Amkor Technology, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amkor provides outsourced semiconductor packaging and test services. Results are unaudited; the company cautions that interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $746.1 million | $686.5 million | $1,433.6 million | $1,341.5 million |
| Gross profit / margin | $138.4 million / 18.5% | $89.3 million / 13.0% | $253.3 million / 17.7% | $194.3 million / 14.5% |
| Operating income / margin | $58.5 million / 7.8% | $22.0 million / 3.2% | $99.5 million / 6.9% | $56.3 million / 4.2% |
| Net income attributable to Amkor | $29.7 million | $0.6 million | $43.1 million | $12.4 million |
| Amkor EPS, basic / diluted | $0.18 / $0.14 | — / — | $0.27 / $0.21 | $0.07 / $0.07 |
Q2 sales rose 8.7% year over year, led by packaging growth of 5.9% and test growth of 30.9%. Mobile communications demand, including flip-chip and wafer-level processing, supported both services. Consumer and computing demand was weaker. Gross-margin improvement also reflects a $30 million Tessera-related charge recorded in Q2 2012; therefore, the year-over-year increase is not solely an improvement in underlying operations.
For the first half, operating cash flow was $200.9 million, versus $142.5 million a year earlier. Capital-expenditure purchases were $222.7 million, producing company-defined free cash flow of negative $21.8 million, improved from negative $90.2 million. Capital additions were $283.1 million, compared with $273.4 million in the prior-year period.
Financial position and material changes
- At June 30, cash and cash equivalents were $636.0 million; current assets were $1.337 billion and current liabilities were $773.7 million.
- Total debt was approximately $1.651 billion including an unamortized premium; $56.4 million was current. Cash less total debt implies net debt of about $1.015 billion. The company reported $149.7 million available on its senior secured revolver, plus foreign-subsidiary facility availability. It was in compliance with debt covenants.
- In May, Amkor issued $225 million of 6.375% senior notes due 2022 for general corporate purposes. In June, it exchanged $193.7 million of 6.0% convertible notes due 2014 for 64.0 million common shares and paid $11.6 million in cash, recorded as a debt-retirement loss. The exchange reduced near-term convertible debt but increased shares outstanding.
- In April, Amkor increased its J-Devices ownership from 30% to 60% for $67.4 million. It continues equity-method accounting because governance arrangements limit its ability to direct certain decisions.
- First-half net income includes significant tax benefits: $8.6 million from reversal of a deferred tax liability related to J-Devices and $6.6 million from releasing a foreign deferred-tax valuation allowance.
- After quarter-end, on July 31, Amkor acquired Toshiba Electronics Malaysia for approximately $60 million, with $17 million payable by March 31, 2014.
Outlook, risks and contingencies
- Management expected 2013 capital additions of approximately $450 million, plus $140 million for land acquisition and preparation for a planned Korean factory and R&D center. The land purchase is subject to construction, investment, hiring, regulatory and other requirements; the project’s eventual scope, cost, timing and benefits are uncertain.
- Management believed operating cash flow, cash on hand and available credit would fund working capital, capital spending and debt service for at least the next 12 months. It cautioned that later liquidity depends on business performance, capital needs, debt refinancing and other factors.
- The semiconductor industry is cyclical, and Amkor has significant fixed costs and capital needs. Customer demand, capacity utilization, pricing, customer concentration, foreign exchange, materials costs and the ability to integrate acquisitions may materially affect results. One customer accounted for 25.3% of first-half sales; the ten largest accounted for 62.9%.
- The Tessera arbitration remains a material uncertainty. Amkor recorded a $56 million estimate in 2012 for damages and interest; Tessera announced it would seek more than $150 million. The final award could exceed the accrual, and Tessera also has a related patent-infringement case pending in federal court. Amkor reported $33.3 million of accrued royalties at June 30.
- Tax holidays in Korea, the Philippines and Taiwan expire in whole or in part through 2017; management expects the effective tax rate to rise as they expire. Amkor also reported $124.6 million of Korean severance obligations.
- Management identified foreign-exchange sensitivity: a modeled 10% adverse currency movement would reduce operating income by approximately $44 million; a separate balance-sheet exposure analysis estimated pre-tax income would be about $11 million lower. These are sensitivity estimates, not forecasts.
Most important facts for investors to verify
- Underlying margin improvement after separating the prior-year Tessera charge from operational and product-mix effects.
- Cash generation against elevated capital spending, the planned Korean facility, and the post-quarter Malaysia acquisition.
- Debt maturities, refinancing capacity, interest burden and the effect of the convertible-note exchange on dilution and per-share results.
- Potential Tessera exposure relative to the recorded accrual, plus the status and possible consequences of the related court case.
- Whether mobile-related demand and capacity utilization can offset weaker consumer and computing demand, customer concentration and expected tax-holiday expirations.