Monday, March 12, 2007

Amkor Tech Facing Bumps in the Road Ahead?






  • From looking at Amkor Technology’s (AMKR-$12.02) regulatory filings, an investor can see the muddy footprints—for better or worse?—of the Kim family in the operational scope of the Company’s semiconductor assembly and testing services.

    As of December 31, 2006, James J. Kim, 71, CEO and Chairman of the Board, and family beneficially owned 87.9 million shares, or approximately 46% of Amkor’s outstanding common stock:

    JooHo Kim, a brother of James J. Kim, is employed as the Corporate Vice President of Information Technology Services, making $270,000 per annum in salary.

    Mr. JooHo Kim, together with his wife and children, own 96.1% of Jesung C&M, a company that provides cafeteria services to Amkor Technology Korea, Inc. During 2006, 2005, and 2004, Jesung C&M provided $6.5 million, $6.5 million, and $6.4 million respectively, in catering services.

    Dongan Engineering Co., Ltd. was 100% owned by JooCheon Kim, another brother of James J. Kim, until the third quarter of 2005. There is no longer any related party ownership. Dongan Engineering Co., Ltd. provides construction and maintenance services to Amkor Technology Korea, Inc. and Amkor Technology Philippines, Inc., both subsidiaries of Amkor. Purchase services provided by Dongan Engineering were $0.5 million and $3.0 million, respectively, in 2005 and 2004.

    Amkor purchases lead frame inventory from Acqutek Semiconductor & Technology Co., Ltd. James J. Kim’s ownership in Acqutek Semiconductor & Technology Co., Ltd. is approximately 17.7 percent. During 2006, 2005 and 2004, purchases from Acqutek Semiconductor & Technology Co., Ltd. were $16.7 million, $11.8 million and $11.8 million, respectively.

    The Company also leases office space in West Chester, Pennsylvania from trusts related to James J. Kim. During 2006, 2005, and 2004 amounts paid for this lease were $0.1 million, $0.6 million, and $1.1 million, respectively.

    John T. Kim, 37, the son of James J. Kim, was formerly employed as Director of Corporate Development (and earned a base salary of $120,000 in 2005). In August 2005, he resigned upon being appointed to the Board of Directors. Mr. John T. Kim received an initial grant of 20,000 shares as a Board member. Annual compensation as a director includes an annual retainer of $25,000 and $2,000 per Board meeting that he attends.

Amkor’s business is highly dependent on the requirements of semiconductor companies for subcontracted packaging and test services.

Prices for assembling and test services have generally declined over time. To capture the growth in the scope and complexity of chip packaging and testing, and to offset product-growth cycle price declines, Amkor is constantly developing and marketing new packages with higher prices, such as advanced leadframe and laminate packages.

Amkor operates in a capital-intensive environment. In recent years, Amkor has invested heavily to service/capture the growing demand for outsourcing of packaging and test services by integrated device manufacturers. The Company spent $66.4 million (excluding performance earn-oyts) purchasing UST, a Taiwan-based provider of wafer level technologies and services for flip chip and wafer level packaging applications. Flip chip assembly has long been used in the automotive industry, and is now gaining popularity among telecom manufacturers (By using the entire surface of the die for establishing interconnect, the need for wire bond interconnect is eliminated and package size can be reduced).

The Company has also spent heavily to expand its geographical presence, by buying and building operational scale and scope in China, Singapore and Taiwan. For example, in 2004, Amkor paid IBM approximately $138.1 million to purchase its test operations in Singapore and Shanghai, China.

During 2006, the Company incurred capital additions of $299 million, commencing operations in a new Singapore 300mm wafer bumping factory (wafer bumping is the process of depositing tiny solder "bumps" onto fabricated semiconductor wafers); in 2007, Amkor anticipates making capital additions of approximately $250 to $300 million.

The source of cash to fund operations, including making capital expenditures and servicing principal and interest obligations with respect to its debt, are cash flows from operations, current cash, and borrowings under available debt facilities.

