艾克爾 (AMKR) 2002 Q2 法說會逐字稿

Good afternoon, Ladies and Gentlemen and welcome to the Amkor 2nd Quarter Earnings Conference Call.

At this time, all participants in a listen-only mode.

Following today's presentation, instructions will be given for the question and answer session.

If anyone needs assistance at any time during the conference, press the star followed by the zero.

As a reminder, this conference is being recorded today, Tuesday, July 30th, 2002.

Now I'd like to turn the conference over to Mr. Jim Kim, the Chairman and Chief Executive Officer of Amkor Technology incorporated.

Go ahead, sir.

Thank you.

Thanks for joining us today.

I'm James Kim, Chairman and Chief Executive Officer of Amkor.

With me are John Boruch, president and chief operating officer.

And Kenneth Joyce, Chief Financial Officer.

I will make some brief remarks.

Ken will discuss our operating results and then John will have some closing remarks -- comments.

We announced a shareholders agreement to sell part of our state in semiconductor to a group of Korea.

This agreement is consistent our announced strategy of amortizing our interest so that we can forecast on our core test business and deliver our bottom share.

The proceeds from this stock sale will be used to repay our bank term loan.

Once this loan is repaid, we will have no significant debt amortization scheduled until 2006.

We also announced that the shareholders agreement calls for Amkor ASI and -- to reach agreement by end of September to terminate our foundry agreement with ASI.

Under the foundry agreement, Amkor has the exclusive rights to sell all of our foundry until 2008.

Conclusions for terminating the agreement, Amkor [INAUDIBLE] receive a payment that reflects a fair value of this contract.

Most of the proceeds received from terminating our foundry agreement and from any sale of our remaining ASI shares would be used to further reduce debt.

Kenneth Joyce will now review our financial results.

Thank you, Jim.

Before we discuss our financial results, I'd like to remind you that during the course of this conference call, we will make forward-looking statements regarding future events and future performance of Amkor.

We wish to caution you that such statements represent the current view of management.

We refer you to today's press release and our filings with the SEC for information on risk factors that could cause actual results to differ materially from our current expectations.

Excluding several special charges, the results of operations for the quarter tracked right to plan.

Assembly and test revenue was $350 million, up 21% from $289 million in Q1.

And gross profit and EBITDA dollars were at their highest level since the 1st Quarter of 2001.

Our results for the quarter included several special charges, first, as previously announced, the company engaged an independent appraisal firm to assess fair value in applying the guidance of FAS 144 and 142.

In accordance with FAS 144, the company recognized a non-cash impairment charge of $185 million, associated with the continued under-utilization of tests and certain encore assembly assets.

To reduce the carrying assets of those assets to fair value.

Further,connection with the recent decline in the company's market capitalization and the recognition of significant stats and impairment charges, the company,accordance with FAS 142, tested goodwill for impairment during the 2nd Quarter of 2002.

The carrying value of the company's test reporting unit, including allocated goodwill and intangibles was in excess of fair value and accordingly, the company recognized a $78 million non-cash goodwill impairment charge.

The second special charge was $4.8 million in lease cancellation and other facility exit costs in connection with the consolidation of some of our U.S. office locations and the closure of our San Jose test facility.

These actions were taken to enhance operational efficiency and reduce fixed costs.

The third special charge was a $43 million non-cash impairment of our equity investment in ASI, in connection with the purchase of 20 million ASI shares by [dung boo] at a price of 5700 Korean Wan per share.

This impairment charge reflects the difference between the carrying value of the ASI investment of $5.64 per share and the per-share price of $4.74, based on the Wan exchange rate of June 30th, 2002.

Stated together, these special items accounted for $311 million, or $1.89 per share, or roughly 81% of our net loss for the quarter.

2nd Quarter units increased 23%.

During the quarter, ASPs essentially were flat.

Overall, 2nd Quarter capacity utilization was around 65%.

During the quarter, we saw strong unit growth across a broad range of packaged families with particularly strong growth in micro lead frame, SOIT, TQST, Chip BGA, and flip chip.

