Amkor Technology Q3 2009 Earnings Call Transcript

Oct.27.09 | About: Amkor Technology, (AMKR)

Amkor Technology, Inc. (NASDAQ:AMKR)

Q3 2009 Earnings Call

October 27, 2009 05:00 PM ET

Executives

Kenneth T. Joyce - President and Chief Executive Officer

Joanne Soloman - Corporate Vice President and Chief Financial Officer

Analysts

CJ Muse - Barclays Capital

Philip Winslow - Credit Susie

Peter Kim - Deutsche Bank Equity Research

Peter Kurz - Citigroup

David Duley - Steelhead Securities

Eric Reubel - MTR Securities

Phillip Armstrong - RBC Capital Markets

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Amkor Technology, Inc. Third Quarter 2009 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference call will be open for questions. This conference call is being recorded today, Tuesday, October 27, 2009, and will run for up to one hour.

Before we begin this call, Amkor would like to remind you that there will be forward-looking statements made during the course of this conference call. These statements represent the current view of Amkor management and actual results could vary materially from such statements.

Prior to this conference call, Amkor's third quarter earnings release was filed with the SEC on Form 8-K. The earnings release together with Amkor's other SEC filings contain information on risk factors, uncertainties and assumptions that could cause actual results to differ materially from Amkor's current expectations.

I would now like to turn the conference over to Mr. Ken Joyce, Amkor's President and Chief Executive Officer. Please go ahead, sir.

Kenneth T. Joyce

Thank you and good afternoon. This is Ken Joyce. With me today is Joanne Solomon, our Chief Financial Officer.

As you know, effective October 1st, I became the Chief Executive Officer of Amkor and Jim Kim assumed the role of Executive Chairman. I am fortunate to have inherited a strong business model that has enabled Amkor to sustain profitability and generate positive free cash flow during one of the worst recessions in recent history.

Since the fourth quarter of 2005 through the third quarter of 2009, we have achieved 15 quarters of positive free cash flow and have reduced our debt by nearly $700 million. We now have a healthy balance sheet and operating cash flow base and we look forward -- we plan to build upon our core strategies. These strategies include; first, partnering with our key customers to service their semiconductor packaging and test needs and to develop new technologies in support of their product roadmaps.

Second, focusing on cash flow generation by closely managing cost and capital spending inline with consumer demand, improving our operating efficiency and managing our debt. And third, sustaining a disciplined and competitive pricing strategy where we receive value for the services and technology we bring to the industry.

I am optimistic about the long-term outlook for the semiconductor industry and Amkor's prospects for the future. As a leading provider of advanced technology for semiconductor packaging and test solutions, we are well position to participate in future industry growth as the worldwide demand for semiconductors recovers from the latest cyclical downturn.

We continue to work closely with several of our key customers to develop and implement the increasingly advanced interconnect technology needed to meet their requirements for smaller geometries with higher levels of performance. I believe that our competitive market position will be enhanced by these efforts as customers increasingly rely and recognize the value we bring well with these new technologies.

Coming to the third quarter results, I am pleased with our performance in a very difficult economic environment. We had 616 million in net sales, an increase of 22% from the second quarter. We achieved gross margin of 25% for the third quarter, up sequentially from 20% in the second quarter of 2009. We benefited from higher levels of capacity utilization and our earlier cost reduction efforts.

As a part of our strategy moving forward, we are focused on maintaining and improving our profitability through better utilization of our asset base, enhancing our product mix, improving yield and managing our other manufacturing costs.

Customer demand has been solid based on current customer forecast, fourth quarter 2009 net sales are expected to be flat plus or minus 2% over the third quarter of 2009. Gross margin for the fourth quarter is estimated to be in the range of 23 to 25%.

Our capital investments are focused on expanding our capacity inline with specific customer requirements, technology advancement and cost reduction programs. In the third quarter of 2009, capital additions totaled $78 million and we expect fourth quarter capital additions to be approximately 70 million. This brings full year capital additions to an expected total of approximately $200 million. We have increased our level of capital spending during 2009 in response to higher than expected customer demand which has constrained our capacity on several of our product lines.

