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, 2011, compared with the first quarter of 2010. The company reports packaging and test segments.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $665.0 million | $645.7 million |
| Gross profit / margin | $126.7 million / 19.1% | $137.0 million / 21.2% |
| Operating income / margin | $50.0 million / 7.5% | $69.0 million / 10.7% |
| Net income attributable to Amkor | $25.1 million | $44.3 million |
| Diluted EPS | $0.10 | $0.18 |
| Cash from operating activities | $120.2 million | $103.7 million |
| Capital expenditures (cash purchases of PP&E) | $113.9 million | $67.1 million |
| Free cash flow, as defined by Amkor | $6.3 million | $36.6 million |
- Cash and cash equivalents were $393.0 million at March 31, 2011; current assets were $1,010.8 million and current liabilities were $704.1 million.
- Total debt was $1,243.5 million, including $132.6 million classified as current. Debt fair value was estimated at $1,633.3 million. The company reported $99.1 million of debt due through year-end 2011.
- Amkor had $99.6 million available under its $100 million revolving credit facility, with no borrowings outstanding. It reported compliance with debt covenants.
Material changes versus the prior comparable period
- Sales increased 3.0%, despite packaging and test unit volume falling to 2.1 billion from 2.5 billion. Higher-value chip-scale packaging and communications demand supported revenue; communications and flip-chip strength offset weaker consumer electronics and networking demand.
- Gross profit declined $10.3 million and gross margin fell 2.1 percentage points. Management cited lower packaging utilization, higher gold and other material costs, increased labor and manufacturing costs, and unfavorable foreign-exchange movements.
- SG&A rose 14.7% to $64.6 million, driven by employee compensation and benefits, share-based compensation, ERP-related depreciation, and professional fees. Operating income fell 27.5%.
- Net income attributable to Amkor declined to $25.1 million from $44.3 million. Lower interest expense partly offset lower gross profit, higher SG&A, and higher income tax expense.
- Operating cash flow increased, but free cash flow fell $30.3 million year over year, principally because of higher capital spending. Capital additions were $105.0 million versus $72.7 million.
- In January 2011, holders converted all $100 million of related-party 6.25% convertible notes into 13.35 million common shares. The transaction reduced debt and increased equity.
Outlook, management commentary, risks and contingencies
- Management expected approximately $450 million of 2011 capital additions, primarily to expand flip-chip assembly and test capacity for communications. It believed cash, operating cash flow, and credit availability would fund operating, capital, and debt-service needs for at least the next 12 months.
- The March 11 Japan earthquake temporarily interrupted the Kitakami facility; it was fully operational by the filing date. The event reduced first-quarter sales by approximately $6 million. Management warned that supply-chain disruptions, particularly involving substrates and wafers, could negatively affect second-quarter results.
- Amkor cited semiconductor-industry cyclicality, high fixed costs and capacity utilization, pricing and commodity-cost pressures, foreign-exchange exposure, customer concentration, substantial debt and capital needs, and reliance on suppliers and international operations as significant risks. Its ten largest customers represented 57.4% of first-quarter sales; two customers each exceeded 10%.
- The Tessera arbitration remained material and uncertain. Tessera claimed approximately $100 million in dispute and sent a license-termination notice in February 2011. Amkor disputed the claims and stated it believed it remained in compliance. A $17 million royalty amount was held in restricted cash escrow; a decision on royalty calculations was expected in the first half of 2011, with another hearing scheduled for August 2011. An adverse outcome could materially affect results, cash flows, and financial condition.
- Amkor appealed the ITC decision finding no violation in its patent dispute with Carsem. The filing states that the outcome of legal proceedings could change and may have a material adverse effect.
- Tax holidays at subsidiaries in China, Korea, the Philippines, and Taiwan were expected to expire at varying dates through 2015, potentially increasing the effective tax rate. The company also disclosed $10.8 million of gross unrecognized tax benefits and a $94.7 million Korean severance obligation.
- Management reported effective disclosure controls as of March 31, 2011, and no material change in internal control over financial reporting during the quarter. The multi-year ERP rollout continued.
Most important facts for investors to verify
- Whether lower utilization, gold and other input costs, and currency movements continue to pressure gross margins.
- Whether Japan-related supplier disruptions affect second-quarter production, customer demand, or costs.
- Actual 2011 capital spending versus the approximately $450 million outlook, and the effect on free cash flow and liquidity.
- Debt maturities, refinancing or conversion assumptions, and the company’s ability to meet debt service while funding capacity investments.
- Developments in the Tessera arbitration, including the termination notice, escrow, and potential financial exposure; also monitor the Carsem appeal.
- Customer concentration, the expiration of foreign tax holidays, Korean severance funding, and the ERP implementation’s effect on operations and controls.