Wafer sales from ASI's foundry were $59 million, compared with 61 in the 1st Quarter. 2nd Quarter depreciation and amortization expense was $95 million, compared to $94 million in the 1st Quarter and $108 million in the 2nd Quarter quarter of 2001.

SG&A expenses were up 4% or $1.9 million sequentially, and 2nd Quarter over prior year -- prior year quarter SG&A expenses were down $2.8 million or 5.5%.

At June 30th, our cash balance was $162 million and our 100 -- $100 million revolver remained unused.

Receivables and inventories rose modestly in connection with higher business levels.

Capital expenditures were approximately $32 million for the 2nd Quarter and totaled $51 million for the first six months.

Cap-X was focused on such areas as micro lead frame and slip chip.

Our current Cap-X plan for 2002 remains around $100 million.

The $32 million in Cap-X for Q2 was in line with our budget of $50 million for the first six months.

I would like to take a few moments to comment regarding financial liquidity.

As we have indicated previously, upon completion of the sale of 20 million shares of ASI, we intend to take the proceeds to repay the entire $97 million term loan under our secured bank credit agreement.

Upon repayment of this term loan, Amkor's current debt will consist of approximately $59 million, held by a Japanese and Taiwanese financial institutions in connection with our working capital requirements and lease obligations in those markets.

Most of this debt is in the form of an unsecured revolving line of credit with a Japanese bank.

This agreement is not subject to any financial covenants and is typical with such lines of credit in Japan, and is automatically renewable on an annual basis.

Our remaining $1.6 billion in long-term debt, no principal payments are due until May 2006.

Under these circumstances and a few of our expectations of increasing cash flow generation, and modest Cap Ex requirements we are very comfortable with our financial liquidity.

During this call, we will provide guidance as to expected patterns of revenues, margin and expenses for the 3rd Quarter of 2002 in order to facility your assessment of our business and financial model.

Before I begin, let me remind you of the risks associated with our forward-looking statements.

I'd like to remind you that form 10K and form 10Q contain a comprehensive discussion of the risks of business, all of which continue to apply.

During the 1st Quarter of 2002, our customer six-month forecast we're building consistently around a broad array of end market applications.

We believe the increased customer activity reflected a shrinking inventory bubble with production rising to meet end market demand.

As our customer forecasts have refreshed over the past several weeks, we have seen evidence of renewed caution regarding end market strength.

Accordingly, our current view of customer demand suggests that the revenue for the 3rd Quarter will be up around 5% over Q2.

Wafer fab revenue is expected to be down modestly from the 2nd Quarter.

Our gross margin is highly dependent upon product mix and utilization rates.

We presently expect 3rd Quarter gross margin to be around 9%, representing a substantial increase over the past several quarters.

Operating expenses will continue to reflect the build-out of our Chinese factories and general business expansion.

As a percentage of revenue, 3rd Quarter operating expenses should be around 14%.

Our corporate tax benefit for 3rd quarter will be 18%.

As indicated in our press release, during the 3rd Quarter, we anticipate taking additional charges in the range of 10 to $15 million in connection with further cost reduction and consolidation initiatives.

We will provide more detail on these initiatives at the appropriate time.

Looking back, we have improved gross margin from negative 4% in Q1 to 3% in Q2 and we expect to achieve 9% in the 3rd Quarter.

Current projections suggest this type of step production improvement in gross margin should continue into the 4th Quarter.

On this basis, we are confident that we will achieve positive operating income in the 4th Quarter.

In Q3, we expect to achieve break-even free cash flow, after interest and after Cap Ex.

We are targeting the free cash flow positive in 4th quarter.

Now I'll turn the call over to John for additional comments.

Thank you, Ken.

First, I want to emphasize that our 21% revenue increase in the 2nd Quarter was achieved on a basis of growth in our core business.

We saw strength across most of our product lines and saw significant adoption of key package technologies such as micro lead frame.

We achieved this 21% growth without the benefit of many new initiatives.

We have not yet produced vehicle revenue in China, although we see this coming later in 2002 and certainly in 2003.

We did not have meaningful 2nd Quarter revenue in the graphics market, although we are now we're engaged in the market and expect further penetration over the next several quarters.

We didn't have meaningful revenue in the Taiwan chip set market, but are making excellent progress with the top suppliers there, and expect to play a more important role as we go forward.

We did not have any revenue from the major players in the CDMA technology.

However, our micro lead frames technology has not provided a solid platform to penetrate this market.

Going forward, we expect all of the above initiatives, China, graphics, Taiwan chipset and CDMA to help fuel our growth.

Our presence in Japan is strong and growing.

Our relationship with Toshiba is excellent and we're making good progress at bringing 3rd party business into the factory.

Our Japan business has been growing and we expect that growth to continue.

In Taiwan, we have updated our technology base and added new product lines, such as flip chip, system and package, and chip scale BGA that will enable Taiwan to be a stronger competitive force.

In China, we're building revenue on packaged solutions designed to support the growing domestic market for cellular phones.

We're ramping several large customers and expect another major customer program to begin in Q1 of 2003.

We believe the stage has been set for Amkor to continue our 30-year tradition of growth.

Our focus is ensuring that this growth is sustainable and profitable.

We will continue our efforts to lower our manufacturing and material costs and to improve our product mix.

Finally, as Ken mentioned, we are confident that we will return to positive operating profitability in the 4th Quarter.

Operator, we will now open the call to questions.

Thank you, sir.

Ladies and gentlemen, at this time we'll begin the question and answer session.

If you have a question, please press the star followed by the 1 on your push-button phone.

To decline from the polling process, press the star followed by the 2.

If you're using speaker equipment, you will need to lift the handset before pressing the numbers.

One moment, please, for the first question.

Our first question comes from Brett Hodess with Merrill Lynch.

Hi, this is Samir Desi in for Brett.

First question is, what was the assembly in test utilization in the quarter?

Our rates were about 65% for our capacity in the 2nd Quarter.

Was that versus around 60% in the previous quarter?

Yes, 50% from the previous quarter.

We added a number of wire bonders during the quarter and some other capacity.

Okay, what's your expectation for pricing, do you see it staying stable this kind of range or expect to go back to the typical declines?

We saw that our -- our ASPs were flat from Q1 to Q2, which was good.

We expect the range to stay within the normal range, 2, 3, 4% range, that's normal in reduction quarter-to-quarter.

And the flat ASP that you recorded; was that a mixed adjusted flat?

No, that is an actual per-need, per-ball ASP.

We measure our ASP, not on average ASP.

In the exchanges, it is on per-need and per-ball terms.

And can you talk a little bit about what are you seeing in the different end markets and what was the breakout was between the end markets between communication, computing and consumer?

We saw, you know, basically most of the markets were firm or -- the cellular market was up for us.

It looked -- I'm not sure about everybody in general, but we have a number of new package types that are going to cellular phones.

We were able to capture the market share there, but that business looks very strong for us.

The -- I'm looking for the percent -- yeah, communication market was around 30%, computing market was about 25% of our activity.

Consumer, 30% and the rest about 15%.

Okay.

And can you talk about what you saw perhaps in the other sectors, as well?

As far as consumer?

Consumer was good for us.

A number of our consumer-type products grew dramatically in the 2nd Quarter.

You have to have something growing for a 21% revenue increase.

That was one of them.

Plus, the wireless; we thought the computer was firm.

And the other markets, auto, et cetera, were up somewhat.

Okay.

One of the things you commented on the call was the newer package sets, you're seeing a lot of growth.

There's been talk in the industry about some of the technology changes we've seen in the past kind of slowing to a certain extent.

I wanted to reconcile what you're seeing there, are you seeing a lot of demand?

Are these new customers or existing customers?

Or...

We see a lot of new chips, we're seeing a lot of new designs, we're seeing a lot of new packages, which is good for Amkor going into play.