Our expected 2009 capital intensity of approximately 9% is still at historically low level, when considered in light of our current depreciation expense. For 2010, we expect capital intensity to return to more normal levels of 10 to 12% subject of course to changes in the overall economy and industry market conditions.

As an example of our close collaboration with key customers, last week we announced that Amkor along with Nakaya Microdevices signed a definitive agreement with Toshiba to form a joint venture. This venture will be named J-Devices, supports Toshiba's efforts to transform its business model and divest a substantial portion of its packaging and test capabilities.

Under terms of the definitive agreement, J-Devices will be 60% owned by existing shareholders of Nakaya Microdevices, 30% by Amkor and 10% by Toshiba. The transaction is expected to close at the end of the month. Amkor is expected to invest approximately 17 million to acquire our equity share in J-Devices and about 45 million to purchase certain assembly and test equipment from Toshiba that we will lease to J-Devices. Amkor will have the option to acquire majority interest in J-Devices in 2012. This investment strengthens our relationship with an important strategic customer and gives us an opportunity to grow our business.

With that, I will turn the call over to Joanne for further discussion of our recent financial results. Joanne?

Joanne Soloman

Thank you, Ken. For the third quarter, unit shipments of 2.3 billion were up 39% compared to the second quarter of 2009 on the strength of our Wirebond packaging services. Net sales grew 22% driven by strong seasonal demand principally in support of wireless and consumer application.

Our revenues for the third quarter were 14% less than the third quarter of 2008, largely due to lower unit volumes for Wirebond packaging services and weakness in demand for our flip chip packaging services.

Flip chip packaging services were down 29% from the third quarter of 2008, driven primarily by some weakness in gaming. We are making progress diversifying the customer base and end-market supported by the affected flip chip production lines and expect to grow this business moving forward.

Fabless semiconductor companies account for about 53% of our total sales in the third quarter. Our customer base is well diversified and our top 10 customers contributed 54% of our net sales in the third quarter. Price erosion for the third quarter was about 2%.

Our results for the third quarter were negatively impacted by the weakness of the U.S. dollar against certain foreign currencies. Our gross profit was lower by about $2 million as a result of foreign currency movement. In addition, our net income was negatively impacted by $8 million in foreign currency losses for the quarter; principally, as a result of the appreciation of the Korean Won against the U.S. dollar and a re-measurement of an employee severance plan liability.

In October 2009, we offered our employees in Korea the opportunity to voluntarily receive an interim payment under the employee severance plan up to an aggregate of $40 million. The program is currently underway and the final amount of the interim payment could be higher or lower than the $40 million depending on employee response and other factors.

Our operating expenses increased from $62 million in the second quarter of 2009 to $67 million in the third quarter. The increase included research and development expenses of $3 million for an impairment charge in connection with the sale of research and development assets in North Carolina. We still maintain our research and development presence in North Carolina, but now operate in an asset like model to save costs.

Our income tax benefit for the third quarter was $31 million. This amount includes $34 million of an income tax benefit primarily from the release of evaluation allowance at our subsidiary in Korea. Excluding the tax benefit, income tax expense for the third quarter was $3 million, primarily from taxes in foreign jurisdictions and foreign withholding tax.

For the fourth quarter of 2009, we anticipate income tax expense of about $1 million. Looking ahead to 2010, we expect that our effective tax rate will be around 10%. Our financial position and liquidity remains sound. We ended the quarter with a cash balance of $447 million and total debt of just under $1.5 billion. We have an aggregate of $86 million of debt coming due through the end of 2010 and the remaining $119 million of our 6.25% notes and 2.5% convertible notes mature in 2011.

We generated $81 million in free cash flow in the third quarter. We are on track to be free cash flow positive for the full year 2009, which will be our fourth consecutive year of being free cash flow positive.

During the third quarter, we repurchased $25 million of our 708 senior notes due 2011 and $49 million of our 7.125% senior notes due 2013 for a face value plus approximately 1 million premium for the combined transaction.

