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AMKR > SEC Filings for AMKR > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for AMKOR TECHNOLOGY INC

Form 10-Q for AMKOR TECHNOLOGY INC


2-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Amkor is one of the world's leading providers of outsourced semiconductor packaging and test services. Packaging and test are integral steps in the process of manufacturing semiconductor devices. The semiconductor manufacturing process begins with the fabrication of individual transistors, or multiple transistors and other electronic elements combined into an integrated circuit (generally known as a "chip" or "die"), onto semiconductor material such as a silicon wafer. Each chip on the wafer is probe tested. The good chips are identified and the wafer is then separated into individual die. Each good die is then assembled into a package that typically encapsulates the die for protection and creates the electrical connections used to connect the package to a printed circuit board, module or other part of the electronic device. In some packages, chips are attached to a substrate or leadframe carrier through wirebonding or flip chip interconnects and then encased in a protective material. Or, for a wafer-level package, the electrical interconnections are created directly on the surface of the die (while the wafer is still intact) so that the chip may be attached directly to other parts of an electronic device without a substrate or leadframe. The packages are then tested using sophisticated equipment to ensure that each packaged chip meets its design and performance specifications. The test services we offer include probe testing and final testing.

Our packaging services are designed to meet application and chip specific requirements including the type of interconnect technology employed; size; thickness and electrical, mechanical and thermal performance. We are able to provide turnkey packaging and test services including semiconductor wafer bump, wafer probe, wafer backgrind, package design, packaging, test and drop shipment services.

Our business is impacted by market conditions in the semiconductor industry, which is cyclical by nature and impacted by broad economic factors, such as world-wide gross domestic product and consumer spending. Historical trends indicate there has been a strong correlation between world-wide gross domestic product levels, consumer spending and semiconductor industry cycles. The semiconductor industry has experienced significant and sometimes prolonged cyclical downturns in the past. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery.

Our net sales, gross profit, operating income, cash flows, liquidity and capital resources have historically fluctuated significantly from quarter to quarter as a result of many factors, including the seasonality of our business, the cyclical nature of the semiconductor industry and other factors discussed in

Part II, Item 1A of this Quarterly Report.

Our net sales increased $59.5 million or 8.7% to $746.1 million for the three months ended June 30, 2013, from $686.5 million for the three months ended June 30, 2012. The increase was driven by a $36.1 million or 5.9% increase in packaging net sales as well as a $23.4 million or 30.9% increase in test net sales. The increases in packaging and test net sales were driven by strong demand for flip chip and wafer-level processing and test services supporting mobile communications products and our continued investments in support of this end market. This increase was partially offset by a decrease in net sales of packaging services related to products for the consumer and computing end markets.

Gross margin for the three months ended June 30, 2013, increased to 18.5% from 13.0% for the three months ended June 30, 2012. The increase was mainly attributable to the $30.0 million charge related to our pending patent license arbitration that was recorded during the three months ended June 30, 2012. The increase was also driven by higher net sales of wafer-level processing and test services supporting mobile communications products, partially offset by weakness in demand for products for the consumer and computing end markets.

We operate in a capital intensive industry and have a significant level of debt. Servicing our current and future customers requires that we incur significant operating expenses and continue to make significant capital expenditures, which are generally made in advance of the related revenues and without any firm customer commitments. We fund our operations, including capital expenditures and debt service requirements, with cash flows from operations, existing cash and cash equivalents, borrowings under available credit facilities and proceeds from any additional financing. Maintaining an appropriate level of liquidity is important to our business and depends on, among other things, the performance of our business, our capital expenditure levels and our ability to repay debt out of our operating cash flows or proceeds from debt or equity financings.

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Driven by continued customer demand for services supporting mobile communications products, our capital additions totaled $283.1 million or 19.7% of net sales for the six months ended June 30, 2013, compared to $273.4 million or 20.4% of net sales for the six months ended June 30, 2012. During the six months ended June 30, 2013, 60.0% of our capital additions were made in packaging, 28.2% in test and 11.8% in research and development and infrastructure projects. During the six months ended June 30, 2012, 44.2% of our capital additions were made in packaging, 30.8% in test and 25.0% in research and development and infrastructure projects.

