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Amkor Technology, Inc. (NASDAQ:AMKR)

Q2 2012 Earnings Call

July 31, 2012 05:00 pm ET

Executives

Ken Joyce - President & CEO

Joanne Solomon - CFO

Analysts

Jeff Harlib - Barclays

Operator

Good afternoon, ladies and gentlemen, and welcome to the second quarter 2012 Amkor Technology Inc. earnings conference call. My name is Diana and I’ll be the conference operator for today’s call. At this time all participants are in a listen-only mode. Following the presentation, the conference call will be open for questions. This conference is being recorded today, Thursday, July 26, 2012, and it will run 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. Actual results could vary materially from such statements.

Prior to this conference call, Amkor’s second quarter 2012 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 exceptions 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.

Ken Joyce

Thank you Diana and good afternoon everyone. With me today is Joanne Solomon, our Chief Financial Officer.

Today I’ll talk about our second quarter 2012 results and guidance for the third quarter. Joanne will then discuss our financial performance in more detail and finally we will open up the call for your questions.

To begin, second quarter sales of $687 million were up 5% from $655 million in the first quarter and in line with our guidance. Our strong position in wireless communications continues to drive our business with notable strength in smartphones and tablets. As expected our growth in this area is during the second quarter was somewhat constrained due to the limited ability of 28-nanometer wafers and the softness in the end market demand by the less dominant OEMs that sell smartphones and tablets.

We also saw a seasonal increase in gaming. Although insourcing by an IDM customer and some softness in the gaming vast market have contributed to lower growth levels than in prior years. And our networking business was up as we saw some signs of recovery in the market.

We made good progress in improving profitability in the quarter with initiatives focused on cost reductions and higher asset utilization at our factories. After adjusting for the loss contingency accrual related to our arbitration proceedings with Tessera, our second quarter adjusted gross margin of 17% and adjusted earnings per share of 15% were also consistent with our expectation.

Looking ahead to the third quarter of 2012, our revenues are expected to be in the range of $700 million to $750 million or up 2% to 9% from the second quarter. Third quarter gross margin is expected to be between the range of 17% to 19%. A seasonal increase in gaming, solid demand for wireless communication and a continuing recovery in the networking sector are all expected to drive our growth in the quarter.

We’re well positioned with the key chip makers that sell into the markets with smartphones and tablets and the wireless communication sector remains a strong strength for us going forward. Nonetheless, our growth in the third quarter is somewhat slower than anticipated due to worldwide macroeconomic uncertainties, the delay in the ramp of 28-nanometer wafer supply and softness in the end market demand by the less dominant OEM that sell smartphones and tablets. In light of these developments, we are lowering our expectations for full-year 2012 capital additions to around $500 million, down from $550 million.

Our capital additions for the first half of 2012 totaled $273 million and we’re estimating capital additions of around a $115 million for the third quarter 2012.

Although, some of that spending could move to the fourth quarter if the ramp of 28-nanometer wafer supply is pushed out further. In addition, we expect to have capital additions of $100 million with the acquisition of land related to our previously announced new factory and R&D center in Incheon, South Korea.

As we have stated many times in the past, the timing of our capital spending is driven by customer demand. Since our last call, this demand has shifted more towards the end of the year and beyond due to factors previously mentioned.

We believe that we’re investing in the right packaging and technology for the right customers and in the right markets and that we and our customers are well positioned to take advantage of the exciting growth opportunities for smartphones and tablets.

Now with that I would like to turn the call over to Joanne.

Joanne Solomon

Thank you, Ken and good afternoon everyone. To begin, our second quarter revenues increased 5% sequentially to $687 million. We saw the excessive seasonal increase in gaming and some growth in networking which drove our ball grid package sales up 17%.

Our leasing packages grew 5% primarily due to increases in automotive and industrial applications. Our chip scale package sales were simply flat as we saw the softness in end market demand by the less dominant OEMs that sells smartphones and tablets and delays in the ramp of 28 nanometer wafer supply. And finally, our test services were up 3% due to growth in networking and automotive.

Second quarter results included a charge relating for arbitration with Tessera of $34 million or $32 million net of tax which is a $0.13 per diluted share. Of the total accrual, $30 million was recorded as cost of goods sold and $4 million was reported as interest expense.

The final award in the arbitration could be more than the amount currently accrued and we may record additional charges as information developed or upon new issuance of the final award. Excluding this accrual, adjusted growth margin of 17% was consistent with our guidance.

As Ken mentioned, we made good progress in improving profitability, adjusted net income was $33 million in the second quarter up from $12 million in the first quarter and up from $14 million in the second quarter of 2011.

Our operating expenses at $67 million were down from $71 million in the first quarter, the sequential decline was driven primarily by the restructuring costs that we incurred in Q1 as part of our cost reduction initiative and the subsequent benefit stand in Q2 from this activity. We expect operating expenses to be around $70 million for the third quarter.

Other income and expense of $25 million of expense was up from $19 million of expense in the first quarter due primarily to the $4 million of interest expense for the loss continued April.

Other expense was down from $38 million in the second quarter 2011 as the period included $16 million of premium take or retired debt. We recognized the income tax benefit of $4 million in the second quarter which is driven primarily by the discreet tax benefit relating to the release of tax reserve established in the prior year.