Here is the recap of our fourth quarter 2009 guidance contained in our earnings release. Sales are expected to be flat plus or minus 2% from the third quarter. Gross margin between 23% and 25%. Net income per diluted share in the range of $0.17 to $0.23. Our net income guidance for the fourth quarter includes approximately $1 million of our share of anticipated earnings from the joint venture with Toshiba and Nakaya Microdevices.

Operator, we will now open this call for questions.

Question-and-Answer Session

Operator

Thank you, ma'am. Ladies and gentlemen we'll now begin the question and answer session. (Operator Instructions). And our first question comes from the line of CJ Muse with Barclays Capital. Please go ahead.

CJ Muse - Barclays Capital

Yeah good afternoon. Thank you for taking my question. I guess, first question, I was hoping you could discuss your current visibility and perhaps break it down by end market communications, consumer PC et cetera? And then I guess as a follow on to that, what your outlook is today for seasonal trends heading into Q1?

Kenneth Joyce

Our outlook as we feel solid and optimistic as we go into Q4, becasuse the demand is good as outlined in our guidance. I think as far as end market distribution, it will be much inline with what you're seeing here in the third quarter, communications and consumer being the leading end market distribution for us, as we look out into the full year 2010. Once again, we're optimistic as far as seasonal trend in the first quarter historically, that's a seasonally down quarter and we would expect that in the first quarter of 2010.

CJ Muse - Barclays Capital

What is typical seasonality for Q1?

Kenneth Joyce

It's down in the generally in the single digits.

CJ Muse - Barclays Capital

Okay, great. And then last question for me and I'll turn it over. In terms of your gross margin guidance, if I take the mid-point there for both revenues and gross margin you are down about 100 bps, can you help me understand them what's going on there as a conservative; is that a product, mix is it ASPs?

Joanne Soloman

It is a combination of factors that brought it down; were definitely getting firm pressure with respect to the Korean Won. We still have the benefit in the third quarter of some subsidies and furloughs which are going away. And we're starting to see some of the comp packages at a factory level coming in. So I think it's a combination of factors that put the margins under pressure.

CJ Muse - Barclays Capital

Thank you.

Kenneth Joyce

Thank you.

Operator

Thank you. Our next question comes from the line of Satya Kumar with Credit Susie. Please go ahead.

Unknown Analyst

Hi, this is Wins calling in for Satya Kumar. Your CapEx at the beginning of the year, you had it at a 100 million and you bumped it up to about 200 million, most of your PS have also bumped the CapEx. So heading into seasonally slower season for I think is in 1Q what kind of pricing pressure do you anticipate moving the next quarter, next couple of quarters?

Kenneth Joyce

We think that the pricing pressure has been relative modest; it's been in a 1 to 2% range and we see no reason why that would change.

Unknown Analyst

Okay. Also the number of flip chip by units are down in this quarter as compared to the previous quarter. Is there any reason for that or can you just elaborate a little bit more on that?

Joanne Soloman

Absolutely, in our prepared remarks we did try to answer that. We -- some of flip chip lines were very dedicated to gaining just a few customers. So we didn't have that good diversifying portfolio of customers to manage any weakness. So that's part of reason the units are down, but we are taking steps and have made inroads to improve profitability going forward on this line.

Unknown Analyst

Okay. And last one Joanne, you typically give the break out of your COGS for materials, labor can you provide that information?

Joanne Soloman

Sure, absolutely. For the third quarter of 2009, materials was about 39% of revenues; labor was about 13% of revenues; depreciation was about 10% of revenues and other COGS was about 13% of revenues.

Unknown Analyst

Sounds good. Thank you very much.

Operator

Thank you. Our next question comes from the line of Peter Kim with Deutsche Bank. Please go ahead.

Peter Kim - Deutsche Bank Equity Research

Hi, thanks for taking my questions. Considering that there is a weakness in your flip chip and recently you -- I guess you've been investing heavily in flip chip capacity. What's your outlook for your capital spending? Do you anticipate investing further in flip chip or do you believe that that's just goes in other segment and you'll adjust CapEx accordingly?