Growth does not come cheap. As of December 31, 2006, Amkor had cash of $244.7 million and $99.8 million available under revolving credit facility; but its total debt balance was about $2.0 billion.

Amkor’s substantial leverage comes with aggressive loan covenants, too. Any ‘technical’ violation (such as late filings of quarterly reports) could trigger a default—and a default and acceleration under one debt instrument may also trigger cross-acceleration under other debt instruments.

Granted, in a good year a highly leveraged company can trade on the equity at a gain. In fiscal 2006, Amkor’s ROE of 55.06% exceeded its ROA by some 47 percent! A prescient word of caution—trading on the equity is a two-way street: just as a company’s gains can be magnified, so, too, can losses be magnified!

Although Amkor achieved net income and positive operating cash flow in 2006, the Company has reported net losses in four of the previous five years and negative free cash flow in several previous years—about $(198.8) million and $(176.9) million, respectively, in fiscal 2005 and fiscal 2004.

Amkor’s fixed charge ratio was 2.48x, 0.18x, and 0.68x in fiscal 2006, 2005, and 2004, respectively. However, this alleged improvement in the Company’s ability to cover the interest payments on its debt does not weight the $185.4 million and $109.5 million in debt payments due in fiscal 2007 and fiscal 2008, respectively. [Nor the $15.3 million in lease obligations owed in the next two years or an under-funded pension plan owed about $27.2 million.]

The Kim family has bet heavily on a semiconductor turnaround, too. In November 2005, Amkor issued $100.0 million of 6.25% Convertible Subordinated Notes (due December 2013) in a private placement to James J. Kim, and certain Kim family members. The December 2013 Notes are convertible at any time prior to the maturity date into common stock at an initial price of $7.49 per share.

The Kim family has almost half of its $2.0 billion fortune invested in Amkor’s future. Among their other interests (not previously disclosed in this posting) is a 9.0% stake, or 4.12 million shares, in the world’s largest video-game retailer GameStop (GME-$54.71), worth an estimated $226.4 million, and a privately-held Sports-Collectible business (bought in 2002 for about $2.0 million from GameStop).

Investors might consider leaving this stock to the Kim family, for sales and share-net growth have been erratic in the last four years, with a net loss for 2005 of $(136.9) million, or ($0.78) per share and a net loss of $(37.5) million, or ($0.21) per share, in fiscal 2005 and fiscal 2004, respectively.

Guidance was recently cut for the 1Q:07, too, as CEO Kim cited a ‘seasonal’ slowdown. [Ed. note: Do not forget margins, too: high fixed costs and factory under-utilization issues.]

As mentioned, Amkor is highly leveraged, with five times as much debt as equity [buying binge of chipmakers’ in-house packaging operations].

The Company has taken steps to cut overhead costs. Recent examples include (i) October 2005, sale of Amkor Test Services, a specialty test operation based in Wichita, Kansas for $8.1 million; (ii) a 2005 deal to subcontract excess manufacturing labor force (in Japan) to one its customers; and (iii) 2006 early voluntary retirement program with special termination benefits to employees at its Korean subsidiary.

In July 2006, the SEC informed the Company that it is formally investigating Amkor’s historical stock option practices and certain trading activities with respect to Amkor securities, including alleged insider trading activities by or on behalf of certain current and former members of the Board of Directors and Amkor’s Chief Executive Officer.


COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Amkor Technology, Inc., The S&P 500 Index
And The Philadelphia Semiconductor Index

* $100 invested on 12/31/01 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.
Copyright © 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.


Buoyed by bargain chip buyers looking through the lens of an alleged cyclical turnaround in the chip equipment market, the share price of Amkor is bumping up against its 52-week high.

Given the lack of share-net visibility, competitive forces in Asia [market share vs. margins], and the Kim family influence—if downturn lasts longer than anticipated, debtload [high leverage and restrictive loan covenants] could be problematic. In our view, risk-reward favors a cautious outlook.


Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

No comments: