Business context and reporting period
Amkor Technology, Inc. filed this Form 10-K for the fiscal year ended December 31, 2010. The company provides outsourced semiconductor packaging and test services, primarily through facilities in Asia. The filing also reports unaudited results for the fourth quarter of 2010.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Net sales | $2,939.5 million | $2,179.1 million |
| Gross profit / margin | $663.8 million / 22.6% | $480.4 million / 22.0% |
| Operating income | $373.8 million | $225.3 million |
| Net income attributable to Amkor | $232.0 million; diluted EPS $0.91 | $156.0 million; diluted EPS $0.67 |
| Cash provided by operating activities | $542.6 million | $261.7 million |
| Capital additions | $504.5 million | $197.7 million |
| Company-defined free cash flow | $96.9 million | $88.2 million |
- 2010 net sales rose 34.9%; packaging revenue was $2,650.3 million and test revenue was $288.9 million. Unit demand increased to 9.8 billion from 7.7 billion.
- Q4 2010 sales were $750.6 million, versus $667.6 million in Q4 2009 and $794.0 million in Q3 2010. Q4 net income attributable to Amkor was $50.6 million, versus $88.0 million in Q4 2009; diluted EPS was $0.20 versus $0.33.
- At year-end, cash and cash equivalents were $405.0 million; working capital was $289.9 million. Total debt was $1,364.3 million, including $150.1 million classified as current. Cash interest paid in 2010 was $96.6 million.
- Debt maturities disclosed at year-end included $150.1 million in 2011, $82.1 million in 2012, $236.1 million in 2013 and $281.6 million in 2014. The $100 million convertible notes due 2013 were converted into shares in January 2011.
Material changes versus prior comparable period
- Revenue and operating results recovered from the semiconductor industry downturn: sales increased 34.9% year over year, and operating income rose to $373.8 million from $225.3 million.
- Gross margin improved by 0.6 percentage points to 22.6%, mainly from higher utilization and operating efficiencies. Higher gold and other material costs, manufacturing costs, and adverse currency movements partly offset the gains.
- Operating cash flow more than doubled, while capital additions increased substantially. Free cash flow, as defined by Amkor, increased by $8.7 million.
- Debt declined by $69.9 million. The company issued $345 million of 7.375% senior notes due 2018 and used proceeds and cash for debt redemptions and repurchases; debt retirement transactions generated an $18.0 million net loss in 2010.
- SG&A increased 14.9% to $242.4 million, partly reflecting restored compensation and ERP-system depreciation. R&D spending rose to $47.5 million from $44.5 million.
Outlook, risks, contingencies, and unusual items
- Management expected approximately $500 million of capital additions in 2011 and stated that cash from operations, existing cash and revolving-credit availability should fund working capital, capital spending and debt service for at least 12 months. This is management’s assessment, not a guarantee.
- The company cited semiconductor cyclicality, high fixed costs and utilization sensitivity, pricing pressure, customer concentration, limited committed backlog, substantial debt and refinancing needs, and significant planned capital spending as material risks.
- Amkor reported $1.364 billion of debt at year-end and $423.0 million of scheduled future interest payments in its contractual-obligations table. Its Korean severance obligation was $88.6 million; changes to the plan or significant workforce reductions could affect cash needs.
- The Tessera arbitration remained unresolved. Tessera claimed approximately $100 million in dispute and sent a notice purporting to terminate the license agreement in February 2011; Amkor disputed the claims. An adverse outcome could materially affect results, cash flows or financial condition. Amkor had placed $15.1 million in escrow for disputed royalties.
- Amkor had appealed the adverse 2010 ITC determination in its patent case against Carsem. The filing states that outcomes of litigation and tax examinations remain uncertain.
- Tax holidays in several jurisdictions expire in whole or in part through 2015; management expects the effective tax rate to rise as benefits expire. The company also identified foreign-exchange exposure: a modeled 10% adverse currency movement would have reduced 2010 operating income by approximately $77 million.
- Amkor completed its Singapore manufacturing exit in 2010; a Singapore facility with a $13.1 million net book value was classified as held for sale. It recorded $4.1 million of cost-of-sales charges related to workforce reductions and restructuring in 2010.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2010. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Review the timing and sources of funds for 2011 debt maturities, interest payments and the planned $500 million capital program, including whether operating cash flow meets management’s expectations.
- Track utilization, gross margins, gold and other material costs, foreign-exchange movements, and customer pricing and order trends.
- Monitor developments and potential financial exposure in the Tessera arbitration and the Carsem appeal; verify whether any further legal or royalty liabilities are recorded.
- Assess the effect of tax-holiday expirations, open tax examinations and the Korean severance plan on cash flow and effective tax rates.
- Confirm the impact of the January 2011 conversion of $100 million of notes on debt, interest expense and shares outstanding; diluted EPS in 2010 was materially below basic EPS because of dilutive securities.