Kenneth Joyce

We'll adjust the CapEx accordingly. The flip chip as Joanne said was attributable to weakness in one particular area. But we continue to experience good demand in other areas where flip chip is there. The CapEx once again, are just relative to where the business is coming; we had very good growth in chip scale packaging and we'll probably be spending some more money in that area.

Peter Kim - Deutsche Bank Equity Research

Okay. And then I ask about your just announced joint venture that you have with J-Devices now. I was wondering -- considering that you already pretty large exposure to that one customer Toshiba and that completing this transaction will probably increase your risk to that consumer and do you believe that this is a long-term beneficial acquisition?

Kenneth Joyce

Absolutely. This is a -- we have long -- Toshiba is a long term strategic customer of Amkor. In the short-term, we're only a minority interest holder in the company. So we're an investor and it will strengthen our relationship. I think if you think long-term it allows us to help them to transform to an asset like model and provides growth process and good levels of profitability with the customer that we have excellent relationship with.

Peter Kim - Deutsche Bank Equity Research

Thank you.

Operator

Thank you. Our next question comes from the line of Tim Arcuri with Citi. Please go ahead.

Peter Kurz - Citigroup

Hi this is Peter Kurz for Tim Arcuri. I want to ask, I guess some of your competitors have talked some about customers shipping to copper from gold packaging. And I am just curious, how you feel like you are positioned for that and if you see that as well in your customer base?

Kenneth Joyce

We are we're seeing some of it, I mean, and we are deployed in copper as well as gold. Obviously as gold prices go up say are now, you see more interest in the copper wire. But we are invested there, we're servicing some customers there and we're doing a good amount of research in that area too.

Peter Kurz - Citigroup

And then, as far as you talked a little bit about gross margins, one of the things pressuring up in Q4 would be some expenses coming back and people related expenses or basically salaries. How much--- I think you had 80 million expenses you taken out for quarter. This year you had 60 million that was expected to comeback; can you just give us, how much of that will be kind of come back in your numbers in Q4 and how much do you expect to come back in 2010 and the timing of that?

Joanne Soloman

The easiest way that I can explain it is when I look at the normalized fixed operating cost for Q3 08 versus Q3 ‘09, we still show savings of about $40 million so of the costs that came back. 15 million of that savings is from reductions in force which are more permanent nature and in fact can increases would only happen further down the line based on demand. The balance of the $25 million, how it comes back as demand increases, the remaining costs may begin to return.

Ken mentioned in his prepared remarks that we continue to take steps to align our cost structure with demand to make sure that we have sustain and improve on our profitability. So we will take steps so that those costs come back very slowly, but as demand does come back, it'll be pressure on getting these costs back earlier.

Peter Kurz - Citigroup

Great. Thanks.

Operator

Thank you. Our next question comes from the line of Dave Duley with Steelhead Securities. Please go ahead.

David Duley - Steelhead Securities

Yes. Could you -- did you guys have 10% customers during the quarter?

Joanne Soloman

We had a one 10% customer and we have not named that as yet.

David Duley - Steelhead Securities

Will you typically disclose that in your filings?

Joanne Soloman

We'll disclose it in -- it's a manual requirement. So we'll disclose beginning with the fourth quarter.

David Duley - Steelhead Securities

Okay. And you talked about being capacity constrains in some product lines and I imagine that's where you're spending some CapEx dollars on. Could you talk about which pipelines or areas you're capacity constrained and what you are spending the 70-$80 million per quarter on at this point?

Joanne Soloman

Absolutely. The lines that are constrained are principally the chip scale packaging. So things that we always just tend to describe those our advanced packages. When I look at our entire CapEx spend for 2009 about 40% is being spent in support of the chip scale packaging; about 20% in support of bump and 10% in support of test. The other balance is in support of line balancing, some of the other lines as well as enhancing out ITS infrastructure and some of the facility costs.

