Business context and reporting period
Amkor Technology, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The company provides outsourced semiconductor packaging and testing services. Management attributed the sharp year-over-year recovery to stronger semiconductor demand and improved consumer spending.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $749.2 | $506.5 | $1,394.9 | $895.3 |
| Gross profit / margin | $179.2 / 23.9% | $102.4 / 20.2% | $316.2 / 22.7% | $150.4 / 16.8% |
| Operating income / margin | $100.7 / 13.4% | $39.9 / 7.9% | $169.7 / 12.2% | $27.7 / 3.1% |
| Net income (loss) attributable to Amkor | $59.1 | $9.2 | $103.3 | $(12.9) |
| Diluted EPS attributable to Amkor | $0.23 | $0.05 | $0.41 | $(0.07) |
- Cash flow: Six-month operating cash flow was $190.5, compared with $33.4 in 2009. Capital additions were $230.8; cash purchases of property, plant and equipment were $142.9. Company-defined free cash flow was $47.6, versus negative $36.6 a year earlier.
- Liquidity: Cash and cash equivalents were $437.8 at June 30. The company reported $99.5 available under its $100 million revolving credit facility and said liquidity should fund operations, capital spending and debt service for at least twelve months.
- Debt: Total debt was $1,443.8, including $144.5 classified as current. Debt fair value was $1,779.7. Debt covenants were reported in compliance at June 30.
- Balance sheet: Total assets were $2,693.1, current assets $1,096.9 and total liabilities $2,195.9. Current liabilities were $804.1.
Material changes versus the prior comparable period
- Q2 sales rose 47.9%; six-month sales rose 55.8%. Packaging drove most of the increase, with Q2 packaging revenue up 51.2% and test revenue up 22.2%.
- Higher demand and factory utilization lifted gross margins. Higher gold and material costs, foreign exchange movements, restored compensation and increased manufacturing costs partly offset the improvement.
- Six-month net income improved from a loss to profit. The 2010 results included $17.8 of debt-retirement costs; the 2009 periods included gains on debt retirement.
- Operating expenses increased: six-month selling, general and administrative expense rose to $122.7 from $102.5, and research and development expense to $23.8 from $20.2. The filing cites restored employee compensation and ERP implementation services among the drivers.
- Cash increased $42.4 from year-end 2009. Receivables and inventories also increased with higher business volumes.
Outlook, management commentary, risks and unusual items
- Management raised its expected 2010 capital additions to approximately 16%–17% of net sales, focused on advanced packaging capacity, customer requirements, technology and cost reductions. Six-month additions were $230.8.
- In May, Amkor issued $345.0 of 7.375% senior notes due 2018, using proceeds and cash to redeem $411.8 principal amount of 2011 and 2013 senior notes. It also used a $180.0 Korean secured term loan to purchase $125.7 of 9.25% notes due 2016. The filing says $47.0 of the Korean loan was repaid in July 2010.
- A $5.3 tax valuation allowance was released for a Taiwan subsidiary, contributing to the six-month income tax benefit of $1.4. Amkor continued to maintain valuation allowances on U.S. net deferred tax assets.
- The company expects approximately $5.6 of additional payments in the remainder of 2010 to wind down Singapore manufacturing operations, with exit plans expected to be completed before year-end.
- Amkor faces significant semiconductor-cycle, utilization, pricing, commodity-cost, customer-concentration, foreign-exchange and financing risks. A 10% adverse currency movement was estimated to reduce six-month operating income by $36.2 and pretax income by $20.1, under the filing’s sensitivity assumptions.
- Legal matters: In the Tessera arbitration, Tessera asserted claims of approximately $100; Amkor disputes them, and an initial hearing was expected in Q4 2010. The company warned that an adverse outcome could materially affect results, cash flow and financial condition. After quarter-end, on July 20, 2010, the ITC found no Carsem Section 337 violation; Amkor stated it intended to appeal.
- Other items: The filing reported $5.3 of gross unrecognized tax benefits and said the amount could decrease by up to $3.5 within twelve months. ERP modules were implemented during the quarter; management judged disclosure controls effective but planned further evaluation and testing of internal-control changes by year-end.
Important facts for investors to verify
- Whether the demand recovery and higher utilization continue, and whether planned capital spending translates into returns without pressuring margins.
- Debt maturities, interest costs, refinancing needs and covenant headroom, including the post-quarter repayment of the Korean loan.
- The status and potential financial exposure of the Tessera arbitration and Amkor’s planned Carsem appeal.
- Progress and remaining costs of the Singapore exit, and the tax and funding implications of the Korean severance obligation of approximately $74.0.
- Whether rising gold and other input costs, foreign exchange movements and customer concentration affect future profitability and cash generation.