For the full year, we expected an effective tax rate of around 14%. Moving on to our with liquidity and capital structure, at June 30 we had $351 million in cash, total debt of $1.4 billion and net debt of $1.0 billion dollars. We were free cash flow negative in the second quarter by $25 million and we expect this free cash flow negative for the year. During the quarter, we successfully completed two transactions to help boost our liquidity. We amended our revolver by increasing the size to the facility to a $150 million an increase of $50 million. Lowered the interest rates and fees and extended the maturity by two years to 2017.

We also entered into a new five year $150 million in Korea and in July we used $50 million of the purchase from these loans to retain existing Korean bank loan, leaving us with a $100 million available to be withdrawn under this loan as needed over the next 12 months for capital addition.

We continually assess our liquidity needs based on our expectations regarding sales, costs, capital spending and other contingencies and we made from time to time or get additional transactions to enhance and improve our liquidity such as refinancing, maturities and other financing alternatives. With that we will now open the call up for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jeff Harlib with Barclays. Please go ahead.

Jeff Harlib - Barclays

Maybe can you talk a little bit about the smartphone and tablet business that you are seeing and investing in, in terms of CapEx and how should we look at that business in terms of capital intensity as well as margins compared to your overall average?

Ken Joyce

The smartphones and tablets are our key strength for us. We continue to invest for that. I think we are in with like I said with all the right customers; we are certainly in within the principal players. The profitability in the smartphones and the tablets is really very solid and the capital intensity depending on the package that's used on the phone would vary but if you are on the wafer level processing types of products, your capital intensity is probably in the 15% to 17% range.

If you are on some of the wire bond products it could be in the 10% to 14% range. And all these phones have a very packages that go into them so there's really a mix, there's not a capital intensity for say, it’s a mix depending on the package mix, it’s in it. We are in there from everything, from the RF to the app processors to the base bands and the MEMS microphone. So we in near many, many places; all require different capital intensity, but the capital intensity profile once again would go with the type of package.

Jeff Harlib - Barclays

Okay, and just maybe if you can talk a little bit about the plans for the new facility in Korea, what that should mean for your overall utilization and what's -- just a little bit on that investment and how that will help the company's margins and efficiency etcetera?

Ken Joyce

Absolutely; what we have done so far is we've made a, we are going to have a capital addition this year of a $100 million and that's for to buy approximately 46 acres of land that's in the Incheon area, so it’s really strategically located, its close to the airport, close to sea access, so really great transportation access to it. But more importantly, it’s a strategic long-term decision; it’s a balance of the short term and long-term. Short-term, we would be putting some money out the door.

Our plans right now are for 2013 to be doing architectural drawings, start building out the facility in 2014, so probably production would start sometime in 2015 according to the plan. This would be for our advanced packages. We have some operations in Korea that we could consolidate into here.

And the other thing is that it’s strategically located where we can move our R&D center from where we have it now and install into this area and attract the type of talent that we need. Korea has some of the absolutely best, most qualified packaging engineers in the world. We want to take advantage of that. We have a good relationship with them.

So that’s really well positioned and it will allow us to service from Incheon in the North, then we have another really nice facility in the South in Gwangju, which is we call our K4 facility and in the North K5; really it’s sufficient capacity to really grow in the smartphones and tablets areas and the new technologies that are coming in and in the flip chip type of packaging its being used, in the wafer level CFC packaging and Korea is just really good with that. So it's a more long-term strategic. In the short-term, once again, if there is a small investment, it will be two years before we head start to bring that up in production.

Jeff Harlib - Barclays

And just lastly, CapEx model looking at into 2013, you know, assuming a normal demand environment and I don't know how much you can provide on that but….?

Ken Joyce

Well, it's really too early to tell what's going to happen in ’14, it’s with all the uncertainty on the macro, clearly here in Q3 and Q4 it's hard to say. But what we can say and I feel very confident saying is smartphones and tablets, the growth there looks pretty strong and it's going to continue to grow for years into the future. That’s a key position for us. I think we have the technology, we have the engineering; we have the customers. So we're going to have good growth in the area and we’ll have to support that and we will support that with CapEx. In terms of what the rest of the business assumes, it's really hard to talk about that at this point in the game. We’ll support our consumers demand, that’s where we put capacity in place and if there is good solid demand opportunities, we’ll be investing for them.

Operator

Thank you. (Operator Instructions) And we have no further questions, you may continue.

Ken Joyce

Okay. If we have no further questions, I think we will just close on the note that we said reiterating our guidance for the Q3 is that our net sales are 700 to 750 up 2% to 9%, gross margins 17% to 19% and earnings per share $0.10 to $0.20 per share. We are excited as we move in. There are some trends that we have to look at on the macroeconomic uncertainties. We are clearly hoping that the 28 nanometer shortage issues get resolved. The demand is still there and we are very confident that it will be resolved, because some of the best minds in our industry are focused on it. So I feel very confident there and so we feel good going into Q3 and actually even as we look out into Q4, we are looking for some growth that we can past these headwinds. So with that I would like to thank everyone for participating with us today and have a good day.

Operator

Ladies and gentlemen that does conclude the Amkor Technology Inc.’s second quarter earnings conference call. If you would like to listen to today’s replay phone number is 1800-406-7325; access ID 4553664. Thank you and have a good day.

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