David Duley - Steelhead Securities

Okay. And which segments were ahead of plan in the current quarter, I notice you had 22% sequential growth which is much better than you expected. Which areas showed the most upside to your expectation?

Joanne Soloman

It was more or less inline with our expectations. I think, we had guided up 21, we were just over what we had guided, but the strength comes principally from wireless consumer.

David Duley - Steelhead Securities

Okay. One final thing from me is, do you have an idea of what your CapEx dollars will be for 2010 versus I think the 200 million you said you're going to spend in 2009?

Joanne Soloman

In our prepared remarks, we talked about 2010 we would expect the capital intensity more like 10 to 20% and… sorry -- 10 to 12 sorry we expect 10 to 12% capital intensity for 2010. Ultimately, what we spend is going to be inline with the demand we see.

David Duley - Steelhead Securities

Thank you.

Operator

Thank you. Our next question comes from the line of David Fitz (ph) with Citi. Please go ahead.

Unidentified Analyst

Hi, thank you. My questions have been asked and answered.

Joanne Soloman

Thank you, David.

Operator

Thank you, sir. (Operator Instructions). And our next question is from the line of Eric Reubel with MTR Securities. Please go ahead.

Eric Reubel - MTR Securities

Hi, thanks for taking my questions. If you could comment a little bit, there has been some talk about possible double ordering and component shortages in some of the EMS channels. I was curious if you could comment in the context that you're seeing some constraints on some of your lines or other particular end markets that are really driving the component shortages and what's your view on double ordering?

Kenneth Joyce

We don't see any double ordering, I mean we're always looking for that Eric. Communications, in the wireless areas has been very strong for us. The broad based consumer market has been very strong for us. As Joanne had indicated little earlier, we've seen a lot of strength during the quarter in chip scale packaging. And when we talk about chip scale, as you're aware that's very small form factors going into either wireless device or into some small consumer device. We track that and there maybe some out there, but we don't believe that we've seen any in our channel so far.

Eric Reubel - MTR Securities

Okay then if I could just ask one on J-Devices, kind of a historical context going back to the first JV with Toshiba. I believe that the plan was kind of to in some way penetrate the Japanese wholesale market which was largely or penetrate the Japanese packaging market which was largely captive. Does this transaction that you're entering in today, does it kind of move the ball forward in your ability to gain traction in getting those captive customers outsourced more or little bit; if you could give little color on that. So where you guys on the one hand, and how does that change the game?

Kenneth Joyce

It was really a truly win-win was for Toshiba in outsourcing the backend and it was good for us in that it was always very profitable and cash flow positive transactions. So good from both standpoints. This once again moves the entire framework of our relationship with Toshiba further, because as they transformed from an IDM into this asset light on the backend, that's what we will be serving in short-term. Nakaya Microdevices does have some other third party business, but that's not the focus of this JV. The focus of this JV right now is to support Toshiba.

Eric Reubel - MTR Securities

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Phillip Armstrong with RBC Capital Markets. Please go ahead.

Phillip Armstrong - RBC Capital Markets

What is the $86 million of debt coming due at the end of 2010?

Joanne Soloman

It's largely corn financing. Financing that we have at our subsidiary.

Phillip Armstrong - RBC Capital Markets

Obviously, you paid down some bonds, reduced debt. Can you do that, that's what you're going to continue to do?

Joanne Soloman

From time-to-time we look to retire debt ahead of maturity but other than that we'll retire it up at maturity.

Phillip Armstrong - RBC Capital Markets

So the $400 million plus in cash got -- what's the minimum need to operate?

Joanne Soloman

We've been saying is that the minimum operating cash is to keep money moving around and having a comfortable cushion is about 200 million We also have a 100 million revolver that we have liquidity here in the U.S. So total minimum liquidity is about 300 million.

Phillip Armstrong - RBC Capital Markets

Okay, great. Thank you.

Operator

Thank you. And at this time, I show no further questions. Please continue.

Joanne Soloman

Great. Thank you everyone for your time and attention and we look forward to next quarter. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you very much for your participation. You may now disconnect.

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