Of course, the one area that is -- that is still lagging is the -- the -- the infrastructure -- communications infrastructure that, still is, you have to reappear.

Other than that, though, it is a typical upturn in the market as far as acceleration of new technologies.

You don't see anything slowing in terms of new technologies at all?

No, no.

In general business trends, you mentioned caution.

Are you seeing less on forecasted upside and can you talk about where the diebacks are, as well?

Business trends, you know, we -- we -- we -- we had previously talked about double digit growth in the 3rd Quarter.

This -- our guidance now is around 5%.

What we've been listening to are -- are -- are -- are the analysts and the forecasters out there and a number of our customers, indicating that the market has gotten a little soft.

Our numbers, internal numbers have shown this great of growth has slowed down for a while.

Which is not untypical of many upturns, okay, you have three, four, five, six months of good, good acceleration, then you pause.

Our hope here at Amkor is that you re-establish that growth rate again.

So, we're being cautious in our -- in our -- in our outlook, but we are -- we're optimistic that -- that the -- certainly we're going to grow in the 2nd and 3 rd quarter and optimistic that we're going to grow again in the 4th Quarter and continuing to 2003.

That's what the numbers say now.

Thank you, sir.

Our next question comes from Steven Palayo with Morgan Stanley.

Hi, there, this is Bill Loose with Steve Palayo.

Just follow-up on the question on capacity.

Can you just talk about in percentage terms, how much you added since say the end of the year last year?

Well, you know, we've added since the end of 2000 $50 million worth of capacity.

That was in micro lead frame capacity.

A lot of it was in micro lead frame.

And -- and some of it was in front-end dish wire bonders.

Thank you.

Our next question comes from Quinn Bolton with CIBC World Markets.

Hi, good afternoon, gentlemen.

Ken, could you just repeat the end of your guidance about the cash flow and -- and then returning to operating profitable by the end of the 4th Quarter of this year?

Well, as you're aware, we've been burning cash for the last couple of quarters; we burned modestly some cash this quarter.

When I say that, we had EBITDA of 48, interest of 37 and Cap-X at 32 and change in working capital.

So, we were really very close to a free-break-even cash flow this quarter.

Our current projections are such with the -- we're looking at our margins, gross margins improving in Q3 that we believe that that will support us in a position to be essentially cash flow break-even if you will, on a free cash flow break-even in Q3.

We have not given guidance to Q4, as you know, Quinn, but as we look out, we see room for further improvement there and expect, based on our internal projections, that woe have increased in cash flow from there.

As far as the guidance with respect to operating being profitable at the operating income level, as you know, the -- the past several quarters we have not been able to achieve that.

We've tried to reduce costs significantly, and we worked on that, and we made some adjustments through.

Our margins increased from negative 3.9 to positive 3 this quarter.

We're looking at 9% next quarter.

So, once again, we're confident that we feel very confident where we're at right now that, -- that as a result of those improved margins and the actions that we've taken to reduce costs that, we will have a profitable operating income come Q4.

Thank you.

Our next question comes from Medhi Hosseini with SoundView technology group.

Yes, can you elaborate on revenue contribution from Japan, China and Taiwan going forward?

We -- we don't break out our revenue by -- by geographic regions, so, we can't give you that.

Well, you suggested in your press release you expect $100 million contribution from Fujitsu by the 4th Quarter.

I'm trying to determine overall business, combining Fujitsu and Toshiba all together by the end of this year.

Yeah, the 100 we referred to, our former press release on an MOU that we have with Fujitsu that we thought would close this year sometime.

We're not sure when exactly that will close.

That's why we mentioned it in the press release.

That's an ongoing activity.

True.

Other than that, we don't break out geographic revenue.

Okay.

My second and last question, if you could elaborate on the rolling forecast that are coming in right now, what I'm mostly interested in, the direction, are they unchanged, going down or going up?

Well, we see a lot of change in the -- in the forecast construction.

So, what it's telling us is our customs are great, paying very close attention to final demand and adjusting their forecast on a daily basis with us, so, that's good.