Net cash provided by operating activities was $200.9 million for the six months ended June 30, 2013, compared to $142.5 million for the six months ended June 30, 2012. For the six months ended June 30, 2013, we experienced negative free cash flow of $21.8 million, primarily due to our capital purchases to support anticipated customer demand for packaging and test services related to mobile communications. We define free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. Free cash flow is not defined by U.S. generally accepted accounting principles ("U.S. GAAP"), and a reconciliation of free cash flow to net cash provided by operating activities is set forth under the caption "Cash Flows" below.

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Results of Operations

The following table sets forth certain operating data as a percentage of net
sales for the periods indicated:
                                          For the Three Months Ended       For the Six Months Ended
                                                   June 30,                        June 30,
                                            2013             2012            2013             2012
Net sales                                    100.0 %          100.0  %        100.0 %          100.0 %
Materials                                     41.7 %           43.2  %         42.1 %           44.0 %
Labor                                         14.0 %           14.4  %         14.4 %           14.2 %
Other manufacturing costs                     25.8 %           29.4  %         25.8 %           27.3 %
Gross margin                                  18.5 %           13.0  %         17.7 %           14.5 %
Depreciation and amortization                 13.2 %           13.2  %         13.7 %           13.4 %
Operating income                               7.8 %            3.2  %          6.9 %            4.2 %
Income (loss) before income taxes              2.7 %           (0.4 )%          2.6 %            0.9 %
Net income attributable to Amkor               4.0 %            0.1  %          3.0 %            0.9 %



Net Sales
                               For the Three Months Ended                            For the Six Months Ended
                                        June 30,                                             June 30,
                       2013          2012              Change              2013            2012               Change
                                                      (In thousands, except percentages)
Net sales           $ 746,059     $ 686,527     $ 59,532       8.7 %   $ 1,433,588     $ 1,341,537     $ 92,051       6.9 %
Packaging net sales   646,793       610,667       36,126       5.9 %     1,240,168       1,192,178       47,990       4.0 %
Test net sales         99,266        75,860       23,406      30.9 %       193,420         149,359       44,061      29.5 %

Net Sales. Net sales in the three and six months ended June 30, 2013, increased compared to the three and six months ended June 30, 2012, as a result of higher net sales of our packaging and test services.

Packaging Net Sales. The increase in packaging net sales for the three and six months ended June 30, 2013 was primarily driven by strong demand for flip chip, wafer-level processing and certain wirebond services supporting mobile communications products, such as 28 nanometer chipsets and NAND memory. Our continued investments supporting mobile communications have provided opportunities for growth in this end market. These increases in net sales were partially offset by weakness in demand for products in the consumer end market, including gaming and home electronics, and by a decrease in the computing end market as net sales in the prior year benefitted from incremental demand from customers whose supply chains were disrupted by the flooding in Thailand.

Packaging unit volume increased to 2.7 billion units during the three months ended June 30, 2013, compared to 2.1 billion units during the three months ended June 30, 2012. Packaging unit volume increased to 5.0 billion units during the six months ended June 30, 2013, compared to 4.0 billion units during the six months ended June 30, 2012. The increase for the three and six months ended June 30, 2013, was primarily due to an increase in wafer-level processing services for mobile communications.

Test Net Sales. The increase in test net sales in the three and six months ended June 30, 2013 was primarily attributable to higher demand for test services for mobile communications products and our continued investments in support of this end market as many of our mobile communications customers require turnkey packaging and test solutions.

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Cost of Sales
                      For the Three Months Ended                       For the Six Months Ended
                               June 30,                                        June 30,
                 2013         2012           Change             2013           2012            Change
                                           (In thousands, except percentages)
Cost of sales $ 607,680    $ 597,207    $ 10,473    1.8 %   $ 1,180,256    $ 1,147,236    $ 33,020    2.9 %

Our cost of sales consists principally of materials, labor, depreciation and manufacturing overhead. Since a substantial portion of the costs at our factories is fixed, relatively modest increases or decreases in capacity utilization rates can have a significant effect on our gross margin.

