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AMKR > SEC Filings for AMKR > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for AMKOR TECHNOLOGY INC

Form 10-Q for AMKOR TECHNOLOGY INC


1-Nov-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.

On July 31, 2013, we completed the purchase of 100% of the shares of Toshiba Electronics Malaysia Sdn. Bhd., Toshiba's power discrete semiconductor packaging and test operation in Malaysia. The financial results of the entity have been included in our Consolidated Financial Statements from the date of acquisition.

Our net sales increased $72.6 million or 10.4% to $768.0 million for the three months ended September 30, 2013, from $695.4 million for the three months ended September 30, 2012. The increase was driven by a $39.4 million or 6.4% increase in packaging net sales as well as a $33.3 million or 41.9% increase in test net sales. The increases in packaging and test net sales were driven by strong demand for NAND memory, test and wafer-level processing services supporting mobile communications, as well as incremental business from our newly acquired power discrete business in Malaysia. These increases were partially offset by a decrease in net sales of packaging services related to products in the consumer end market.

Gross margin for the three months ended September 30, 2013, increased to 18.4% from 16.8% for the three months ended September 30, 2012. The increase was primarily driven by higher net sales of wafer-level processing, NAND memory and test services supporting mobile communications. Our gross margin for the three months ended September 30, 2013, was negatively impacted by a $10.0 million charge to cost of sales relating to our pending patent license arbitration.

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

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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.

Driven by continued customer demand for services supporting mobile communications products, our capital additions totaled $380.2 million or 17.3% of net sales for the nine months ended September 30, 2013, compared to $446.8 million or 21.9% of net sales for the nine months ended September 30, 2012. During the nine months ended September 30, 2013, 55.2% of our capital additions were made in packaging, 30.8% in test and 14.0% in research and development and infrastructure projects. During the nine months ended September 30, 2012, 41.4% of our capital additions were made in packaging, 39.6% in test and 19.0% in research and development and infrastructure projects.

Net cash provided by operating activities was $375.2 million for the nine months ended September 30, 2013, compared to $284.4 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, we experienced negative free cash flow of $26.8 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 Nine Months Ended
                                                September 30,                    September 30,
                                            2013             2012            2013             2012
Net sales                                    100.0 %          100.0 %         100.0 %          100.0 %
Materials                                     39.0 %           42.8 %          41.0 %           43.6 %
Labor                                         14.1 %           14.8 %          14.3 %           14.4 %
Other manufacturing costs                     28.5 %           25.6 %          26.8 %           26.7 %
Gross margin                                  18.4 %           16.8 %          17.9 %           15.3 %
Depreciation and amortization                 13.8 %           13.5 %          13.7 %           13.4 %
Operating income                               7.6 %            7.8 %           7.2 %            5.4 %
Income before income taxes                     5.0 %            4.6 %           3.5 %            2.2 %
Net income attributable to Amkor               3.3 %            3.2 %           3.1 %            1.7 %

Net Sales
                               For the Three Months Ended                            For the Nine Months Ended
                                     September 30,                                         September 30,
                       2013          2012              Change              2013            2012               Change
                                                       (In thousands, except percentages)
Net sales           $ 767,987     $ 695,353     $ 72,634      10.4 %   $ 2,201,575     $ 2,036,890     $ 164,685       8.1 %
Packaging net sales   655,294       615,933       39,361       6.4 %     1,895,462       1,808,111        87,351       4.8 %
Test net sales        112,693        79,420       33,273      41.9 %       306,113         228,779        77,334      33.8 %

Net Sales. Net sales in the three and nine months ended September 30, 2013, increased compared to the three and nine months ended September 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 nine months ended September 30, 2013 was primarily driven by strong demand for NAND memory and wafer-level processing services supporting mobile communications along with incremental business from our newly acquired power discrete business in Malaysia. Our investments supporting mobile communications have continued to drive our growth in this end market. The increase in packaging net sales for the nine months ended September 30, 2013, was also attributable to high demand for our flip chip packaging services. These increases in net sales were partially offset by weakness in demand for products in the consumer end market, including gaming and home electronics. For the nine months ended September 30, 2013, our packaging net sales were also impacted by weakness 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 3.8 billion units during the three months ended September 30, 2013, compared to 2.2 billion units during the three months ended September 30, 2012. Packaging unit volume increased to 8.8 billion units during the nine months ended September 30, 2013, compared to 6.2 billion units during the nine months ended September 30, 2012. The increase for the three and nine months ended September 30, 2013, was primarily due to an increase in packaging services for discrete products from our newly acquired business in Malaysia, leadframe products and wafer-level processing services for mobile communications products.

