Amkor Technology, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amkor provides outsourced semiconductor packaging and test services. Financial statements are unaudited.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $695.4m | $740.0m | $2,036.9m | $2,092.6m |
| Gross profit / margin | $116.8m / 16.8% | $122.2m / 16.5% | $311.1m / 15.3% | $378.7m / 18.1% |
| Operating income / margin | $54.0m / 7.8% | $44.0m / 5.9% | $110.3m / 5.4% | $150.0m / 7.2% |
| Net income attributable to Amkor | $22.3m | $27.4m | $34.7m | $67.0m |
| Diluted EPS | $0.11 | $0.11 | $0.19 | $0.28 |
Q3 packaging sales declined 7.7% to $615.9m, while test sales rose 9.3% to $79.4m. For the first nine months, packaging sales fell 3.7% and test sales increased 6.4%.
Cash flow, balance sheet and debt
- For the first nine months, operating cash flow was $284.4m, down from $375.8m. Property and equipment purchases were $380.3m, resulting in negative free cash flow of $95.9m, versus positive $51.4m a year earlier. Free cash flow is a company-defined, non-GAAP measure.
- At September 30, cash and cash equivalents were $549.1m; current assets were $1,182.9m and current liabilities $738.4m. Total debt was $1,627.1m, including $40.5m current debt; cash less debt was approximately negative $1,078.1m. Total liabilities were $2,483.7m.
- In September, Amkor issued $300m of 6.375% senior notes due 2022 and used proceeds to refinance subsidiary borrowings. In October, it repaid a further $157.1m of subsidiary debt and borrowed another $20m under a 2017 term loan; the company said it had no debt due until April 2014 after the refinancing. These are post-quarter events.
- Liquidity included $149.7m available on the $150m revolving facility, plus stated foreign subsidiary availability of $85m under revolvers and $75m under term loans. Management believed liquidity was adequate for at least 12 months. Debt covenants were reported as met at quarter-end.
Material changes and management commentary
- Q3 sales fell 6.0%, mainly from weaker demand for wirebond array packages, gaming and some smaller smartphone and tablet OEMs. Test demand, particularly in communications, strengthened.
- Q3 gross margin improved 0.3 percentage points year over year, reflecting prior restructuring benefits and favorable currency movements, partly offset by higher depreciation and lower sales. Nine-month gross margin declined 2.8 points, affected by lower packaging sales, higher depreciation and a $30m Tessera-related charge included in cost of sales.
- Capital additions were $446.8m for the first nine months, up from $325.4m, focused on flip-chip packaging and test capacity for communications demand. Management expected approximately $500m of capital additions for full-year 2012.
- Amkor planned to spend approximately $350m over three to four years on a proposed Incheon, Korea facility and research center; approximately $10m was planned for Q4 2012. The project was based on a non-binding memorandum of understanding and could change or not proceed.
- The company repurchased 8.4m shares for $41.8m in Q3; $91.6m remained under its authorization at quarter-end. It also reported $366.9m of cash held offshore.
Risks, contingencies and unusual items
- Tessera arbitration and litigation: A July 2012 interim arbitration order found royalties due on certain patents and that Tessera had terminated the license effective February 17, 2011. Amkor accrued $34m in Q2 ($30m cost of sales and $4m interest); it paid Tessera $19.9m in August for the undisputed amount. Tessera said it would seek more than $125m, and the final award could exceed the accrual. Tessera also filed a patent complaint; Amkor disputes the claims.
- Other litigation: Amkor received a favorable Federal Circuit ruling in its Carsem patent dispute, reversing an invalidity finding and remanding the matter. Carsem sought rehearing in October 2012.
- Debt and investment demands: High leverage, substantial scheduled interest and capital needs may constrain financial flexibility. The Korean severance obligation was $119.8m. Tax holidays in several countries were expected to expire in whole or in part through 2017, potentially increasing the effective tax rate.
- Operating and market exposures: Semiconductor cyclicality, capacity utilization, pricing and customer demand are significant risks. The ten largest customers accounted for 62.4% of nine-month sales; one customer represented 19.5%. A 10% adverse currency movement was estimated to reduce nine-month operating income by approximately $58.5m.
- Management identified ERP implementation as a change to internal controls, while reporting disclosure controls effective at September 30, 2012. It planned further evaluation and testing of internal-control changes by year-end.
Important facts for investors to verify
- Final Tessera arbitration award, potential additional accruals or payments, and consequences of the license termination and related court case.
- Whether expected smartphone and tablet demand materializes and supports utilization and returns on the expanded capacity.
- Actual full-year capital spending, progress and commitments for the proposed Incheon project, and the resulting cash and debt levels.
- Customer concentration and trends in packaging versus test demand, especially exposure to the largest customer and wireless communications.
- Debt refinancing and maturities after the October repayments, liquidity availability, and the effects of expiring tax holidays and Korean severance obligations.