Material costs as a percentage of net sales decreased to 41.7% and 42.1% for the three and six months ended June 30, 2013, from 43.2% and 44.0% for the three and six months ended June 30, 2012. The decrease as a percentage of sales was primarily due to increased net sales related to wafer-level processing and test services, which have lower material costs as a percentage of net sales. Material costs in absolute dollars for the three and six months ended June 30, 2013, increased compared to the three and six months ended June 30, 2012, as a result of the increased net sales of packaging services.

Labor costs as a percentage of net sales of 14.0% and 14.4% for the three and six months ended June 30, 2013, remained consistent with labor costs as a percentage of net sales of 14.4% and 14.2% for the three and six months ended June 30, 2012. Labor costs in absolute dollars increased primarily due to increased compensation expense and headcount at certain foreign manufacturing locations along with unfavorable foreign currency exchange rate movements as substantially all of our manufacturing operations' workforce is paid in local currencies.

Other manufacturing costs as a percentage of net sales decreased to 25.8% for the three and six months ended June 30, 2013, from 29.4% and 27.3% for the three and six months ended June 30, 2012. The decrease in other manufacturing costs as a percentage of sales, and in absolute dollars, was attributable to the $30.0 million charge relating to our pending patent license arbitration that was recorded during the three months ended June 30, 2012. This decrease was partially offset by increased depreciation expense due to our continued investments in property, plant and equipment to service the demand of our customers.

Gross Profit
                  For the Three Months Ended                For the Six Months Ended
                           June 30,                                 June 30,
                2013          2012        Change        2013          2012         Change
                                   (In thousands, except percentages)
Gross profit $ 138,379     $ 89,320     $ 49,059     $ 253,332     $ 194,301     $ 59,031
Gross margin      18.5 %       13.0 %        5.5 %        17.7 %        14.5 %        3.2 %

Gross profit and gross margin for the three and six months ended June 30, 2013, increased compared to the three and six months ended June 30, 2012. The increase in gross profit and gross margin was primarily the result of the $30.0 million charge relating to our pending patent license arbitration that was recorded during the three months ended June 30, 2012. The increase was also the result of higher net sales of wafer-level processing and test services supporting mobile communications, partially offset by weakness in demand for products in the consumer and computing end markets.

                            For the Three Months Ended                For the Six Months Ended
                                     June 30,                                 June 30,
                          2013          2012        Change        2013          2012         Change
                                             (In thousands, except percentages)
Packaging gross profit $ 107,207     $ 67,998     $ 39,209     $ 190,708     $ 155,301     $ 35,407
Packaging gross margin      16.6 %       11.1 %        5.5 %        15.4 %        13.0 %        2.4 %

Packaging Gross Profit. Gross profit and gross margin for packaging net sales for the three and six months ended June 30, 2013, increased compared to the three and six months ended June 30, 2012. The increase in gross profit and gross margin

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was primarily attributable to the pending patent license arbitration charge discussed above, which relates entirely to the packaging segment. The increase in gross profit and gross margin was also the result of higher net sales of wafer-level processing services supporting mobile communications. These increases were partially offset by weakness in demand for products in the consumer end market as well as lower demand for products in the computing end market as net sales in the prior year benefitted from incremental demand from customers whose supply chains were disrupted by the flooding in Thailand.

                       For the Three Months Ended              For the Six Months Ended
                                June 30,                               June 30,
                     2013          2012       Change        2013         2012        Change
                                      (In thousands, except percentages)
Test gross profit $  31,172     $ 21,322     $ 9,850     $ 62,624     $ 39,000     $ 23,624
Test gross margin      31.4 %       28.1 %       3.3 %       32.4 %       26.1 %        6.3 %

Test Gross Profit. Gross profit and gross margin for test net sales for the three and six months ended June 30, 2013, increased compared to the three and six months ended June 30, 2012. The increase in gross profit and margin was driven by higher test net sales in support of mobile communications. Costs of sales for test services are primarily fixed in nature and have relatively low material content. Accordingly, increases in net sales or utilization generally result in increased gross profit and gross margin due to the high degree of operating leverage for these services.