Test Net Sales. The increase in test net sales in the three and nine months ended September 30, 2013 was primarily attributable to higher demand for test services for mobile communications 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 Nine Months Ended
                             September 30,                                   September 30,
                 2013         2012           Change             2013           2012            Change
                                           (In thousands, except percentages)

Cost of sales $ 626,979 $ 578,566 $ 48,413 8.4 % $ 1,807,235 $ 1,725,802 $ 81,433 4.7 %

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 39.0% and 41.0% for the three and nine months ended September 30, 2013, respectively, from 42.8% and 43.6% for the three and nine months ended September 30, 2012, respectively. The decrease was primarily due to a change in mix to packaging and test services with lower material content.

Labor costs as a percentage of net sales decreased to 14.1% and 14.3% for the three and nine months ended September 30, 2013, respectively, from 14.8% and 14.4% for the three and nine months ended September 30, 2012, respectively. The decrease was primarily due to higher net sales of packaging and test services while our labor costs remained consistent. Increases in our employee compensation costs were offset by net savings from restructuring activities at our manufacturing operations.

Other manufacturing costs as a percentage of net sales increased to 28.5% for the three months ended September 30, 2013, from 25.6% for the three months ended September 30, 2012. Our other manufacturing costs for the three months ended September 30, 2013, included a charge of $10.0 million relating to our pending patent license arbitration. Other manufacturing costs as a percentage of net sales also increased as a result of higher depreciation expense due to our continued investments in property, plant and equipment to service the demand of our customers, primarily in support of mobile communications.

Other manufacturing costs as a percentage of net sales of 26.8% for the nine months ended September 30, 2013, remained consistent with other manufacturing costs as a percentage of sales of 26.7% for the nine months ended September 30, 2012. Our other manufacturing costs for the nine months ended September 30, 2013, included higher depreciation expense and a $10.0 million charge from our pending patent license arbitration. Our results for the nine months ended September 30, 2012, included a $30.0 million charge for the same arbitration.

Gross Profit
                   For the Three Months Ended               For the Nine Months Ended
                         September 30,                            September 30,
                2013          2012         Change        2013          2012         Change
                                   (In thousands, except percentages)
Gross profit $ 141,008     $ 116,787     $ 24,221     $ 394,340     $ 311,088     $ 83,252
Gross margin      18.4 %        16.8 %        1.6 %        17.9 %        15.3 %        2.6 %

Gross profit and gross margin for the three and nine months ended September 30, 2013, increased compared to the three and nine months ended September 30, 2012. The increase in gross profit and gross margin was primarily driven by higher net sales of wafer-level processing, NAND memory and test services. Gross profit and gross margin for the three months ended September 30, 2013, were negatively impacted by a $10.0 million charge to cost of sales for our pending patent license arbitration, which related entirely to the packaging segment. Our results for the nine months ended September 30, 2012, included a $30.0 million charge for the same arbitration.

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                            For the Three Months Ended              For the Nine Months Ended
                                  September 30,                           September 30,
                          2013          2012       Change        2013          2012         Change
                                            (In thousands, except percentages)
Packaging gross profit $ 105,366     $ 96,550     $ 8,816     $ 296,074     $ 251,851     $ 44,223
Packaging gross margin      16.1 %       15.7 %       0.4 %        15.6 %        13.9 %        1.7 %

Packaging Gross Profit. Gross profit and gross margin for packaging net sales for the three and nine months ended September 30, 2013, increased compared to the three and nine months ended September 30, 2012. The increase in gross profit and gross margin was primarily driven by higher net sales of wafer-level processing and NAND memory services. Gross profit and gross margin for packaging services for the three months ended September 30, 2013, were negatively impacted by a $10.0 million charge to cost of sales for our pending patent license arbitration, which related entirely to the packaging segment. Our results for the nine months ended September 30, 2013, included a $30.0 million charge for the same arbitration.

                       For the Three Months Ended             For the Nine Months Ended
                             September 30,                          September 30,
                     2013         2012        Change        2013         2012        Change
                                      (In thousands, except percentages)
Test gross profit $ 35,642     $ 20,237     $ 15,405     $ 98,266     $ 59,237     $ 39,029
Test gross margin     31.6 %       25.5 %        6.1 %       32.1 %       25.9 %        6.2 %

Test Gross Profit. Gross profit and gross margin for test net sales for the three and nine months ended September 30, 2013, increased compared to the three and nine months ended September 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 Nine Months Ended
                                 September 30,                                     September 30,
                    2013         2012             Change             2013          2012              Change
                                                (In thousands, except percentages)
Selling, general
and

administrative $ 64,347 $ 49,297 $ 15,050 30.5 % $ 189,524 $ 160,041 $ 29,483 18.4 %

Selling, general and administrative expenses for the three and nine months ended September 30, 2013, increased compared to the three and nine months ended September 30, 2012. The increase for the three and nine months ended September 30, 2013, was attributable to higher employee compensation costs as well as professional fees associated with acquisitions and pending litigation.

