.4m of additions had been recorded through September 30. Investment focused on advanced packaging capacity, technology, facilities and cost reduction. No specific revenue or earnings guidance is provided in the filing text.
- Management believed cash, operating cash flow and available credit would fund working capital, capital spending and debt service for at least the next 12 months, while cautioning that later liquidity depends on industry performance and access to refinancing or capital markets.
- Key risks include semiconductor cyclicality, short-term and uncommitted customer demand, fixed-cost exposure and utilization, pricing pressure, gold and materials costs, customer concentration, substantial debt and significant capital needs. The ten largest customers represented 53.8% of nine-month sales.
- Foreign-exchange sensitivity analysis estimated that a 10% adverse currency movement could reduce nine-month pretax income by $27.1m and operating income by $54.6m. Amkor had no outstanding derivative contracts.
- Amkor was in arbitration with Tessera over license royalties and other claims; Tessera asserted approximately $100m in dispute. Amkor disputed the claims and had escrowed funds, including an additional $3.9m in October 2010. Management said an adverse decision could materially affect results, cash flows and financial condition.
- The International Trade Commission found no Carsem patent violation; Amkor appealed in September 2010. The company also expected approximately $2m of special-benefit expense from a Korean voluntary early-retirement program announced in October. Singapore manufacturing exit payments of approximately $3.4m were expected during the remainder of 2010.
- Disclosure controls were assessed as effective at September 30. A multi-year ERP rollout had changed financial-reporting controls; evaluation and testing were to continue through December 31, 2010.
Important facts for investors to verify
- Whether demand and utilization sustain growth, and whether higher material costs and gold prices continue to pressure margins.
- Execution and funding of the approximately $480m 2010 capital-additions plan, alongside debt maturities and interest requirements.
- Developments in the Tessera arbitration, escrow requirements and the Carsem appeal.
- Progress and control effectiveness following ERP implementation, and the timing and cost of the Singapore exit and Korean retirement program.
- Tax valuation allowances, foreign tax exposures and the potential resolution of unrecognized tax benefits.