What it says is that they're not building inventory, they're really trying to find out where the final demand is.

Secondly, it seems to us that it is still strong, relative to forecast.

Our customers are still being conservative in their outlook, in our opinion.

And that we receive, as the quarter progresses, a lot of upsides as we go forward.

Now, with all of the concern about the market softening in general, we at Amkor have a lot of specific programs that we think are going to cause us to grow during the 3rd and 4th Quarters.

The question for us is: Is the underlying general market softening such that we'll lose backlog and revenue as we go forward?

Right now it's looking more like it is increasing modestly to us.

And we look at what's happening in July, you know, July is about our revenue month, and July will be good.

July will be our best month of the year so far.

So, we're hopeful that the 5% is conservative.

Thank you, sir.

Our next question comes from James Crew with Morgan Stanley.

Good afternoon.

Sort of following up on that -- that volume or the best month being July, could you just talk about, then, sort of the trends during the quarter and -- and then, as that looks into the 3rd Quarter, do you expect a lot of the strength to come in September with a sort of back-to-school, and sort of that 5% growth predicated on a kind of normal rebound in PC demand, and also is that outlook -- what kind of utilization are you looking for in the 3rd Quarter?

And the last question to Ken would be just on that restructuring, is that all cash that -- that is going to flow through?

Okay, Q2 kind of looked like each month was bigger than the last month, April, May, June, we saw a larger month in revenue.

Q3, we're -- we're having a good July.

Normally August is better than September.

Excuse me, August is better than July.

It has been for the last seven years in our business.

And the question mark for us is September.

So, no, we are not counting on a great September; we're counting on a bad September.

That's hence our 5% guidance.

Now, if September comes in good, then our numbers were conservative.

There is reason to think they might be, but we will see.

Thank you.

Our next question comes from John Joseph with --

Ma'am, ma'am?

James?

Sorry, I have a cell phone and hope there's not a lot of noise here.

John, did you say that pricing was flat in the quarter and your outlook for pricing in the 3rd Quarter would be for slightly down?

Yes, in normal ranges, you know, 2, 3%.

Okay.

And then Ken, can you give us the financial implications of cancellation of the [ANOM] agreement?

Does this mean that you will no longer be using the fab resources of [ANOM], and it sounds like there's a -- a cash benefit or there's a return of cash from that agreement?

Actually, right, it's a good question, John, there would be a -- in other words, in effect we would terminate the foundry contract and get some kind of opinion in exchange for that cancellation.

So, it would be a one-time infusion of cash and probably be -- we're negotiating that, and it would be based some kind of a stream of discounted cash flow to come to a fair value.

And we hope to have that closed by the 3rd Quarter, by the end of September.

The implications that that has for accounting is, as you're aware, Amkor historically has sold 100% of the output of the ASI wafer fab, that's going into the revenues as well as our cost of goods sold.

We earned a 10% margin on that business, and then we had certain support out of Boise and Europe, basically sales and engineering for -- that would come out of the G&A.

So, what would happen if we complete this -- when, not if, but when we complete this, it will be treated as a discontinued operation.

It would come out of sales.

We would no longer report the sales for the wafer fab.

It would come out of sales, margin, SG&A and be reported as a one-line, even on a comparative basis it goes away.

The other thing is: As you're aware, we have two components of that.

We also report a portion of the earnings; we own 42% of ASI, and we account for that on the equity method of accounting right now.

We recognize 42% of their gain or loss.

Our target is to get that below 20% into such a position that we would no longer account for it on an equity basis, but we're still working in that regard.

Thank you.

Our next question comes from Jeff Harwood with Credit Suisse First Boston.

Hi, good afternoon.

Few things, first, the -- the change in your -- your Q3 -- the change in the Q3 comes from a forecast.

Can you talk about what market segments have gotten hit?

And which ones have held up?

And then, also, just on the flow-through of the cost savings both the Q2 actions and the Q3 actions, should we see some of the benefit from that in Q3 and Q4?

