Amkor Technology, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. Amkor provides outsourced semiconductor packaging and test services. This unaudited report covers the three months ended March 31, 2015, compared with Q1 2014; balance-sheet figures are compared with December 31, 2014. Results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net sales | $742.9 million | $696.0 million; up 6.7% |
| Gross profit / margin | $134.9 million / 18.2% | $128.8 million / 18.5% |
| Operating income / margin | $54.0 million / 7.3% | $45.4 million / 6.5% |
| Net income attributable to Amkor | $28.8 million; diluted EPS $0.12 | $20.6 million; diluted EPS $0.09 |
| Operating cash flow | $165.0 million | $131.9 million |
| Capital expenditures | $106.1 million | $96.0 million |
| Free cash flow (company-defined, non-GAAP) | $58.9 million | $35.9 million |
Sales growth was primarily driven by strong demand for advanced products supporting mobile communications. Gross margin declined 0.3 percentage point, mainly because of higher depreciation, partly offset by sales growth, favorable currency movements and lower gold costs. Research and development expense fell 14.3% to $18.0 million, reflecting 20-nanometer chipset design wins moving into production in the second half of 2014. Equity earnings from J-Devices were $6.2 million, versus $5.8 million.
At March 31, cash and cash equivalents were $494.2 million, including $367.5 million held offshore; current assets were $1.206 billion and current liabilities $701.4 million. Total debt was approximately $1.526 billion, including $75 million owed to a related party. The company reported $199.6 million available under its $200 million U.S. revolving facility and additional borrowing availability at foreign subsidiaries. It was in compliance with debt covenants. Debt fair value was $1.566 billion. Cash increased $44.2 million during the quarter.
Material changes and notable items
- Net sales, operating income, net income attributable to Amkor, operating cash flow and free cash flow all increased year over year; gross margin was lower.
- Amkor increased its J-Devices ownership from 60% to 65.7% in January for $12.9 million. It accounts for the investment under the equity method because governance provisions limit control. The company expected to consider exercising an option to reach 80% in Q4 2015; if exercised, closing was expected by early 2016 and consolidation could begin after governance restrictions lapse.
- Amkor settled Tessera patent-license litigation in January 2015, agreeing to pay $155 million in 16 quarterly installments through Q4 2018. At quarter-end, the liability was $145.3 million, including $31.0 million current. The related $87.1 million pre-tax charge was recorded in Q4 2014, not Q1 2015.
- Q1 investing cash use included $106.1 million of property, plant and equipment payments and the $12.9 million J-Devices investment. The company drew $30 million on a Korean facility in February to prepay a term loan; the borrowing was repaid in April 2015.
Outlook, commentary and risks
- Management expected 2015 capital expenditures of approximately $600 million, including about $150 million for the new K5 Korea factory and research and development facility. The planned K5 construction spend for 2015–2016 was approximately $375 million, including capitalized interest. Q1 capex was $106.1 million.
- Management believed cash flow from operations, cash on hand and available credit would fund working capital, capex, debt service and other liabilities for at least 12 months. It cautioned that funding beyond that period was not assured.
- Key exposures include semiconductor-industry cyclicality, short-term and nonbinding customer demand, customer concentration, pricing pressure, utilization of fixed-cost capacity, and substantial capital spending made ahead of firm customer commitments. Management cited mobile communications and advanced packaging as growth opportunities, alongside efforts to broaden customers in China, Taiwan and automotive markets.
- Debt, scheduled principal and interest payments, and restrictive covenants may constrain flexibility. The Korean severance obligation was $147.5 million; changing plans could require funding, while retaining the current plan may limit tax deductions. Tax holidays in several countries expire at various dates through 2022, which management expects could increase the effective tax rate.
- A 10% adverse currency move was estimated to reduce pretax income by about $17 million through balance-sheet remeasurement, and Q1 operating income by about $24 million through sales and expense exposure. These are sensitivity estimates with stated limitations.
- Management said other legal matters were not expected to have a material adverse impact, but acknowledged outcomes could change. Disclosure controls were assessed as effective at March 31, 2015; no material changes in internal control over financial reporting were reported for the quarter.
Important facts for investors to verify
- Whether mobile-related demand and capacity utilization sustain sales growth and support margins despite rising depreciation and planned investment.
- Actual 2015 capital spending, K5 construction costs and schedule, and whether customer demand fills the added capacity.
- Available liquidity, debt maturities and covenant compliance, including the impact of Tessera installments and the Korean severance obligation.
- Whether and when Amkor exercises the J-Devices option, the purchase price, and the timing and effects of any future consolidation.
- Customer demand and concentration, foreign-exchange exposure, and the effect of expiring tax holidays on taxes and cash flow.