Selling, General and Administrative Expenses
                           For the Three Months Ended                         For the Six Months Ended
                                    June 30,                                          June 30,
                    2013         2012             Change             2013          2012              Change
                                                (In thousands, except percentages)
Selling, general
and

administrative $ 65,618 $ 53,489 $ 12,129 22.7 % $ 125,177 $ 110,744 $ 14,433 13.0 %

Selling, general and administrative expenses for the three and six months ended June 30, 2013, increased compared to the three and six months ended June 30, 2012. The increase for the three and six months ended June 30, 2013, was attributable to higher professional fees associated with acquisitions, investments and pending litigation. The increase was also attributable to the additional costs associated with our CEO succession.

Research and Development
                               For the Three Months Ended                  For the Six Months Ended
                                        June 30,                                   June 30,
                            2013        2012          Change         2013        2012           Change
                                                 (In thousands, except percentages)

Research and development $ 14,308 $ 13,867 $ 441 3.2 % $ 28,614 $ 27,292 $ 1,322 4.8 %

Research and development activities are focused on developing new packaging interconnect and test services and improving the efficiency and capabilities of our existing production processes. Areas of focus include 3D packaging, including embedded die, silicon interposers and Through Silicon Via technologies, fine pitch copper pillar packaging and wafer-level processing. The increase in research and development expenses for the three and six months ended June 30, 2013, compared to the three and six months ended June 30, 2012, was primarily attributable to increased depreciation as a result of our continued investments in research and development initiatives.

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Other Expense, Net
                            For the Three Months Ended                         For the Six Months Ended
                                     June 30,                                          June 30,
                     2013         2012             Change              2013         2012             Change
                                                 (In thousands, except percentages)
Interest expense,
net               $ 26,255     $ 25,116     $  1,139       4.5  %   $ 50,998     $ 46,305     $  4,693      10.1  %
Foreign currency
loss, net            2,041        1,277          764     (59.8 )%        875        2,067       (1,192 )   (57.7 )%
Loss on debt
retirement, net     11,619            -       11,619     100.0  %     11,619            -       11,619     100.0  %
Equity in
earnings of
unconsolidated
affiliate           (1,445 )       (892 )       (553 )    62.0  %     (1,500 )     (2,880 )      1,380     (47.9 )%
Other income, net     (108 )       (518 )        410     (79.2 )%       (337 )     (1,152 )        815     (70.7 )%
Total other
expense, net      $ 38,362     $ 24,983     $ 13,379      53.6  %   $ 61,655     $ 44,340     $ 17,315      39.1  %

Interest expense for the three and six months ended June 30, 2013, increased compared to the three and six months ended June 30, 2012, due to additional interest expense from higher levels of long-term debt. In June 2013, we completed a tender offer for our Convertible Senior Subordinated Notes due 2014 and exchanged $193.7 million of these notes for shares of our common stock. As a result of this transaction, we recorded a charge of $11.6 million related to the cash payment we made to holders of the notes.

During the three months ended June 30, 2013, we increased our ownership interest in J-Devices Corporation ("J-Devices") from 30% to 60%, and J-Devices completed its acquisition of three packaging and test factories from Renesas. J-Devices experienced lower customer demand during the three months ended June 30, 2013, as well as increased costs related to these acquisitions and ongoing integration efforts. These factors constrained J-Devices' profitability and lowered our equity in earnings during the six months ended June 30, 2013.