And then just the -- the termination of the foundry agreement, is that tied to the final share purchase by [dung boo]?

In other words, do you need to complete that before you -- before you complete the share purchase?

John can answer --

Yeah, we would answer that first.

Shareholders agreement is essentially contained that foundry agreement to be terminated by end of September 30.

In other words, we have to enter into an agreement.

I'm not free to reveal that yet.

There is close in there to negotiate that amount.

Let me make it clear, Jeff.

I think you did ask.

The -- the sale of the foundry agreement -- I mean the sale of the shares is not contingent upon the sale of the foundry agreement.

The sale of the shares is complete; that's subject to definitive agreement and the settlement is August 28th.

We are still negotiating the -- the sales marking rate, separate issue, but one is not contingent on the other.

Correct.

Go ahead, John.

You also asked, with respect to Q2 cost savings, now, we did have a reduction in force again in -- with our non -- I mean our non-factory workforce in Q2.

We recognized a $1.1 million in severance charge in the quarter, and with that, that will return to us about $13 million annually, so we will start to see some of that in the 3rd, probably in the range of around $3 million a quarter, I would think, starting, going into Q3 and 4.

In addition to that, we terminated some leases which will also return to us approximately $4 million.

And as we indicated in the release, looking forward into Q3, we are going to incur charges of probably another 10 to $15 million for some additional restructuring activities.

John, do you have further comments?

Yes, just on the Q3 market changes, what we -- we see staying strong as wireless for us?

What we -- what we see a little weak or flat; the consumer and the -- when the computer markets.

Especially in our Taiwan factories; our Taiwan factories sees a reduced revenue Q2, from Q1.

And we're waiting for the computer back-to-school rebound, but not counting on it, but if it's there, we will service it.

We saw some weakness, especially in the Taiwan factories in the consumer and in the -- the computer markets.

Thank you.

Our next question comes from Andrew Cohen with SAC capital.

Hi, good afternoon, thanks very much.

Congratulations on the quarter.

Quickly, if you could, could you walk me through the margin expansion that you're projecting for Q3 and for how you get there?

The margin expansion past through Q3 or into Q3 --

No, you're anticipating a 9% margin.

Can you explain that 600-basis point gain?

Well, part of it comes from the assets that were impaired, there will be depreciation savings of around 4%, 4 to 5% right there, and the others will come from additional cost reduction activities.

Thank you.

Our next question comes from John Brodrick with Banc of America.

Yeah, hi, my question is related to the previous one; what would the margin have been in the current quarter, in the 2nd Quarter had you not taken the restructuring charges?

It would be virtually the same because there is no benefit -- depreciation benefit in Q2 as a result of the impairment.

In other words, we recognize the impairment as of June 30th.

So, the depreciation benefits won't kick in until Q3 and 4.

March will be essentially the same.

One follow-up question, you're at 65% utilization now.

What level of utilization and what kind of market activity would you have to get to where you wouldn't anticipate any further restructurings beyond what you talked about for the 3rd Quarter?

In other words, is there a break point where you say, Well if we expect flat volumes and capacity utilization, is "X," -- we need more restructuring charges.

Can you talk about it strategically?

How it works?

I will answer it, Ken.

Thank you, John.

Basically what we've done here is we have geographically put ourselves in the right countries over the last year or so.

We think we're serving the right businesses.

We've restructured some of our businesses and our focuses there.

We've looked at the effort it's going to take forward to go -- to now fill up these factories and win.

We decided we could get along with the resources we had.

We have a rift.

Which we do not think will penalize us in any ways.

We have some consolidations, which were the cost savings, and again, we do not think will penalize us in any way as far as future growth with the bottom line.

So, after this next round of -- of -- we had already instituted some of these restructuring structuring changes, but we didn't get them done in time because of people issues and government issues, et cetera, but they were already in motion in the 2nd Quarter.

They will be completed in the 3rd and we will recognize them and be able to announce them.

We can't talk about them now because people are involved and et cetera, but they're already in motion.

