Amkor Technology, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. Amkor provides outsourced semiconductor packaging and test services. This unaudited filing covers the quarter and six months ended June 30, 2011; comparisons are with the same 2010 periods. The company reported two segments: packaging and test.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $687.6 million | $749.2 million | $1,352.6 million | $1,394.9 million |
| Gross profit / margin | $129.8 million / 18.9% | $179.2 million / 23.9% | $256.5 million / 19.0% | $316.2 million / 22.7% |
| Operating income / margin | $56.0 million / 8.1% | $100.7 million / 13.4% | $106.0 million / 7.8% | $169.7 million / 12.2% |
| Net income attributable to Amkor | $14.5 million | $59.1 million | $39.6 million | $103.3 million |
| Diluted EPS | $0.07 | $0.23 | $0.17 | $0.41 |
- Cash flow: Six-month operating cash flow was $233.9 million, versus $190.5 million. Capital expenditure purchases were $224.6 million, versus $142.9 million; company-defined free cash flow was $9.3 million, down from $47.6 million.
- Liquidity: June 30 cash and cash equivalents were $475.5 million, with $19.7 million of current restricted cash. Current assets were $1,110.9 million and current liabilities $680.3 million.
- Debt: Total debt was $1,323.4 million, including $99.3 million current debt; the company reported $99.6 million available on its $100 million revolving facility and compliance with covenants. Debt fair value was estimated at $1,639.9 million.
- Other metrics: Total assets were $2,817.7 million and total equity $781.4 million. Korean severance obligations were $103.3 million. Two customers each represented more than 10% of first-half sales; the ten largest customers together represented 59.2%.
Material changes versus prior period
- Q2 sales declined 8.2%; first-half sales declined 3.0%. Packaging sales fell 9.7% for Q2 and 3.8% for the first half, while test sales rose 5.7% and 4.5%, respectively.
- Profitability weakened: Q2 gross margin fell 5.0 percentage points and first-half gross margin fell 3.7 points. Management cited weaker packaging demand and utilization, unfavorable currency movements, higher depreciation, and increased gold costs. Q2 packaging volume was 2.2 billion units versus 2.7 billion; first-half volume was 4.3 billion versus 5.2 billion.
- Q2 net income was also affected by $15.5 million of debt-retirement loss and $3.6 million of income tax expense, compared with a $1.2 million tax benefit in Q2 2010. Lower interest expense partly offset the pressure.
- In May 2011, Amkor issued $400 million of 6.625% senior notes due 2021, using most proceeds to refinance its 9.25% notes due 2016 and 2.5% convertible notes due 2011. A related-party purchaser acquired $75 million of the new notes. In January, $100 million of related-party 6.25% convertible notes converted into 13.35 million shares.
Outlook, commentary, risks and unusual items
- Management expected full-year 2011 capital additions of approximately $425 million, including about $25 million for R&D initiatives. It stated that available cash, operating cash flow and facility availability should fund operations, capital expenditures and debt service for at least 12 months; this is not a guarantee of future liquidity.
- The March 2011 Tohoku earthquake interrupted Kitakami operations; the facility was substantially operational by quarter-end. Management said Japan-related substrate and wafer shortages had affected results.
- In July 2011, after quarter-end, a Tessera arbitration panel rejected approximately $18 million of claimed royalties for certain packages, but found Amkor materially breached royalty and audit provisions. Amkor estimated the amount due after offsets at approximately $125,000. Tessera’s separate claims concerning additional patents exceeded $400 million; Amkor disputed them and warned an adverse outcome could materially affect results, cash flows and financial condition. Amkor expected escrowed $17 million to be returned following the panel decision.
- Other notable risks include semiconductor demand cycles, fixed-cost exposure and utilization, customer concentration and short-term order visibility, commodity and foreign-exchange exposure, substantial debt, Korean severance funding, and reliance on Asian operations and suppliers. The company reported no derivative transactions during the first half.
- Tax holidays in China, Korea, the Philippines and Taiwan were expected to expire in whole or in part through 2015, potentially increasing the effective tax rate. Management also reported $9.9 million of gross unrecognized tax benefits and was seeking local rulings that could reduce them by up to $8.3 million.
- Disclosure controls were assessed as effective at June 30. Amkor implemented significant ERP modules at a subsidiary on July 1 and planned further evaluation and testing of related controls.
Important facts for investors to verify
- Whether packaging demand, utilization and gross margins recover, and whether Japan supply constraints ease.
- The status and potential exposure of the Tessera arbitrations, including the disputed claims exceeding $400 million and expected release of escrow.
- Execution of the $425 million capital program against operating cash flow and the company’s debt maturities and interest burden.
- Customer concentration, particularly the two customers exceeding 10% of first-half sales, and demand visibility given limited binding commitments.
- Potential effects of currency movements, gold and other material costs, tax-holiday expirations, Korean severance obligations, and ERP implementation on earnings, liquidity and controls.