Income Tax Benefit
                             For the Three Months Ended                          For the Six Months Ended
                                      June 30,                                           June 30,
                      2013          2012             Change             2013         2012              Change
                                                   (In thousands, except percentages)

Income tax benefit $ (10,238 ) $ (3,891 ) $ (6,347 ) 163.1 % $ (6,209 ) $ (529 ) $ (5,680 ) 1,073.7 %

Generally, our effective tax rate is below the U.S. federal tax rate of 35% because we have experienced taxable losses in the U.S. and our income is taxed in foreign jurisdictions where we benefit from tax holidays or tax rates lower than the U.S. statutory rate. Our income tax benefits for the three and six months ended June 30, 2013 and 2012, were attributable to income tax on profits earned in certain foreign jurisdictions and foreign withholding taxes fully offset by discrete income tax benefits. During the three and six months ended June 30, 2013, we recorded a discrete income tax benefit of $8.6 million for the reversal of a deferred tax liability associated with the undistributed earnings from our investment in J-Devices and a discrete income tax benefit of $6.6 million for the release of a valuation allowance on deferred tax assets at one of our foreign jurisdictions. During the three and six months ended June 30, 2012, we recorded discrete income tax benefits consisting primarily of a $4.0 million reduction in unrecognized tax benefits associated with a favorable ruling related to revenue attribution.

During 2013, our subsidiaries in Korea, the Philippines and Taiwan have operated under tax holidays which will continue to expire in whole or in part at various dates through 2017. We expect our effective tax rate to increase as the tax holidays expire as income earned in these jurisdictions will be subject to higher statutory income tax rates.

At June 30, 2013, we had U.S. net operating loss carryforwards totaling $336.9 million, which expire at various times through 2031. Additionally, at June 30, 2013, we had $90.5 million of non-U.S. net operating loss carryforwards, which expire at various times through 2023. We maintain a valuation allowance on all of our U.S. net deferred tax assets, including our net operating loss carryforwards, and on deferred tax assets in certain foreign jurisdictions. We will release such valuation allowances as the related tax benefits are realized or when sufficient net positive evidence exists to conclude that it is more likely than not that the deferred tax assets will be realized.

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Liquidity and Capital Resources

We assess our liquidity based on our current expectations regarding sales, operating expenses, capital spending and debt service requirements. Based on this assessment, we believe that our cash flow from operating activities, together with existing cash and cash equivalents and availability under our revolving credit facilities, will be sufficient to fund our working capital, capital expenditure and debt service requirements for at least the next twelve months. Thereafter, our liquidity will continue to be affected by, among other things, volatility in the global economy and credit markets, the performance of our business, our capital expenditure levels, other uses of our cash including the final amount of payments due in our disputes with Tessera, any purchases of stock under our stock repurchase program, any investments in joint ventures or acquisitions and our ability to either repay debt out of operating cash flow or refinance at or prior to maturity with the proceeds of debt or equity offerings. There can be no assurance that we will generate the necessary net income or operating cash flows to meet the funding needs of our business beyond the next twelve months due to a variety of factors, including the cyclical nature of the semiconductor industry and other factors discussed in Part II, Item 1A of this Quarterly Report.

Our primary source of cash and the source of funds for our operations are cash flows from operations, current cash and cash equivalents, borrowings under available debt facilities and proceeds from any additional debt or equity financings. As of June 30, 2013, we had cash and cash equivalents of $636.0 million, $1,651.0 million of debt and availability of $149.7 million under our $150.0 million first lien senior secured revolving credit facility. Additionally, our foreign subsidiaries had $75.0 million available to be drawn under secured revolving credit facilities for general corporate purposes, general working capital purposes and capital expenditures and $332.0 million available to be borrowed under secured term loan credit facilities for general working capital purposes, capital expenditures and the repayment of inter-company debt.

Included in our cash balance as of June 30, 2013, is $260.8 million held offshore by our foreign subsidiaries. If we were to distribute this offshore cash to the U.S. as repatriated earnings of our foreign subsidiaries, we would incur foreign withholding taxes; however, we would not incur a significant amount of U.S. federal income taxes, due to the availability of tax loss carryovers and foreign tax credits.

We sponsor an accrued severance plan for our subsidiary in Korea, which under existing tax laws in Korea, limits our ability to currently deduct related severance expenses accrued under that plan. The purpose of these limitations is to encourage companies to migrate to a defined contribution or defined benefit plan. If we retain our existing severance plan, the deduction for severance expenses will be limited to severance payments made to retired employees, which results in a larger current income tax liability in Korea. If we decide to adopt . . .

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