Amkor Technology, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with Q1 2012 unless otherwise noted. Amkor provides outsourced semiconductor packaging and test services. The company cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $687.5 million | $655.0 million | +5.0% |
| Gross profit / margin | $115.0 million / 16.7% | $105.0 million / 16.0% | Margin +0.7 percentage points |
| Operating income / margin | $41.1 million / 6.0% | $34.3 million / 5.2% | Higher |
| Net income | $13.8 million | $11.6 million | Higher |
| Net income attributable to Amkor | $13.4 million | $11.8 million | Higher |
| Basic / diluted EPS | $0.09 / $0.07 | $0.07 / $0.06 | Higher |
| Operating cash flow | $98.7 million | $56.1 million | +$42.6 million |
| Capital expenditure purchases | $112.5 million | $121.1 million | Lower |
| Free cash flow (company-defined) | $(13.9) million | $(65.0) million | Improved |
Test revenue rose 28.1% to $94.2 million; packaging revenue increased 2.0% to $593.4 million. Test gross margin rose to 33.4% from 24.1%, while packaging gross margin declined to 14.1% from 15.0%. Growth in test, flip chip and wafer-level processing for mobile communications supported overall sales and margins; weaker consumer and computing wirebond demand partly offset the gains. Interest expense increased, mainly reflecting higher debt.
Balance sheet and liquidity
- Cash and cash equivalents were $466.7 million at March 31, up from $413.0 million at year-end. Current assets were $1.133 billion and current liabilities $664.8 million.
- Total debt was $1.578 billion, versus $1.545 billion at December 31, 2012; none was classified as current. Debt includes $225 million of related-party long-term debt. Amkor reported compliance with debt covenants.
- Availability included $149.7 million under the $150 million senior secured revolver, $80 million under foreign revolving facilities and $217 million under subsidiary term facilities for capital expenditures. Management said existing cash, operating cash flow and available facilities were expected to fund requirements for at least 12 months.
- Operating cash flow improved, while free cash flow remained negative because capital purchases exceeded operating cash generation. Financing cash inflow was $32.9 million, primarily from Korean subsidiary borrowing.
Outlook, developments and risks
- Management expected 2013 capital additions of approximately $525 million, plus $150 million for land acquisition and preparation for a new Korean factory and R&D center. Construction spending for that facility was expected to total approximately $300 million over several years. The land agreement is conditional on meeting specified requirements.
- In April 2013, after quarter-end, Amkor completed the increase of its J-Devices ownership from 30% to 60% for approximately $67 million. It expects to retain equity-method accounting because governance rights limit its ability to direct the venture. Amkor also resumed discussions about a possible Toshiba Malaysia packaging operation acquisition; terms remain unfinalized, with an estimated cash price around $72 million plus a license royalty and working capital.
- The 2014 convertible notes mature in April 2014, with $250 million principal outstanding and a $3.02 conversion price. The company noted conversion was not assured. Scheduled principal payments include $255 million in 2014 and $105 million in 2015.
- Tessera arbitration: Amkor had recorded a $56 million estimate for damages and interest, described as the low end of the possible loss range. Tessera announced it would seek more than $150 million. The panel had not yet determined final royalties, interest or costs; Amkor said additional charges could be recorded. A separate Tessera patent lawsuit also remained pending, with an adverse outcome potentially material.
- Customer concentration is significant: one customer accounted for 26.8% of Q1 sales, and the ten largest customers represented 63.2%. Semiconductor cyclicality, utilization and pricing, customer order variability, substantial fixed costs and capital needs, and competition are key business risks.
- Tax holidays in Korea, the Philippines and Taiwan expire in whole or in part through 2017; management expects tax expense to rise as they expire. Foreign-exchange sensitivity analysis estimated that a 10% adverse currency movement could reduce operating income by about $21 million.
- The Korean severance obligation was $124.0 million. Amkor also reported approximately $33.3 million of accrued royalties relating to the pending Tessera arbitration. These and other commitments may affect future cash requirements.
Most important facts for investors to verify
- Whether mobile-related test and advanced packaging growth continues and offsets weakness in wirebond markets.
- Actual capital spending and facility project costs, timing and customer demand supporting the investments.
- Final Tessera arbitration and court outcomes, amounts payable, and any additional accruals or business impact.
- Ability to fund the 2014 note maturity and subsequent scheduled debt service while maintaining liquidity.
- Progress and cash requirements of the J-Devices ownership change and any Toshiba Malaysia transaction, alongside customer concentration and tax-holiday expirations.