After that, I think we've got this company, we will certainly reduce costs and look for cost savings, but these are the big things we've gotten out of the way, and I think will run in a normal kind of way from here on out.

Thank you.

Our next question comes from Noah Freeman with Brookside Capital.

Pardon me, Noah Freeman?

Pardon me, Noah Freeman?

He may have stepped away from the line for a moment.

Our next question is from Eric Rubel with Miller Roberts.

Good afternoon, gentlemen, and congratulations.

I wanted to follow-up on gross margin question; looking at the incremental margin for the quarter -- for the current quarter, it was about 42%, and, you know, getting to the 9% gross margin it seems like a more than -- more than 100% incremental gross margin contribution.

How should we be looking -- how should we be looking at incremental gross margin?

Jim?

That's a good question.

The -- it seems to me that, clearly, as we look out for the next six quarters, there will be a benefit in each of those quarters as a result of the -- the -- the asset impairments that we've recognized in Q2.

So, there -- there -- there is a -- there is a component there you to look at.

That is approximately 4 -- 4 -- 400 basis points, I would say, for the next six quarters out.

In addition to that, Eric, I think it's fair to say that roughly -- on the variable-plus side, roughly 40% for materials and the balance becomes your other costs that would be covered in looking at the margin.

Thank you.

Our next question comes from Noah Freeman with Brookside Capital.

Hey, guys, sorry about my absence before, and I apologize if the question has been asked.

Can you describe the impairment charge you're taking on under-utilized equipment and how that exactly works?

Sure.

As you're aware, the -- the FASB has issued a new announcement, FAS 144, and basically there are a number of items you to look at there, when you're looking at and evaluating the carrying value of your assets to see if they're in excess of fair value and if you can recover the carrying value.

And one of the criteria that they look at are -- are cash flows and cash flows stem from utilization and when you have a protracted period of under-utilization, you have to look at and evaluate those assets and see if the carrying assets are in value.

In order to do that, you need the assistance of appraisers to help you come up with fair value.

That's where we're engaged.

In our case here, the particular assets were substantially our test assets that we sold a recovery come in the first two quarters.

We've a long period of low utilization, obviously, in 2001 and went into 2002.

We saw significant recovery in our assembly side on the test side of the house, the recovery didn't come as quick, and we had to look at those assets for impairment.

At the same time there, there certain non-core assembly assets that we looked at, and that's how that impairment was recognized.

Thank you.

Next we have David Fips with JP Morgan.

Hi.

Just want to follow up again on the gross margin question.

If we look at depreciation and amortization, what would you have for expectations for the remainder of the year for depreciation and amortization?

Stepped down about 400 basis points or $15 million per quarter?

It would be around that, exactly, yes.

Thank you, that clears up everything.

Good quarter.

Thank you.

Our next question is a follow-up from Quinn Bolton.

Hi, just want to ask two quick follow-ups.

One, on the [dung boo] agreement, are there any outs now that you signed the definitive agreement?

No, it is a definitive agreement, in fact, Quinn, we received a 10% deposit under terms of payment.

We're due to receive another 40% here in the next 10 days.

Within 10 days of signing, which was the other day, and we'll receive the final 50% by August 28th.

Okay, and the second is it is not contingent -- or the sale of the marketing rights is separate from the sale of the shares, it's discussed in the same agreement, but one is not contingent on the other.

Absolutely.

One is not contingent on the other.

By the way, however, in the likelihood of terminating foundry agreement is very high at the moment.

In fact, there is already agreement exists of the ranges of the -- you know, financial -- financial terms.

But, again, it's in a process of negotiation therefore we cannot reveal to you yet.

Thank you.

Our next question comes from Natasha Silver with Deutsche Banc.

Go ahead.

Hi, just a quick question, if you could just give us some color on receivables, receivables went up to 254 from 218 in the previous quarter and inventories also grew.

If you could just comment on those two items?

Sure.

