Amkor Technology, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; financial statements are unaudited. Amkor provides outsourced semiconductor packaging and test services.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $989.4 million | $917.3 million | $1,903.0 million | $1,786.0 million |
| Gross profit / margin | $172.2 million / 17.4% | $131.6 million / 14.3% | $315.1 million / 16.6% | $254.5 million / 14.2% |
| Operating income | $168.3 million | $30.5 million | $192.9 million | $52.6 million |
| Net income attributable to Amkor | $115.5 million | $4.7 million | $105.5 million | $3.8 million |
| Diluted EPS | $0.48 | $0.02 | $0.44 | $0.02 |
Q2 sales rose 7.9% year over year; first-half sales increased 6.6%. Gross-margin expansion reflected higher sales and fixed-cost leverage, partly offset by costs associated with factory consolidation in Japan. The prior-year comparisons were affected by Japan earthquake disruption, which reduced sales by about $15 million and weighed on gross margin.
Reported operating income includes a $108.1 million pretax gain from the May sale of the K1 factory. Excluding that gain, operating income was approximately $60.2 million for Q2 and $84.8 million for the first half; these are simple calculations from reported figures, not company-reported non-GAAP measures. First-half R&D expense increased 49.7% to $85.8 million, primarily due to costs associated with the K5 facility. First-half interest expense, including related-party interest, was $44.9 million, up from $39.5 million; foreign-currency effects were also a source of period-to-period volatility.
Cash flow, liquidity and debt
- Cash and cash equivalents were $657.6 million at June 30, 2017, up from $549.5 million at year-end 2016. Cash, cash equivalents and restricted cash totaled $663.9 million.
- First-half operating cash flow was $200.0 million, down from $273.2 million, mainly due to working-capital changes. Capital expenditures were $271.7 million. Company-defined free cash flow was $59.3 million versus negative $82.2 million; it includes $131.0 million of property-sale proceeds, so it is not equivalent to operating cash flow less capital spending alone.
- Total debt was $1.568 billion; $330.6 million was classified as current. The company reported $182.9 million available under its $200 million revolving facility and additional foreign credit capacity. It was in compliance with debt covenants at quarter-end.
- Amkor expected cash, operating cash flow and available credit to cover financial requirements for at least the next 12 months, while cautioning that future liquidity depends on business performance, capital needs and access to financing.
- In July 2017, after quarter-end, Amkor redeemed $200 million of 6.625% senior notes using cash on hand and expected an approximately $4 million early-extinguishment charge in Q3.
Developments, outlook and risks
- Amkor completed its acquisition of Nanium, a wafer-level fan-out packaging provider, on May 22, 2017. The filing includes Nanium results from that date and records no acquisition goodwill.
- The K1 factory sale generated $142.4 million of proceeds and the $108.1 million pretax gain. Management cited advanced packaging and test, mobile demand, customer expansion in China and Taiwan, and automotive and analog markets as opportunities.
- Management expected 2017 capital expenditures of approximately $525 million; $271.7 million had been spent in the first half. Spending is subject to customer demand, project timing, cash needs and financing availability.
- Tax expense was $33.0 million for the first half. Tax holidays in Korea, Malaysia, the Philippines and Taiwan expire at various dates through 2025; the company expects its effective tax rate to increase as holidays expire. Gross unrecognized tax benefits were $24.8 million at June 30.
- Key risks include semiconductor cyclicality, limited customer order commitments and customer concentration, pricing pressure, high fixed costs and capital requirements, substantial debt and restrictive covenants, foreign-exchange exposure, supply and yield disruptions, natural disasters, and acquisition integration. Amkor also identified risks from integrating Nanium and implementing its multi-year ERP program.
- The company reported ordinary-course legal matters and said their ultimate outcome was not expected to have a material adverse impact, while noting outcomes remain uncertain. A patent-license litigation settlement had $58.1 million remaining at quarter-end, payable through 2018. The Korean unfunded severance liability was $138.6 million.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus the $108.1 million K1 gain, and how utilization, pricing and product mix affect margins.
- Whether operating cash flow improves after the first-half working-capital outflow, and how the K1 proceeds and capital spending affect cash generation.
- Progress toward the approximately $525 million 2017 capital-expenditure plan and whether customer demand supports the added capacity.
- Debt maturities, the post-quarter $200 million note redemption, remaining liquidity and continued covenant compliance.
- Nanium integration and contribution, tax-holiday expirations, and potential changes in tax or legal exposures.