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

development $ 18,647 $ 13,472 $ 5,175 38.4 % $ 47,261 $ 40,764 $ 6,497 15.9 %

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, wafer-level processing in support of advanced wafer nodes. The increase in research and development expenses for the three and nine months ended September 30, 2013, compared to the three and nine months ended September 30, 2012, was primarily

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attributable to increased employee compensation costs along with higher depreciation as a result of our continued investments in research and development initiatives.

Other Expense, Net
                            For the Three Months Ended                         For the Nine Months Ended
                                   September 30,                                     September 30,
                     2013         2012             Change              2013         2012             Change
                                                 (In thousands, except percentages)
Interest expense,
net               $ 25,742     $ 22,410     $  3,332      14.9  %   $ 76,740     $ 68,715     $  8,025      11.7  %
Foreign currency
(gain) loss, net    (2,716 )      2,394       (5,110 )   213.5  %     (1,841 )      4,461       (6,302 )   141.3  %
Loss on debt
retirement, net          -            -            -         -  %     11,619            -       11,619     100.0  %
Equity in
earnings of
unconsolidated
affiliate           (3,179 )     (2,541 )       (638 )    25.1  %     (4,679 )     (5,421 )        742     (13.7 )%
Other income, net       (7 )       (359 )        352     (98.1 )%       (344 )     (1,511 )      1,167     (77.2 )%
Total other
expense, net      $ 19,840     $ 21,904     $ (2,064 )    (9.4 )%   $ 81,495     $ 66,244     $ 15,251      23.0  %

Interest expense for the three and nine months ended September 30, 2013, increased due to higher levels of long-term debt in 2013. 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 debt retirement charge of $11.6 million related to the cash payment we made to holders of the notes.

Our foreign currency gains and losses are primarily the result of fluctuations of certain Asian based currencies and our net monetary exposure to those currencies at our foreign subsidiaries. During the three months ended September 30, 2013, we recorded a foreign currency gain of $2.7 million primarily due to the appreciation of the Korean won relative to the U.S. dollar and the associated impact on our forward contracts. During the nine months ended September 30, 2013, we recorded a foreign currency gain of $1.8 million, which was mainly driven by the depreciation of the Japanese yen relative to the U.S. dollar and the associated impact on our U.S. dollar denominated net monetary assets.

During the nine months ended September 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. Revenues for J-Devices have increased substantially during the three and nine months ended September 30, 2013, over the prior year periods as a result of acquisitions. However, J-Devices' profitability for such periods has been constrained due primarily to increased costs related to acquisitions and ongoing integration efforts, as well as lower overall utilization of fixed assets. The constrained profitability at J-Devices had a corresponding impact on our equity in earnings of J-Devices.

Income Tax Expense
                          For the Three Months Ended                   For the Nine Months Ended
                                September 30,                                September 30,
                     2013        2012          Change           2013       2012            Change
                                             (In thousands, except percentages)

Income tax expense $ 12,170 $ 9,538 $ 2,632 27.6 % $ 5,961 $ 9,009 $ (3,048 ) (33.8 )%

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 expense for the three and nine months ended September 30, 2013 and 2012, was attributable to income tax on profits earned in certain foreign jurisdictions and foreign withholding taxes, partially offset by discrete income tax benefits. During the nine months ended September 30, 2013, we recorded a discrete income tax benefit of $9.2 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 months ended September 30, 2013, we also recorded $2.8 million of income tax expense for the revaluation of certain deferred taxes resulting from the approval of a tax incentive in Korea and $2.8 million of income tax expense for an addition to our unrecognized tax benefits related to the characterization of a deduction in a

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foreign jurisdiction. During the three months ended September 30, 2012, we recorded $3.1 million of income tax expense as a result of an addition to our unrecognized tax benefits related to the interpretation of a tax law change in a foreign jurisdiction.

During 2013, our subsidiaries in Korea, Malaysia, the Philippines and Taiwan have operated under tax holidays which will continue to expire in whole or in part at various dates through 2022. 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 September 30, 2013, we had U.S. net operating loss carryforwards totaling $341.3 million, which expire at various times through 2033. Additionally, at September 30, 2013, we had $40.2 million of non-U.S. net operating loss carryforwards, which expire at various times through 2019. 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 . . .

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