Receivables went up, really in response to the growth in business, but our -- our receivables were quite pleased in our core business, and when I say that outside of the JV in Japan where normal terms of payment are in Asia are in excess of 90%, if you exclude those, our DSOs on our core business are 42 days.

In this environment, that is really very good.

We're very pleased with our collections on -- and -- and on the AR side.

On the inventory side, there's been a modest build, but once again that's been to service our sales and as you're aware, we have no finished goods, we have no work in process, that's all raw materials and it's subject to a take or pay, our customers give us work heads, we buy to that.

There is very little liability.

So, it's -- we're -- we're in good position, actually, with the receivables and inventory.

Thank you.

Our next question comes from Ramash Methrow with Salomon Smith Barney.

Good afternoon, gentlemen.

I wanted more details in regards to the strength that you saw in July in terms of the segments and the customer types?

And what -- the trend in July -- did it come as a surprise to you, or did you expect it to be back-end loaded?

No, we were pleased with July.

We thought that there might be a June kick from our customers and then with the 4th of July for the USA customers and the summer holiday that Europe always takes off, we thought that the summer might be a little -- July might start off weak.

It did not.

So, we're -- we're pleased with our July performance and it was the best month this year.

And a good start to the quarter.

Maybe 5% conservative, but we'll see how September holds up.

Thank you.

Our next question is from Marquee Hall with King Street Capital.

Yes, thank you.

Could you tell us if you were to account --

I'm sorry, ma'am, we can't hear you, could you speak up, please.

Yes, can you hear me now?

Thank you.

Yes.

If you were to account for the foundry business as a discontinued operation in this quarter, what would your EBITDA have been?

It would have been probably about $2 million less than we reported.

And the reason for that is once again, if you -- if you take sales of $59 million and take 10% of that, that is the gross profit, roughly $6 million, and the cost of the -- the SG&A group to support, that's probably $4 million.

You're losing $2 million on a cash flow basis.

Thank you.

Our next question is a follow-up from Noah Freeman.

Hi, guys, I just wondered why you -- reference to my earlier question, why the tests capacity was so much less used and saw much less growth than the assembly.

Was it that people coming out to you were just assembly?

Thank you.

I will answer that, Ken.

What happened with our test activity is we put a lot of test capacity in place in the year 2000, chasing the boom like everybody else.

Because of Amkor's history and our profile, the IDM community, the large independent manufacturers, like Motorola and TI and the like, make up a -- pretty large percent of our total activity.

What happened in -- in 2001 is they pulled back a lot of their test activity that they scheduled into us.

In addition, the FABless community, they're FABless, they do have some test capability, not assembly capability, but they all have some test capability.

Again, they pulled back their activity into their own factory to utilize their assets.

We had a double whammy here, which produced very low utilization rates, down to 20% in the worst quarters for the test assets.

Now it is up to, you know, a larger number, but we look out and say when are we going to use some of the platforms?

We see no forecast for the next six months or so.

Those are the ones we looked at to impair.

It's not to say we will never use them, but right now we have no use for them.

Thank you.

Our next question is from Phil Dumbas with Wachovia Securities.

I understand your stock has taken a big hit here, but can you update us on your thoughts in regards to the shelf that you filed?

The -- the shelf that we filed has obviously been -- it's effective right now and we have it there and we've put it in place to be opportunistic if the market presented the opportunity, we -- we'd certainly like to take advantage of it.

We've made it very clear, and our continued position is that we're going to work to deliver the company and that's what that -- that instrument was principally filed for, to give us the opportunity to take chances to change our capitals -- or improve, I should say, our capital structure.

And I want to add one thing to that, I want to remind everyone, we don't see a pressing need right now for big uses of cash.

There is no need to go into the area now.

We choose not to.

Gentlemen, I am showing there are no further questions at this time.

Please continue.

Well, I want to thank everybody for being on the call.

We're looking forward to -- it's a good quarter in Q3.

We will talk to you next time.

Thank you.

Thank you.

Thank you.

Ladies and Gentlemen, this concludes the Amkor 2nd Quarter Earnings conference Call.

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