"Our recent financial performance reflects the impact of the current semiconductor industry correction on an operating plan that was predicated on stronger business conditions," said James Kim, Amkor's chairman and chief executive officer. "In January of this year, business forecasts were robust across our customer base, and I expressed our belief that 2004 revenues would exceed $2 billion. We put in place an operating plan that would position Amkor to capitalize on this growth. Over the past six months, however, semiconductor industry conditions have softened, and we now expect full year revenue closer to $1.9 billion. As we work through the current industry correction, absorb our expanded operational footprint and integrate our recent acquisitions, there will be a near term impact on our financial performance. However our industry is cyclical, and we firmly believe that we are properly positioning Amkor for the long term."
"Due to a strengthening of die support in the last week of September, our third quarter revenue was stronger than we expected when we revised our Q3 outlook one month ago," said John Boruch, Amkor's president and chief operating officer. "Nonetheless, as indicated in our revised outlook, we experienced declining customer forecasts during the third quarter."
"Our third quarter gross margin of 18% was slightly better than the 17% we anticipated in our revised outlook one month ago, as third quarter revenue came in much closer to original guidance," said Ken Joyce, Amkor's chief financial officer. "During the quarter we also increased our material reserves by $6 million to better align our raw material inventory with expected customer demand."
SG&A expenses decreased by $1 million from the second quarter. These expenses included a total of $8 million in legal fees and expenses in connection with the mold compound litigation and Amkor's patent infringement lawsuit against Carsem Semiconductor Sdn Bhd. An evidentiary hearing in the Carsem litigation has been conducted and an initial determination by the International Trade Commission Administrative Law Judge is expected in the fourth quarter, with a final review by the ITC expected in early 2005. The legal fees and expenses were partially offset by the reversal of $2.4 million in employee bonus compensation that was accrued in the first half of 2004.
"Given the continuing inventory correction by our customers, it is difficult to accurately project our revenue, the product mix associated with that revenue, and the resulting gross margin. Near term, we expect our margins to remain under pressure due to the combined impact of competitive pricing actions, excess manufacturing capacity relative to demand, and absorption of costs associated with our recent acquisitions," said Joyce.
"Due to a reduction in forecasted taxable income for the full year 2004, we would have had a nominal tax benefit in the third quarter; however we have recorded a tax provision of $7 million in connection with new guidance issued by tax authorities during the third quarter relating to taxation of our foreign operations," said Joyce.
"Third quarter capital expenditures totaled $73 million and were focused on expanding our test and flip chip capabilities," said Joyce. "We are currently budgeting capital expenditures of $32 million for the fourth quarter, approximating total 2004 capital expenditures of $400 million. For 2005, we are targeting total capital expenditures of $100 million compared with estimated annual depreciation and amortization of approximately $250 million. Next year's capital plan will also be focused on supporting our test and flip chip operations."
In connection with the IBM transaction and related building purchase in China announced in May of this year, we will be making scheduled payments totaling approximately $122 million in the fourth quarter of this year. On our balance sheet at September 30, we include $120 million of this obligation under "short term borrowings and current portion of long-term debt."
As previously announced we are structuring a $300 million six-year term loan facility, with closing scheduled for October 27, 2004. Under terms of the loan agreement we will make a single bullet payment six years from closing of the credit facility. We believe it is prudent to raise these funds at this time to ensure that the company has adequate liquidity during the current industry downturn.
At September 30, 2004 Amkor had U.S. net operating losses available for carryforward totaling $417 million expiring through 2024. Additionally, at September 30, 2004, we had $43 million of non-U.S. operating losses available for carryforward, expiring through 2013.
Selected operating data for the third quarter of 2004 is included in a separate section before the financial tables.
Our customers remain cautious about end-market demand and are exercising tight control over inventory. The high degree of uncertainty in the semiconductor sector is reflected by continued weakness in our customers' forecasts, and this is impairing our business visibility.
On the basis of current customer forecasts, we have the following expectations for the fourth quarter of 2004:
- Revenue in the range of 5% to 10% below the third quarter. - Gross margin in the range of 15% to 17%. - Net loss in the range of $0.16 to $0.23 per share.
Amkor will conduct a conference call on October 26, 2004 at 5:00 p.m. eastern time. The call can be accessed by dialing 303-262-2075 or by visiting the investor relations page of our web site: http://www.amkor.com/ or CCBN's website, http://www.companyboardroom.com/. An archive of the webcast can be accessed through the same links and will be available until our next quarterly earnings conference call. An audio replay of the call will be available for 48 hours following the conference call by dialing 303-590-3000 passcode: 11006479#.
Amkor is a leading provider of contract semiconductor assembly and test services. The company offers semiconductor companies and electronics OEMs a complete set of microelectronic design and manufacturing services. More information on Amkor is available from the company's SEC filings and on Amkor's web site: http://www.amkor.com/.
Forward Looking Statement Disclaimer
This press release contains forward-looking statements within the meaning of federal securities laws, including, without limitation, statements regarding the following: Amkor's expected revenues for 2004; Amkor's expected revenue, gross margin and net loss for the fourth quarter of 2004; Amkor's near term financial performance, including expected gross margins; Amkor's positioning for the long term; the trend in declining customer forecasts; the judicial determination and final review of the Carsem litigation; budgeted capital expenditures; estimated depreciation and amortization; payments in connection with the IBM transaction; and the closing of the $300 million six-year term loan facility. These forward-looking statements are subject to a number of risks and uncertainties that could affect future results and cause actual results and events to differ materially from historical and expected results, including, but not limited to, the following: the highly unpredictable nature of the semiconductor industry; volatility of consumer demand for products incorporating our semiconductor packages; weakness in the forecasts of Amkor's customers; customer modification of and follow through with respect to forecasts provided to Amkor; deterioration of the U.S. or other economies; the highly unpredictable nature of litigation; our relationship with IBM; the satisfaction of conditions in the agreements entered into in connection with the IBM transaction; the ability of Amkor to attract potential lenders; the results of any additional negotiations with potential lenders; the ability of the Amkor to successfully close the term loan facility; worldwide economic effects of terrorist attacks; military conflict in the Middle East and potential military conflict in Asia, Africa and elsewhere; competitive pricing and declines in average selling prices; timing and volume of orders relative to the production capacity; fluctuations in manufacturing yields; competition; the risk of adverse results of litigation against us; dependence on international operations and sales; dependence on raw material and equipment suppliers; changes in tax laws; exchange rate fluctuations; dependence on key personnel; difficulties in managing growth; enforcement of intellectual property rights; environmental regulations and technological challenges.